Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/16/2014

Table of Contents

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

Market Wrap

New Intraday High

by Jim Brown

Click here to email Jim Brown

Market sentiment turned on a dime after Fed expectations turned more dovish.

Market Statistics

So many excuses, so few facts. The reasons for the market rebound today could fill a thousand word essay. The short list includes a sudden liquidity injection by the People's Bank of China, new surveys and commentary claiming Janet Yellen will not change the language in the FOMC statement along with the end of the cash raise period ahead of the Alibaba IPO.

The People's Bank of Japan injected 500 billion yuan into the top five banks. This targeted QE represented 100 billion to each of the top five banks and has a duration of three months. This is what China calls a Short-Term Lending Facility (SLF) and is the equivalent of a short term QE program and it was unannounced. This came after the Manufacturing PMI fell to 51.1 for August and their GDP estimates slipped to 6.9%.

Multiple surveys of analysts and economists over the potential FOMC statement suggested the furor last week about a language change was a tempest in a teapot. The CNBC survey of 37 analysts found only 41% expected the language to change on Wednesday. Another 24% expected it in October, 24% in December and 11% in January.

Fed reporter Jon Hilsenrath said the Fed will probably keep the "considerable time" language in the policy statement but would likely qualify those words with some additional language. Since the words are tied to the current QE program that is expected to be terminated at the October meeting they will have to change the language in October in some form.

Lastly the period where investors could sell stocks to raise cash before the Alibaba IPO has ended. In order to be sure you had settled cash in your account on Thursday you would have to have sold before the close on Monday. The next big impact from the IPO will be investors putting that cash back into the market if they did not receive any BABA shares from the IPO. This could produce a market bounce on Friday and Monday assuming there are no other headlines.

The only economic report of note was the Producer Price Index (PPI) for August. The headline number was flat at zero after rising +0.1% in July. The core rate, excluding food and energy, was also zero and that was the first time in five months that the core rate did not rise.

Final energy goods declined -1.5% after falling -0.6% in July. This was the 6th decline in seven months. Intermediate unprocessed goods declined -3.3% and core unprocessed goods declined -5.9%. Oil and gasoline prices have been declining for the last three months and oil has hit levels that should be strong support. This suggests the decline in producer prices should be moderating.

The calendar for tomorrow is of course headlined by the FOMC statement at 2:PM and Yellen's press conference at 2:30. At this point the consensus is calling for no material change in the statement and possibly some further dovish comments to put investor minds at ease and take the pressure off rising rates.

The Consumer Price Index (CPI) and NAHB Housing Market Index will be the morning events.

Fedex (FDX) will report earnings before the open and that is normally seen as a proxy for the economy when they update guidance.


The change in outlook for the Fed statement caused a sharp decline on the dollar at 11:30 and commodities rebounded strongly on short covering. Crude oil gained +2% and copper +2.4%. The liquidity injection into China banks was also in play suggesting China was going to do whatever necessary to stimulate their economy.



Chinese e-commerce company Alibaba.com IPOed yesterday with shares soaring +122% to $3.87, up from the issue price of $1.74. Demand for the IPO was strong with the 858.9 million share offering more than 257 times oversubscribed. Alibaba said its share sale was the biggest technology IPO since Google in August 2004.

If that preceding paragraph seems strange in light of the headlines over the last two weeks then you have been paying attention. That was the news headline when Alibaba went public in November 2007 just before the financial crisis. The listing was on the Hong Kong stock exchange. Jack Ma took the company private again in June 2012 when Alibaba bought back all its shares at the IPO price, which was a 45.9% premium over the closing price when the buyback was announced. Jack Ma said the depressed share price had an adverse impact on its reputation with customers. Alibaba paid $7 billion at the time to buy back 20% of itself from Yahoo.

Fast forward to 2014 and Alibaba just raised the price range for Friday's IPO to $66-$68, which would raise about $22 billion. However, if underwriters exercise the 48 million share overallotment option, which is almost guaranteed, it would boost that to $24.3 billion and overtake the Agricultural Bank of China $22.1 billion IPO in 2010 to be the largest IPO ever.

After the bell Adobe (ADBE) reported earnings of 28 cents compared to estimates for 26 cents. Revenue of $1.01 billion was just below estimates of $1.02 billion. They said Creative Cloud subscribers rose to 2.8 million, up +506,000 from the prior quarter. Their guidance for the current quarter was revised to 26-32 cents and analysts were expecting 31 cents. Revenue would be $1.03 to $1.08 billion and analysts were expecting $1.09 billion. Shares declined after the news.


Rackspace Hosting (RAX) fell -16% after the close when it said it decided to stay independent after a strategic review of the alternatives. The company also named the current president Taylor Rhodes as its new CEO. Back in May Rackspace shares rallied +17% on news they were exploring alternatives including a sale. Analysts believe Rackspace was unable to find a buyer in that highly competitive market.


Casino stocks fell again after Morgan Stanley warned the conditions in Macau could get worse. The analyst just returned from a fact finding trip to Macau and he said Macau casinos have not yet found a bottom. FBR Capital said Macau gambling revenue was on a trajectory for a fourth straight monthly decline and its first quarterly decline in years. Additionally a casino smoking ban goes into effect in October and China and Asia populations are still heavy smokers. This will limit time in the casinos by smokers and therefore limit gambling. Shares of LVS fell another -1.6% and MGM -1.7%.

Humana (HUM) shares rallied +3.7% after they said they replaced a $1 billion share buyback with $700 million remaining with a new $2 billion buyback program through 2016. They also announced a $1.75 billion debt offering with $1 billion of that to be used to buy back $1 billion in shares by June 30th 2015 out of the $2 billion authorized.


Apple (AAPL) shares fell slightly after news broke the iPhone 6 would not be available in China until next year because it has not yet received government approvals in that country. Apple still expects to launch in 115 countries by the end of 2014. Apple said iPhone sales over the weekend were more than 4 million units and a record but that was below some analyst estimates. Website issues and the shipping delay may have caused some users to abort their buying effort. Apple still says they will have phones in retail stores this weekend. In the prior two releases they sold 9 million phones in the first weekend the phones were actually available. Apple shares are threatening to fall below uptrend support but so far they have avoided the dreaded post announcement drop. Until they move under $98 the trend is still positive.


Teekay Tankers (TNK) rallied +10% after Deutsche Bank initiated coverage with a buy rating.

ViMicro (VIMC) rallied another 24% to $8.25 after raising estimates last week. Shares were up +14% on Monday. The company provides video surveillance products in China and the USA.


UPS said it was hiring 90,000 to 95,000 temporary workers for the holiday shopping season. This compares to 55,000 hired in 2013 and the 333,000 current employees. The company said it was also adding thousands of additional trucks, trailers, aircraft and portable loading aids for the holiday period. The National Retail Federation has predicted online sales will rise 9-12% and more than the 4.1% increase expected at retail stores. Online sales rose +9.3% in 2013. Obviously margins are going to suffer but they are expecting an even larger burst of holiday packages this year.


Boeing (BA) and SpaceX will split a $6.8 billion award from NASA to build a space taxi and return the U.S. to manned space flight. Boeing will receive $4.2 billion and Elon Musk's Space Exploration Technologies Corp, commonly known as SpaceX will receive $2.6 billion. The companies are expecting to have a working model by 2017. Currently the U.S. pays Russia about $70 million a seat to send U.S. astronauts to the space station on Russian vehicles. It is entirely possible that Russia could announce at any time we are no longer selling seats in retaliation for the sanctions over Ukraine.

SpaceX has a 7 person Dragon V2 capsule that is capable of landing anywhere on earth with the "precision of a helicopter" according to their publicity info. Boeing also has a 7 passenger CST-100 vehicle that has roots in the Apollo missions.

NASA said it would continue to work with other vendors including Blue Origins, which is backed by Jeff Bezos. The problem with these various vehicles is that they are either powered by unproven rockets in the case of SpaceX or Saturn 5 rockets using Russian rocket engines. This is another challenge since Russian rockets are no longer available. The SpaceX Falcon 9 rocket exploded during an August 22nd test. Bezos company Blue Origins is competing to replace the Russian rockets currently in use.


Allergan (AGN), Valeant (VRX) and Bill Ackman's Pershing Square settled a court case today that attempted to halt the special shareholder meeting in December. Now that the meeting is definitely scheduled and the roadblocks for Ackman and Valeant have been removed it is up to Allergan to find some other way to block the takeover by Valeant. About the only option left is for Allergan to buy somebody else really quick to make the Valeant acquisition less affordable for Ackman and Valeant.

Allergan is pursuing separate litigation against Ackman to prevent him from voting his 9.72% stake. Allergan claims Ackman violated insider trading securities laws by joining with Valeant in the takeover attempt. An announcement by Allergan of a pending acquisition is going to crater the stock if it takes the Valeant bid out of play. January put prices are huge because of this possibility.


Endo International (ENDP) made an unsolicited offer of $2.2 billion for Auxilium Pharmaceuticals (AUXL) after the close. The offer values AUXL at $28.10 per share and includes the assumption of their debt. AUXL is suffering from the bad press testosterone therapies have been receiving. Their Testim gel sales are falling and they said they would cut 190 jobs earlier this month. That is 30% of their workforce and part of a plan to save $75 million a year. Endo is transforming itself from a drug company to a drug and medical device maker and has spent about $4.5 billion on acquisitions in recent years. Shares of AUXL rose to $30 in afterhours from the $21.52 close.


It was an interesting day in the market with the major rebound beginning about 11:15 when the Jon Hilsenrath comments hit the wire. From that point on it was straight up until 1:30 and traders began to worry about the analysis of the Hilsenrath comments. Those with alternate views began to share them and the rally faded. The S&P hit 2002 intraday and right back to within 5 points of its closing high.

The selling from last week has been completely forgotten and it should remain a distant memory IF the Fed doesn't spoil the party with a hawkish statement change at 2:PM on Wednesday. The bears that loaded up on shorts last week hoping for a Fed induced correction were squeezed once again and a positive statement from Yellen could send stocks to new highs and cause fund managers to hold their nose and chase them higher.

Support at the 1980 level was rock solid on Friday and Monday and it was touched briefly again this morning. This three day basing should be enough to convince large cap investors the next move is going to be higher, Fed permitting.


The Dow traded up to a new high at 17,167 intraday but faded to close at 17,131. That was only 7 points away from a new closing high. Clearly the Dow is poised for a sprint to higher highs if the Fed retains its dovish posture.

The converging resistance at 17,131 to 17,150 was briefly penetrated but returned before the close. Support on Friday was 16,950 and 17,000 returned as support today.

Only one Dow component was negative today and that was Nike.



The Nasdaq crash on Monday broke strong support at 4550 and today's rebound barely returned the index to that level with a close at 4552. At any other time I would be warning of a continued move lower. However, I am convinced the sell off was a result of the cash raise for Alibaba shares. Everyone that does not receive shares on Friday morning is going to be putting that cash back into the market and those same tech shares that declined on Monday will be back in favor a couple days from now. At least that is my opinion and I am sticking with it until proven wrong.

On a purely technical basis and ignoring all the external events like Alibaba and the FOMC meeting the Nasdaq chart is bearish. Technicians always claim all the current events are already priced into the charts. If that is the case the Nasdaq is in trouble. We will know for sure next Monday if that unspent cash does not come back into the market.



The Russell 2000 chart is bearish as well. The Russell posted a minimal rebound today but it is still a lower high and lower low. The prior support at 1146 did not hold and the Russell dipped to 1141 at the open. The lack of a meaningful Russell rebound is negative for broad market sentiment.

Based on the Russell chart I would have a bearish bias. Small caps typically lead in both directions and they are pointing lower.

The Russell is one day away from a death cross where the 50-day average crosses under the 200-day average. That is typically a sell signal for fund managers.


I am seriously conflicted tonight. With the negative chart patterns on the Nasdaq and Russell 2000 I should have a negative bias. The new high on the Dow and strong rebound on the S&P suggests a big cap breakout ahead. When small caps and large caps disagree I would normally go with the small caps. This is a troubling conundrum. The wild card is the Fed and then the Alibaba IPO disrupting cash flows.

I would NOT be an aggressive buyer or seller of stocks over the next three days. Let's wait for the situation to play out and then follow the market.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

Click the advertisement below for a free trial to the Ultimate Investor newsletter.

 


New Plays

Sinking Customer Sentiment

by James Brown

Click here to email James Brown


NEW BEARISH Plays

AGCO Corp. - AGCO - close: 46.43 change: -0.61

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 976 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Farmers do not like to buy new equipment when the price of their crops is falling.

According to the company website, "AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. We support more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts. Our products are available in more than 140 countries worldwide."

AGO management has noted weakness in multiple parts of the world this year. Their most earnings report was July 29th. They managed to beat bottom line estimates by 8 cents with a profit of $1.77 a share. Yet revenues dropped by almost 10% and missed the revenue estimates. To make matters worse AGCO management lowered their 2014 guidance by a significant margin. A few analysts expect the company's earnings to fall over the next 18 months.

Part of the challenge is the business climate for farmers. Falling crop prices affect farmer sentiment and they tend to spend less. Unfortunately for AGCO the U.S. has seen falling commodity prices for a while and it's getting worse. The recent rise in the dollar is forcing grain prices lower. Plus the American farmer is expecting a record-breaking harvest this year. They are expecting so much grain (corn and soybeans) that it will exceed the nation's ability to store it all. That doesn't bode well for farmer sentiment either.

Technically shares of AGCO are bearish. Investors have been selling the rallies since the peak in 2013. Back in July the stock broke down under a long-term, multi-year trend line of support. Now after a four-week consolidation near $48.00 the stock has started to breakdown again.

Tonight we're suggesting a trigger to open bearish positions at $46.25. We are not setting an exit target yet but I will note the point & figure chart is projecting at $40.00 target.

Trigger @ $46.25

- Suggested Positions -

Short AGCO @ (trigger)

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

Buy the NOV $45 PUT (AGCO141122P45) current ask $1.20

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Transports Ignore Bounce In Oil

by James Brown

Click here to email James Brown

Editor's Note:
Crude oil bounced today, likely on dollar weakness, but the rise in oil failed to stop the rally in the transports.

PPC hit our entry trigger. TSL has been removed.


Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland - ADM - close: 51.26 change: +0.70

Stop Loss: 48.90
Target(s): To Be Determined
Current Option Gain/Loss: +1.0%
Entry on September 11 at $50.75
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
09/16/14: ADM was showing relative strength today with a +1.38% gain. This is also a new all-time high for the stock. Traders may want to start adjusting their stop loss higher.

Earlier Comments: September 10, 2014:
Sometimes it pays to be in the middle. ADM does not farm so falling grain prices don't hurt but actually help. The company is the middleman between producers (farmers) and retailers.

According to the company website, "Every day, the 31,000 people of Archer Daniels Midland Company turn crops into renewable products that meet the demands of a growing world. At more than 270 processing plants, we convert corn, oilseeds, wheat and cocoa into products for food, animal feed, industrial and energy uses. We operate the world's premier crop origination and transportation network, connecting crops and markets in more than 140 countries on six continents."

"Archer Daniels Midland Company is one of the largest agricultural processors in the world. Serving as a vital link between farmers and consumers, we take crops and process them to make food ingredients, animal feed ingredients, renewable fuels and naturally derived alternatives to industrial chemicals."

The earnings picture has been improving. The upcoming harvest could really boost ADM's margins. American farmers are looking at a potential record-breaking crop of corn and soybeans. Estimates suggest the crop will be so big it will exceed the nation's permanent storage by 694 million bushels. That's enough to fill about 174,000 jumbo hopper rail cars.

Shares of ADM are currently at all-time highs. The breakout past round-number resistance at $50.00 is bullish. We are suggesting a trigger to open bullish positions at $50.75.

- Suggested Positions -

Long ADM stock @ $50.75

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

Buy the 2015 JAN $50 call (ADM150117c50) entry $2.36*

09/11/14 triggered @ 50.75
*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


Best Buy Co. - BBY - close: 34.80 change: +0.79

Stop Loss: 31.75
Target(s): To Be Determined
Current Option Gain/Loss: +6.7%
Entry on September 08 at $32.60
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.3 million
New Positions: see below

Comments:
09/16/14: We could be seeing a little short squeeze in BBY. The stock outperformed the market again with a +2.3% gain. Shares are nearing what might be potential resistance at the $35.00 mark. Do not be surprised to see a pullback.

Tonight we'll adjust the stop loss to $31.75.

Earlier Comments: September 6, 2014:
It's tough to be bearish when investors are buying bad news. The U.S. economy is slowly improving there have been nagging concerns over the U.S. consumer. If that wasn't bad enough Amazon.com has become the dominant player in consumer electronics. So why are investors buying shares of BBY?

First here's a brief description from the company website: "Best Buy Co., Inc. is the world's largest consumer electronics retailer, offering advice, service and convenience – all at competitive prices – to the consumers who visit its websites and stores more than 1.5 billion times each year. In the United States, more than 70 percent of Americans are within 15 minutes of a Best Buy store and BestBuy.com is among the largest ecommerce retailers in the United States. Additionally, the company operates businesses in Canada, China and Mexico. Altogether, Best Buy employs more than 140,000 people and earns annual revenues of more than $40 billion."

The last few years have seen BBY suffer from the online showroom phenomenon. Where customers come in, look at merchandise in BBY's showroom, and then go home and buy it online (usually at Amazon.com). The company has been desperately fighting this issue for a couple of years and they have made progress. However, sales continue to suffer.

BBY reported earnings on August 26th. Wall Street expected a profit of $0.31 on revenues of $8.98 billion. BBY beat the bottom line estimate with $0.44 but revenues only hit $8.9 billion. More importantly management guided lower. They expect same-store sales declines in both the third and fourth quarter. So why are investors buying the stock? It could be a case of all the bad news is already price in. Some consider BBY to be a value play at current levels.

If investors are willing to buy the bad news then it could be tough to be bearish. The shorts could be in trouble. The most recent data listed short interest at 9.5% of the 288.6 million share float. A breakout higher could spark some short covering. The point & figure chart is already bullish and suggesting at $49.00 target.

Traders bought the post-earnings sell-off in August and they bought the dip again this past week. Now BBY is on the verge of hitting new multi-month highs. We're suggesting at trigger to open bullish positions at $32.60.

- Suggested Positions -

Long BBY stock @ $32.60

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

Long 2015 $35 call (BBY150117c35) entry $1.48*

09/16/14 new stop @ 31.75
09/08/14 triggered @ 32.60
*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


Southwest Airlines - LUV - close: 34.53 change: +0.67

Stop Loss: 31.95
Target(s): To Be Determined
Current Option Gain/Loss: +3.8%
Entry on September 09 at $33.25
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.9 million
New Positions: see below

Comments:
09/16/14: Crude oil saw a bounce today but that didn't stop the airline stocks from rising. Shares of LUV outpaced its peers with a +1.9% surge to new highs.

Tonight we'll adjust the stop loss to $31.95. More conservative investors may want to raise their stop even higher.

Earlier Comments: September 6, 2014:
Airline stocks have been big winners this year. A big drop in the price of crude oil has been a blessing since fuel is the biggest expense for airliners. Year to date the S&P 500 index is up +8.5%. The XAL airline index is up +26.2%. Yet shares of LUV are up an astounding +74.25%.

According to the company's press release, "Dallas-based Southwest Airlines continues to differentiate itself from other carriers with exemplary Customer Service delivered by more than 45,000 Employees to more than 100 million Customers annually. Based on the most recent data available from the U.S. Department of Transportation, Southwest is the nation's largest carrier in terms of originating domestic passengers boarded. The airline also operates the largest fleet of Boeing aircraft in the world to serve 93 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and five near-international countries via wholly owned subsidiary, AirTran Airways. Southwest is one of the most honored airlines in the world, known for its triple bottom line approach that takes into account the carrier's performance and productivity, the importance of its People and the communities it serves, and its commitment to efficiency and the planet."

Earnings are coming in better than expected. When LUV reported on July 24th Wall Street was looking for a profit of $0.61 a share on revenues of $4.95 billion. LUV reported a profit of $0.70 with revenues up almost 8% to $5.01 billion. Demand for domestic air travel has been strong. Shares of LUV have been showing significant relative strength.

Traders bought the dip on Friday at short-term technical resistance on the simple 10-dma. That left LUV to end the week near all-time highs. Tonight we are suggesting a trigger to buy calls at $33.25.

- Suggested Positions -

Long LUV stock @ $33.25

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

Long 2015 Jan $35 call (LUV150117c35) entry $1.25

09/16/14 new stop @ 31.95
09/11/14 speculation that oil might have reversed higher today
09/09/14 triggered $ 33.25
Option Format: symbol-year-month-day-call-strike


Morgan Stanley - MS - close: 35.11 change: -0.10

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: + 1.0%
Entry on September 03 at $34.75
Listed on September 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.8 million
New Positions: see below

Comments:
09/16/14: Shares of MS snapped a four-day winning streak with a minor 10-cent loss today. Investors could use a rally past $35.25 as a new entry point.

Earlier Comments: September 2, 2014:
MS is in the financial sector. They're one of the biggest players in the financial services industry. The stock has been outperforming its peers by a significant margin. Citigroup (C) is still down -0.8% for 2014. Goldman Sachs (GS) is only up +1.0%. JP Morgan (JPM) is up +1.6% and BAC is up +3.3% in 2014. The XLF financial ETF is up +6.8% year to date. Yet MS is up +9.4%.

The company has managed to build its revenues on stronger wealth management business. The company has beaten Wall Street's earnings estimates four quarters in a row.

Their most recent earnings report was July 17th. Analysts were expecting a profit of 55 cents a share on revenues of $8.18 billion. MS delivered $0.60 a share with revenues coming in at $8.61 billion. The company's profit has more than doubled from a year ago.

The stock has spent months consolidating sideways under resistance near $33.50. This past month has seen a bullish breakout higher. Now broken resistance near $33.50 should be new support. MS is currently testing short-term resistance near $34.50.

Tonight we're suggesting a trigger to open bullish positions at $34.75.

- Suggested Positions -

Long MS stock @ $34.75

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

Long 2015 Jan $35 call (MS150117C25) entry $1.70*

09/03/14 triggered @ 34.75
*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


Microsoft Corp. - MSFT - close: 46.76 change: +0.52

Stop Loss: 44.45
Target(s): To Be Determined
Current Option Gain/Loss: +6.1%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

Comments:
09/16/14: Traders were in a buy-the-dip mood with MSFT and shares bounced off their rising 10-dma. In other news we might start hearing more about the next upgrade cycle soon. A WSJ article out today discussed MSFT's plans to introduce their next operating system. The author said they are informally referring to it as Windows 9. The preview event will be September 30th. Comments:
09/15/14: MSFT confirmed it will buy the hit game Minecraft for $2.5 billion, that's up from the $2.0 billion discussed last week. Some analysts were pointing out that a few of people at the top of Mojang, the private Swedish game company that created Minecraft, essentially the main talent behind Minecraft are not joining Microsoft Studios. This raised a few eyebrows. Meanwhile shares of MSFT joined the sell-off in the NASDAQ today and lost almost -1%.

Broken resistance near $45.50 should be new support.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

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

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

09/11/14 new stop @ 44.45
08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike


Pilgrim's Pride - PPC - close: 31.84 change: +0.49

Stop Loss: 29.30
Target(s): To Be Determined
Current Option Gain/Loss: +0.9%
Entry on September 16 at $31.55
Listed on September 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
09/16/14: Our brand new play on PPC is off to a strong start. Shares outperformed the major indices with a +1.5% gain on Tuesday. Our trigger to open bullish positions was hit at $31.55. The next hurdle for the bulls is the 2014 high near $32.00.

Earlier Comments: September 15, 2014:
Last year the U.S. stock market was up about +30%. Shares of PPC rallied almost +100%. This year the S&P 500 is up about +7%. Yet shares of PPC are up +90%. One reason is rising demand for protein and another is falling feed costs.

According to the company website, "Pilgrim's Pride Corporation employs approximately 35,700 people and operates chicken processing plants and prepared-foods facilities in 12 states, Puerto Rico and Mexico. The Company's primary distribution is through retailers and foodservice distributors. Pilgrim's is the second-largest chicken producer in the world, with operations in the United States, Mexico and Puerto Rico. Our corporate headquarters is in Greeley, Colorado. We have the capacity to process more than 36 million birds per week for a total of more than 9.5 billion pounds of live chicken annually. The company exports chicken products to customers in approximately 105 countries, including Mexico." (FYI: The company is majority owned, about 75%, by Brazilian meat producer JBS SA, symbol: JBSAY).

The cost to feed millions and millions of chickens is the number one expense for a chicken farmer. The price of corn and soybeans has been falling. Currently both grains are at multi-year lows. That means PPC's margins should improve. The good news is that U.S. farmers are looking at a record-breaking harvest of corn and soybeans again this year. That should continue to push grain prices lower.

Technically shares of PPC are riding their long-term trend of higher lows. Shares got ahead of themselves in July and sold off following its earnings report at the end of the month. Yet investors bought the dip at technical support on the rising 50-dma. Now after consolidating sideways for the last few weeks PPC is starting to rally again.

Today's intraday high was $31.39. We're suggesting a trigger to open bullish positions at $31.55.

- Suggested Positions -

Long PPC stock @ $31.55

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

Long 2015 Jan $35 call (PPC150117C35) entry $1.40*

09/16/14 triggered @ $31.55
*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


WhiteWave Foods Co. - WWAV - close: 36.80 change: +0.11

Stop Loss: 35.85
Target(s): To Be Determined
Current Option Gain/Loss: +5.4%
Entry on August 19 at $34.91
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
09/16/14: WWAV did not see a lot of participation in today's relatively wide market rally. That's a concern. We've decided to raise the stop loss up to $35.85 to reduce our risk.

I am not suggesting new positions at this time.

Earlier Comments: August 16, 2014:
Consumer tastes and buying habits are changing and more people are opting for more natural and organic foods.

WWAV is in the consumer goods sector. You might not recognize the name but they're behind brands like Silk, Horizon Organic, Land-O-Lakes, International Delight, Alpro, and Earthbound Farm Organic.

WWAV considers themselves "a leading consumer packaged food and beverage company that manufactures, markets, distributes, and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce throughout North America and Europe. The Company is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products. The Company's widely-recognized, leading brands distributed in North America include Silk plant-based foods and beverages, International Delight and LAND O LAKES* coffee creamers and beverages, Horizon Organic premium dairy products and Earthbound Farm' certified organic salads, fruits and vegetables. Its popular European brands of plant-based foods and beverages include Alpro and Provamel" (The Land-O-Lakes brand is licensed from the owners).

If you're looking for a company that is growing then keep an eye on WWAV. They have beaten Wall Street's estimates on both the top and bottom line at least four quarters in a row. The last three quarters management has been raising their guidance. In Q4 2013 WWAV's revenues were up +11.5%. The first quarter of 2014 saw revenues soared +36.5%.

Their latest report was August 7th. Analysts were looking for a profit of $0.22 on revenues of $815.6 million. WWAV delivered a profit of $0.23 with revenues climbing +39.5% to $837.9 million.

The natural and organic retailers might be facing tougher margins and stronger competition (WFM, SFM, TFM, NGVC) but that doesn't seem to be the case for a producer and distributor like WWAV.

You can see the big surge in the stock price on August 7th as traders reacted to the bullish earnings news and guidance. After consolidating gains the last few days shares of WWAV have started to push higher again. They have been outperforming the major market indices and WWAV closed at a new all-time highs on Friday.

We believe the rally continues but I am labeling this a more aggressive, higher-risk trade due to WWAV's recent volatility. The last several weeks have seen some significant swings.

Friday's intraday high was $34.06. We're suggesting a trigger to open bullish positions at $34.15.

- Suggested Positions -

Long WWAV stock @ $34.91

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

Long OCT $35 call (WWAV141018C35) entry $1.70*

09/16/14 new stop @ 35.85
09/06/14 new stop @ 33.90
09/02/14 new stop @ 32.90
08/19/14 trade opens on gap higher at $34.91, suggested entry point was $34.15.
*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




BEARISH Play Updates

Mobile Mini, Inc. - MINI - close: 39.02 change: +0.01

Stop Loss: 40.10
Target(s): To Be Determined
Current Option Gain/Loss: - 0.6%
Entry on August 28 at $38.80
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 265 thousand
New Positions: see below

Comments:
09/16/14: The fact that MINI did not participate in the market rally today is a small victory for the bears. However, I am not suggesting new positions at this time.

Earlier Comments: August 27, 2014:
The mobile storage space might be facing some headwinds. MINI provides commercial storage, construction storage, residential storage, and mobile offices. According to the company's website, "Mobile Mini, Inc. is the world's leading provider of portable storage solutions through its total lease fleet of over 213,000 portable storage and office units with 135 locations in the United States, United Kingdom and Canada. Mobile Mini, Inc. went public in 1994 and trades on NASDAQ under the symbol MINI. Mobile Mini offers customers a wide range of portable storage and office products in varying lengths and widths with an assortment of differentiated features such as: proprietary security systems, multiple door options and 100 different configuration options."

Sales are growing but MINI is developing a trend of missing earnings or delivering lackluster results. MINI missed Wall Street's EPS estimates back in February and April. The latest earnings report was July 30th. Revenues were almost +10% from a year ago but earnings were down. MINI reported a 23-cent profit, which was in-line with estimates but down from 25 cents a year ago. Investors crushed the stock following the late July earnings report. MINI was already weak through most of July and then got hammered from $43 to under $38 on its earnings news.

The stock's long-term up trend might be in jeopardy. The company is not growing fast enough to justify its P/E above 40. The stock's oversold bounce from the post-earnings sell-off has stalled at technical resistance at the exponential 200-dma. Now it appears that MINI is beginning to roll over.

Today's low was $38.93. I'm suggesting a trigger at $38.80 to open bearish positions.

- Suggested Positions -

Short MINI stock @ $38.80

09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80


Transocean Ltd. - RIG - close: 35.37 change: -0.19

Stop Loss: 39.05
Target(s): To Be Determined
Current Option Gain/Loss: + 7.4%
Entry on September 03 at $38.20
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: see below

Comments:
09/16/14: Shares of RIG tried to bounce today but the rebound failed near the $36.00 level. The stock closed at another 10-year low.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

- Suggested Positions -

Short RIG @ $38.20

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

Long OCT $35 PUT (RIG141018P35) entry $0.27*

09/06/14 new stop @ 39.05
09/03/14 trade begins. RIG gaps higher at $38.20
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/02/14 remove the trigger ($37.25) and short RIG now at current levels.
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Trina Solar Ltd. - TSL - close: 13.50 change: -0.26

Stop Loss: 17.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.4 million
New Positions: see below

Comments:
09/16/14: Shares of TSL did not participate in the market's rally today. Considering the recent relative weakness we are removing TSL as a candidate.

Trade did not open.

09/16/14 removed from the newsletter, suggested entry was $14.80

chart: