Option Investor
Newsletter

Daily Newsletter, Saturday, 9/20/2014

Table of Contents

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

Market Wrap

Allibabble

by Jim Brown

Click here to email Jim Brown

Alibaba is finally a public company for the second time and the hype surrounding the IPO was extreme.

Market Statistics

Alibaba (BABA) shares opened about 2 hours late at $92.70 per share compared to the IPO price of $68. The 15% greenshoe option was executed meaning Alibaba sold 368,122,000 shares. That the Alibaba IPO was worth just over $25 billion making it the biggest IPO ever and beating out the Agricultural Bank of China for that title.

Alibaba's market cap at the close was $242 billion putting it just below Walmart at $245 billion and the 11th largest company based on S&P weightings. Of course BABA is not in the S&P because it is a foreign company. The graphic below shows how BABA ranks with the top 20 S&P-500 companies.


Shares spiked in early trading to $99.70 and then declined to 89.95 about 1:30 before rebounding to close at $93.31. When shares briefly dipped below $90 more than 5.7 million shares traded in just one minute. This was probably the underwriters and Goldman Sachs, the stabilization agent, making sure the price did not decline under $90 to spoil the IPO. It was a successful IPO for the NYSE and showed that their pricing and order matching process was superior to the Nasdaq process. More than 400,000 orders traded at the open and more than 100 million shares traded in the first ten minutes.

It was pointed out that Jack Ma and his team was intimately engaged in actually picking out who would get Alibaba shares on Thursday. The team spent 9.5 hours with the underwriters deciding who would get shares out of the more than 1,800 orders from institutions and funds. We were told that the process was weighted towards those institutions the underwriters thought would keep the shares and not trade them on the first day. The IPO was ten times oversubscribed resulting in allocations of around 10% of the requested quantity. A few entities received up to 25% of their request and hundreds got no shares at all. One hedge fund that had requested $200 million in shares received less than $1 million or one-half of 1% of their request. Another fund that requested several million dollars worth received only 1,000 shares worth $68,000. The Alibaba friends and family allotment was $1.5 billion and retail investors received only $1 billion worth of shares. This was purely an institutional IPO.

With 368 million shares sold the volume traded on Friday was more than 271 million. Apparently quite a few institutions could not pass up the lure of a $25 first day profit and sold their shares.

Jack Ma was a rock star for the day appearing on various interview programs including CNBC. More than 130 Chinese reporters were at the NYSE to record the process for the folks at home. As one of his goals for the day Jack Ma asked to have his picture taken with Art Cashin. Congratulations to Arthur. Arthur has only been working there for 50 years.

Plenty of analysts are already questioning Alibaba's valuations with a forward 2015 PE of 34 based on Friday's share price. They have 279 million active buyers. They have 8.5 million active sellers. They processed 14.5 billion transactions in the last 12 months and had $2.4 billion in revenue last quarter. Since inception they have sold more than four times as much as EBay. They have 27,000 employees compared to Amazon's 88,400. Amazon is the world's 9th most visited website and TaoBao, a shopping portal owned by Alibaba is the 10th most visited.

Alibaba has an 85% market share in China and a growth rate of 45%. That should make you think twice. If they already have 85% of the market how are they going to keep growing at a 45% rate? Ma says he is going after the world market but I suspect that will not be as easy to conquer as China.

After selling the 368 million shares on Friday the remaining company ownership looks like this. Softbank 34%, Yahoo 23%, Jack Ma 8.8%, Joseph Tsai 3.6% and everyone else 31%.

Jack Ma was making $20 a month when he started the business in his apartment. He and 16 friends pooled their resources and raised $60,000 and that is what funded the startup. Not a bad investment although most of those friends exited a long time ago.

Investors buying shares on Friday did not actually buy a piece of Alibaba. They bought a holding company that has contracted with multiple Variable Interest Entities (VIE) and that holding company is incorporated in the Cayman Islands. The holding company has a contractual claim on Alibaba's earnings. This structure is necessary because China does not allow the majority ownership of a company by foreigners. Inside Alibaba Group Holdings Ltd (BABA) there are contracts with multiple VIEs that hold the licenses to operate various websites and businesses in China. These VIEs are 100% owned by Chinese citizens. Those licenses give the Alibaba the authority to operate in China. Alibaba contracts with the VIEs and the VIEs are contractually liable to the holding company.

China has not ruled on the legality of VIEs. The SEC warns that the actual business like Alibaba in this case could decide to sever relations with the VIEs and the holding company would be left with no assets. This has happened in the past in 2011, 2012 and 2014. However, other Chinese companies including SINA, SOHU, BIDU, CTRP and CNET also use the VIE structure to get around the Chinese restriction on foreign ownership.


Yahoo (YHOO) shares declined -3% on a sell the news event. I warned about this last week. Yahoo got $8.3 billion from the sale and will net about $6 billion after taxes. Meyer has said she will return $3 billion to shareholders and use the other $3 billion on acquisitions. Reportedly funds that did receive some Alibaba shares were shorting Yahoo to hedge the BABA shares. Yahoo still has more than 400 million Alibaba shares but they can't sell them for at least a year. That is roughly another $37 billion at Friday's closing price. Yahoo received $8 billion in cash from the IPO and has another $37 billion in future income but Yahoo's market cap is only $41 billion. This is a serious lack of confidence vote by Yahoo investors. One analyst said this would be a prime opportunity for an activist investor to appear and force Yahoo to make some changes.

Yahoo shares hit a 14 year high earlier in the week but expectations are for a continued decline in the days ahead. Volume was 10 times normal.


The story is similar at Softbank except that they did not sell any shares in the IPO. They own 34% of Alibaba, now worth about $82 billion. The CEO has said he has confidence BABA shares will continue to move higher and they are willing to wait for the future. Shares of Softbank sold off on Friday as well.


There was no economic news of note on Friday and it would have been ignored with all the Alibabble in progress.

Next week the biggest economic report is the GDP revision for Q2 on Friday. The numbers are off the wall crazy. The official consensus is for a 4.3% revision but there are numerous whisper numbers in the 4.8% to 5.0% range. While I realize there will be some bounce back from the -2.9% number in Q1 I have a hard time rationalizing a 4.8% print. I suppose it is possible but it would definitely be a surprise. The rough guess on the Q3 number is in the 3.5% to 3.8% range.

Second in importance is the Richmond Fed Manufacturing Survey on Tuesday followed by the Kansas Fed report on Thursday. We also get new and existing home sales and after the Lennar (LEN) earnings last week I would expect some positive numbers.

There is a flurry of Fed speakers next week and I am sure they will all be trying to paint a different picture of the future for Fed policy. With the market so jittery over the Fed's future direction any of these could be market movers.



We are very close to the start of the Q3 earnings cycle. The number of reporters is increasing even though we are still three weeks away from the official start when Alcoa (AA) reports.

Oracle (ORCL) reported an earnings miss on Thursday night and Larry Ellison said he was stepping down from the CEO role and would remain the Executive Chairman and Chief Technology Officer. Ellison is a 70 year old college dropout who founded Oracle and has powered it since 1977. He has accumulated a personal wealth of $46 billion along the way. The CEO position will be shared by Mark Hurd and Safra Catz.

Oracle posted earnings of 62 cents compared to estimates of 64 cents. Shares fell -4% on the dual news items.


Red Hat (RHT) declined -4.5% after beating earnings and revenue Thursday evening. Adjusted earnings of 41 cents beat estimates of 38 cents. Revenue of $446 million beat estimates of $435 million thanks to a 19% increase in subscription revenue. Shares hit a historic high in mid August and moved sideways into this report.


Dresser Rand (DRC) rallied +9% after the company said it was getting competing acquisition offers. The agreed bid by Sulzer AG may be in trouble if Siemens AG votes to submit a formal bid of $85 according to the rumors. Siemens has coveted Dresser for several years but could never agree on a merger. If the board votes to offer $85 it may have to go hostile to get around Sulzer. Prior to the Siemens rumor DRC was trading at $68 and it spiked to $82.50 ON Friday before pulling back slightly. That is going to give Sulzer management a sleepless weekend. The buyout talks began back in July when DRC spiked to $70.


Concur Technologies (CNQR) agreed to be acquired by German software company SAP in a deal valued at $8.3 billion. This equates to $129 per share and the largest in SAP history. Shares of CNQR rallied to $127.50 on Friday.


CAT said dealer sales fell -10% in 3 months ending in August due to weaker results outside North America. The company said dealer sales of construction equipment declined -1% in August and resource-industry equipment declined -33%. Energy and transportation equipment sales rose +4%. In North America overall sales rose +8%, down from 11% in July and 14% in June, but fell in other regions. Sales in Asia declined -24%. Mining equipment declined -40% in Europe. This is a clear indication that the global economy is weakening. You need heavy equipment to build stuff so a decline in demand suggests slowing economies.


Apple's initial release of the iPhone 6 was somewhat overshadowed in the headlines by the Alibaba IPO but for the Apple faithful it was the only thing on their minds. In New York more than 1,880 people were in line to buy an iPhone when the doors opened at the Apple store Friday morning. That was 33% more than he 5s and 5c and 240% higher than the iPhone 5. Some had been in line for days. Lines in the Midwest were up 39%. The iPhone 6 Plus was feeling the love with line surveys showing that 67% were going to buy the plus. Also, the big memory models were clearly the hot skews with 33% planning on getting the 128gb model. That is up from 22% and 17% in the prior two models. Of those surveyed 47% were also interested in buying the Apple Watch when it comes out next year. The carrier breakdown was 39% AT&T, 16% Verizon, 10% T-Mobile and 4% Sprint. The rest were planning on buying unlocked phones or use an international carrier. Apple price targets are moving higher with $120 to $135 the new levels being quoted.

Apple is now rumored to announce two new iPads on Oct 20th according to the Daily Dot.


The Nonfarm Payroll numbers are likely to take a significant jump in the coming months as various companies announce their hiring plans for the holidays. UPS is adding 95,000. Fedex (FDX) is adding 50,000. Walmart (WMT) is hiring 60,000, up +10% from last year. The retail sector has not really begun to advertise their hiring plans but sales are expected to rise sharply this year. Ecommerce sales are now expected to rise +17% this season and the highest growth since 2011. Holiday ecommerce spending is expected to account for 8.4% of all retail sales. That is the most growth since 2008.

Fedex posted earnings of $2.10 compares to estimates of $1.96 earlier in the week.


Remember last week when Ebay spiked higher on a rumored deal with Google? No deal ever appeared but on Friday somebody bought 29,000 November $55 calls at $1.40 with Ebay at $52. That equates to a $4 million position. Open interest was only 3,721. Nearly 20,000 October $52.50 calls traded against an open interest of 36,852. The Google rumor may not have been true but somebody expects Ebay to soar very soon. That could be somebody like Carl Icahn preparing to announce a new activist agenda and taking a position before they announce the move.


Markets

The Dow closed at a new high near 17,300 and the S&P rallied intraday to 2,019 and a new high. In theory that should be bullish and be the result of traders not allocated any BABA shares putting their money back into the market. However, the S&P slid back into negative territory along with the Nasdaq.

The worst chart is the Russell 2000. I mentioned on Tuesday that the price action on the Russell was bearish and then it rallied the next two days. However, it gapped higher to 1164 at Friday's open and then collapsed to lose -12 points for the day and close at 1146. This is very bearish.

James and I independently look through hundreds of charts every Friday and he and I both remarked at the number of bearish candles on Friday. In the past there have been numerous occasions where a major market event caused a market spike that immediately turned into a reversal point for the market. The hype leading up to the event works traders into a frenzy and the event becomes climactic. It becomes a reason to sell the news rather than continue pushing the market to new highs.

Obviously nobody knows what caused the end of day sell off on the major averages and the all day sell off on the Russell but selling happened. The death cross on the Russell is going to happen on Monday regardless of how the market opens next week.

The Russell 2000 tends to lead the market up and down. At this point it is leading down. The RSI is negative. The MACD is negative and moving average cross is negative. The trend of lower highs is negative.

Everyone wants to seize the gains from Wednesday and Thursday and proclaim a rebound in progress. Unfortunately Friday's decline completely erased those gains and the index is on the verge of setting a new five-week closing low if it moves under 1146.51. Intraday it was 1141.54 on the 16th.

Nobody knows why fund managers were selling the Russell. While it came on the same day as the Alibaba IPO there may have been some correlation but nobody knows. What we do know is that any continued selling next week suggests we are moving back into correction mode.

I could not find an advance-decline chart on the Russell so I used the S&P Small Cap as the closest alternative. The Small Cap A-D line is about to make a six-week low. The midcaps are also in decline mode.


S&P Small Cap A/D Line

S&P Mid Cap A/D Line

It is hard to talk correction in one paragraph and new highs in the next but that is what we have this weekend. The S&P is in breakout mode despite the fractional loss at the close on Friday. The S&P is less than one point from new high territory and it is hard to call that bearish.

With 368 million BABA shares selling on Friday that means $25 billion left the market. Add in the 272 million shares that traded intraday and that is another $20 billion that did not flow into anything else. I believe the cash from those BABA shares that were sold intraday will come back into the market next week. Funds that were allocated shares had to have the cash on hand and when they flipped them they freed up that cash again and will be investing it elsewhere next week. It is possible the selling on Friday was just another cash raise process related to the IPO but there is no way to confirm it.

Any cash flow speculation surrounding the IPO is just educated speculation and we can't count on it for next week. We can hope it comes back into the market but we can't bet on it. Hopefully the Alibaba headlines will fade over the weekend and we can get back to business as usual next week.

Support on the S&P is now 2000 followed by 1980. I would not mind retesting 2000 but I sure don't want to test 1980 again. The bottom chart shows the advance-decline has stopped rising and could be about to decline as evidenced by the MACD.



The Dow punched through the various levels of converging resistance on Thursday and added to those gains on Friday despite closing -71 points off its high of 17,350. The good news is that prior resistance should now be support at 17,150-17,125. The Dow candle for the last four days looks very unsupported. The long wick on Friday's shooting-star candle is typically associated with market tops when it comes on top of a strong gain. This means we need to be especially vigilant next week in watching the market action before jumping into new positions.



The advance-decline line on the Dow is where it should be with the Dow making new highs.


The Nasdaq also gapped higher and then sold off hard but it did rebound slightly at the end of the day. However, support at 4550 was never in danger with the low at 4563. While I wish the Nasdaq had confirmed the Dow gains instead of the Russell decline we don't always get our wishes. The -13 point drop was minimal and the Nasdaq is still holding at the highs. If this was the only chart you looked at you would probably be bullish. The resistance at 4600 is still solid and that was probably a factor in the morning decline. The gap higher was immediately sold and the index fell back into neutral territory -21 points under resistance.

Sellers were 2:1 over advancers on the Nasdaq but the average share only declined -0.3%. You can hardly call that a rout. Unfortunately in the bottom chart of the advance-decline line for the Nasdaq the trend is down with decliners growing.




The Dow Transports broke out to a new intraday high but for the second time this week they recoiled from long term uptrend resistance. Support is 8500 and resistance is 8715 and exactly where I had my resistance line from three weeks ago.


The NYSE Composite is made up of about 2,000 stocks on the NYSE. About 1,600 of them are U.S. stocks and 350 are foreign stocks listed through ADRs. Note that the NYSE posted a lower high and then rolled over to close under 11,000. The A/D line suggests the index is going lower.



Big caps are still showing relative strength and small caps are weak. Normally small caps lead so we need to watch this development very closely next week. Volume on the quadruple witching expiration was high at 9.24 billion shares. That was obviously helped by the 272 million BABA shares but it was still high even if you ignore BABA.

This was an option expiration Friday and that could have had a lot to do with the gap and cr@p we saw on the indexes. Monday is a key day. Option settlement day is normally neutral to slightly weak and then we are off into a new option month and investors begin adding new positions. Let's hope those new positions are not all puts.

As you can tell from the small and midcap A/D charts there is considerable weakness is everything but the biggest of the large caps. This is a warning that the market internals are worsening. It does not mean a market crash is imminent but it does deserve some caution until the internals either improve or worsen.

Random Thoughts

Two U.S. F-22 fighters intercepted six Russian planes off the coast of Alaska and two Canadian CF-18 fighters intercepted two Russian Bear bombers that approached Canadian airspace on Wednesday.

The American fighters intercepted two Bear bombers, two Mig-31 fighters and two IL-78 refueling tankers. Two weeks ago fighters intercepted 2 Bear bombers making a cruise missile attack practice run just outside Canadian waters. Russian bomber launched cruise missiles have a range of 1,800 miles. More than 16 U.S. interceptions of Russian planes were made in a ten day period in August.

Dutch fighter jets intercepted 2 Russian Bear bombers in their airspace on Wednesday. On Thursday two RAF fighter jets out of Scotland intercepted 2 Russian Bear bombers nearing UK airspace.

Sweden summoned the Russian ambassador to complain after 2 Russian SU24 fighter-bombers violated Swedish airspace on Wednesday.

Clearly Putin is sending the world a message that he is not afraid of anyone. Over the last month he has repeatedly bragged that Russia was upgrading their nuclear arsenal to be ready for all future options. On September 10th Russia tested a new submarine launched ballistic missile. Russia is also expanding its fleet of attack submarines and will soon field a new long range bomber.

British Typhoon fighter shadowing Russian Bear bomber off the coast of Scotland.


Putin is also making plans to turn off the Internet for Russian citizens in the event of an emergency. What is an emergency in Russia? That could be a big anti-government protest or a military confrontation that Russia lost. Part of the proposal is to bring all .RU domains under state control in order to "strengthen Russia's sovereignty in cyberspace." The next step would be to force all .RU domains to be hosted in Russia. The majority are now hosted outside Russia for security purposes. Newspapers, TV and radio are already under Russian state control. The Internet has been relatively unfettered but content has been largely dominated by state sponsored bloggers and Putin fans. He currently has an 86% approval rating thanks to all of the bloggers touting his praises.

Russian channels have portrayed the events in Ukraine as Russia's heroic fight against the "fascists in Kiev." Russia continues to deny any involvement by Russian soldiers or Russian military equipment. Russia claims it is only providing humanitarian supplies to the pro Russian separatists battling the fascists.

Putin has warned that Internet communications are vulnerable to U.S. spying and he has suggested building a "Russian Internet" which would be basically a "Russian Intranet" with no access to international websites. If Putin does decide to enact these changes it would be spun as an effort to rescue the Internet from U.S. sanctions.

Putin was quoted as having said to the Ukrainian president, "Russia could be in Kiev in two days and also in Riga, Vilnius, Tallinn, Warsaw and Bucarest." All are former USSR or Soviet Union countries and are now NATO and EU members.

OPEC is preparing to take action to halt the decline in oil prices. The secretary-general of OPEC said the group may cut production targets for 2015 because of an abundance of supply. OPEC produces about 40% of the world's oil supply and even though U.S. shale production has disrupted global export patterns OPEC can still impact prices. They currently produce about 30 million barrels per day. El-Badri said 2015 production could be 29.5 million barrels per day, and 500,000 barrels below their current quotas.

Analysts believe the price of gasoline is going to fall to the lowest level in four years this fall thanks to the low oil prices. Average prices are expected to be in the $3.15 range but more than 30 states are expecting prices under $3.00. Brent crude prices are now $15 lower than they were in June. U.S. crude prices range from $2 to $17 under Brent prices. Oil from shale fields like the Bakken is sometimes $12 to $15 under WTI prices because of transportation discounts.

The Fed is one month away from ending QE. Their balance sheet is now over $4 trillion as a result. Instead of buying trillions of dollars in treasuries they could have given every family in America $56,000. This would have sent the U.S. economy into a super growth mode as consumers spent their new found wealth. Unfortunately, the Fed would never have gotten the money back. In the case of buying treasuries they will eventually mature and the Fed will get all its money back including interest.

The price of ground beef hit an all time high of $4.013 per pound in August. Prices in July hit $3.884 per pound and that was also a new record. Just five years ago in August 2009 it was $2.134 per pound. I can remember when it used to be 59 cents a pound and whole chickens were 29 cents a pound and bananas were 10 cents a pound and a loaf of bread was 29 cents. (1965) Of course the Fed keeps telling us that there is no inflation because they don't count food and energy prices in the official number because they are so volatile. Beef prices rose +4.2% in August and the largest increase since November 2003.

The IMF warned that equity prices in "virtually all major asset classes" look stretched. Those elevated prices along with extremely low implied volatility has elevated leverage in the markets. A build-up of "excessive leverage" could be "abruptly corrected" according to the IMF. This came a week after the OECD warned that current bullishness in markets appeared "at odds" with the "intensification of several significant risks." Apparently everybody is a market expert now.

Forty-six percent of doctors now give Obamacare a "D" or an "F" rating according to a new survey from the Physicians Foundation. Only 25% gave the new law an "A" or "B." This survey was mailed to "virtually every doctor in the American Medical Association." They received more than 20,000 responses.

Janet Yellen is becoming Allan Greenspan, who was known for his confusing Fedspeak. Take this rambling comment from Yellen in her recent press conference. "Well, you know, we stayed low for a very long time. We have been at zero for a very long time and below the levels that some common policy rules would now be suggesting, given the level of unemployment and inflation. So the recovery has been very slow. We've also been doing unconventional policies, of course, buying assets. And in the general sense, I think we have been lower for longer than–if you complete that sentence–then many standard policy rules would suggest. So in a sense, that is a policy that we have had." Clearly trying to qualify every statement you make in every way possible has ruined her command of the English language. At least she did not use Greenspan's big words that required a dictionary to decipher.

The UN said the Ebola virus has infected nearly 6,000 people and the infection rate is doubling every three weeks. The CDC warned that as many as "half a million" may be infected by the end of January. The UN said the chances of Ebola coming to America by the end of 2014 are now over 18%. Because of the long incubation period many people can be infected without knowing it. The potential for these infected persons boarding an airline and spreading the disease around the world is growing every day. People in the infected areas in Guinea, Liberia and Sierra Leone are no longer going to the doctor when they get sick because they are afraid of the outcome. Many believe they can just fight it at home. This causes the family to become infected and spread it to their contacts. The CDC said an "uncontrolled cross-border transmission could fuel a major epidemic to take off in new geographical areas."

Sierra Leone citizens were told to stay indoors for three days in an effort to slow the progression of the disease. The lockdown program was accompanied by a door to door effort by 30,000 health workers to try and locate those homes with infected people. The six million residents are supposed to stay indoors through Sunday night.

In southern Guinea an Ebola education team of two administrators, two medical officers, a preacher and three journalists was attacked while trying to educate people on the risks of Ebola. All 8 were killed. Despite the deaths from the disease the population continues to not believe it will happen to them. Fears, misinformation and stigmas among residents are complicating efforts to contain the disease.

The Wall street Journal said the air campaign against ISIS in Iraq and Syria is being designed to allow President Obama to exert a high degree of personal control over the individual air strikes. The plan would require presidential approval for individual strikes. With the president picking individual targets from the Oval Office this would be unprecedented control. Clearly he does not trust the military to make tactical decisions. Since they don't trust him to make tactical decisions either the outcome of this war is in serious doubt. Officials have warned that half hearted pin-prick air strikes are going to only embolden ISIS and aid in their recruitment efforts. Former defense secretary Robert Gates warned that the "absolutely no boots on the ground" promise by the president was likely to have the same effect as "If you like your medical plan you can keep it."

Apple's long iPhone lines have spawned a new business opportunity. Professional line sitters are growing in number and they are having no trouble getting clients. One individual in New York started a new company called S.O.L.D Inc and advertises his line sitters. They get $25 for the first hour and $10 for each additional hour. He now has 25 people working for him and they also sit in lines not related to iPhones. A sitter typically earns $125-$185 waiting in line for Saturday Night Live tickets. Reality TV competitions create super long lines and his sitters are front and center. They also wait in line for sample sales at places like Gucci and Escada. Independent line sitters wait in lines and buy the products themselves and then resell them online. Premiums for iPhones typically run $300 over cost. iPhone 6s are going for double their cost.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

Alan Greenspan

Only 93 shopping days until Christmas

 


New Plays

Falling Revenues

by James Brown

Click here to email James Brown


NEW BEARISH Plays

CBS Corp. - CBS - close: 55.91 change: -0.59

Stop Loss: 57.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
Television is a cutthroat business. Companies fight with affiliates, content providers, distribution rights, and more. They need to because traditional TV has been dying for years as more and more consumers forgo television for their computer, tablet, or even smartphone to get their media. Companies like Netflix also steal viewership. Granted the major networks have invested a lot to build up their own "second screen" viewership but it's unclear if the investment is paying off.

Who is CBS? According to the company website, "CBS Corporation (NYSE: CBS.A and CBS) is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world. The Company has businesses with origins that date back to the dawn of the broadcasting age as well as new ventures that operate on the leading edge of media. CBS owns the most-watched television network in the U.S. and one of the world's largest libraries of entertainment content, making its brand – "the Eye" – one of the most recognized in business. The Company's operations span virtually every field of media and entertainment, including cable, publishing, radio, local TV, film, outdoor advertising, and interactive and socially responsible media. CBS's businesses include CBS Television Network, The CW (a joint venture between CBS Corporation and Warner Bros. Entertainment), Showtime Networks, CBS Sports Network, TVGN (a joint venture between CBS Corporation and Lionsgate), Smithsonian Networks, Simon & Schuster, CBS Television Stations, CBS Radio, CBS Television Studios, CBS Global Distribution Group (CBS Studios International and CBS Television Distribution), CBS Interactive, CBS Consumer Products, CBS Home Entertainment, CBS Films and CBS EcoMedia."

Shares of CBS peaked near $68.00 back in early March 2014, marking what looks like the end of a strong two-year rally from its 2011 lows. The challenge seems to be revenues. The last couple of earnings reports have seen CBS beat Wall Street's EPS estimates. How they are doing that could be cost cutting or financial engineering. CBS has announced significant stock buybacks and accelerated repurchases in 2014. Yet revenues keep falling.

Back in May, when CBS reported its Q1 earnings, revenues for the quarter were down -4.6% from a year ago. When CBS reported its Q2 results in early August this year, revenues were down -5.4%. Management tried to soften the blow with news they were doubling their stock buyback from $3 billion to $6 billion. Yet the stock continues to fall. Investors are probably worried about the falling revenue numbers.

Technically shares of CBS are testing major support at its trend line of higher lows (see the weekly chart) and support near $55.00. It also appears that CBS has created a bearish head-and-shoulders pattern, albeit one with two right shoulders (which is not uncommon). Thus a breakdown under $55.00 would be very negative for the stock price.

The May 2014 intraday low was $55.01. Tonight I am suggesting a trigger to launch bearish positions at $54.75.

Trigger @ $54.75

- Suggested Positions -

Short CBS stock @ (trigger)

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

Buy the 2015 Jan $55 put (CBS150117P55) current ask $2.95

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Beware The Reversals

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market ended Friday's session in a relatively widespread decline.

There were an uncomfortable number of bearish reversals created on Friday. The most common form I noticed on Friday was the bearish engulfing candlestick reversal pattern on the daily chart. These patterns normally need to see confirmation first but they remain a warning signal.

Our BRCM and HPQ trades were triggered on Friday.


Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland - ADM - close: 51.69 change: -0.37

Stop Loss: 50.75
Target(s): To Be Determined
Current Option Gain/Loss: +1.9%
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:
09/20/14: ADM hit a little profit taking on Friday with a -0.7% decline. We are going to take a more defensive posture and up the stop loss to $50.75. I am not suggesting new positions at this time.

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*

09/20/14 new stop @ 50.75
09/18/14 new stop @ 49.75
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

chart:


Best Buy Co. - BBY - close: 34.61 change: -0.35

Stop Loss: 32.75
Target(s): To Be Determined
Current Option Gain/Loss: +6.2%
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:
09/20/14: One pattern we noticed a lot on Friday was the early morning gains reversing and stocks closing with losses. BBY is an example where shares gapped open higher and then failed early on. BBY managed to pare its losses by the closing bell but the stock did still produce a bearish engulfing candlestick reversal pattern.

The stock is up five weeks in a row and might be due for a pullback. I am raising our stop loss up to $32.75.

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*

09/20/14 new stop @ 32.75
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

chart:


Broadcom Corp. - BRCM - close: 40.89 change: -0.55

Stop Loss: 39.45
Target(s): To Be Determined
Current Option Gain/Loss: - 1.7%
Entry on September 19 at $41.60
Listed on September 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.1 million
New Positions: see below

Comments:
09/20/14: BRCM hit new multi-year highs on Friday morning. Shares also hit our suggested entry point at $41.60. Unfortunately the rally did not last and shares reversed into a -1.3% decline. BRCM is another example of the bearish reversals we noticed on Friday.

I would wait for a new high or a bounce from $40.00 before launching new positions.

Earlier Comments: September 18, 2014:
We are quickly approaching a world where everything can and will be connected. Broadcom plans to make it happen by leading the world into the Internet of Things.

Who is Broadcom? The company describes itself as "a global leader and innovator in semiconductor solutions for wired and wireless communications. Broadcom products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. With the industry's broadest portfolio of state-of-the-art system-on-a-chip solutions, Broadcom is changing the world by Connecting everything."

By connecting everything they mean it. From broadband technology to cloud infrastructure to wireless and wearables to home networking, to automotive, appliances, bandwidth to backhaul, GPS to GPON, processors to powerline, set-top box to small cells, wearables to Wi-Fi, Broadcom is designing chips for to connect it.

What is the Internet of Things? It's a hot buzzword right now and one we will hear a lot more often over the next few years. Gartner, the world's leading information technology research company, described the Internet of Things (abbreviated as IoT) as the "network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment." One concept to help envision this idea is making dumb electronic devices smart. It could be anything from your coffeemaker to your refrigerator.

Gartner estimates that the IoT, "which excludes PCs, tablets and smartphones, will grow to 26 billion units installed in 2020." That is a 30-fold increase from 2009. Cisco Systems (CSCO) believes that the number of connected items could hit 50 billion by 2020. That's six devices for every person on the planet. Gartner is estimating that the products and services for the IoT will generate more than $300 billion in sales by 2020.

The IoT sounds like the next technology revolution. While it's only a few years away that might be too far in the future for some investors to consider. Right now everyone is focused on Apple's (AAPL) new smartphone the iPhone 6. BRCM just happens to be a major supplier for AAPL's new phone.

AAPL revealed their new phone last week. The reviews have been a little over-the-top. Descriptions of the Iphone 6 have been glowing. Some are calling it the "best smartphone on the planet" or the "best smartphone ever made!" One professional reviewer described the new iPhone 6 as the fastest iPhone yet. First-day pre-orders for AAPL's new phone hit a record-breaking four million phones. That is double the number of pre-orders for the iPhone 5 two years ago. There are estimates that AAPL could sell between 60 to 70 million iPhone 6s by the end of 2014. It certainly sounds like they have a hit on their hands and that's good news BRCM.

There was another story out recently that hinted BRCM may have won the contract to supply chips to AAPL's new smart watch as well. AAPL's new watch is expected in 2015.

Meanwhile BRCM continues to see earnings growth. They have beaten analysts' EPS estimates four quarters in a row. Shares of BRCM are currently trading at multi-year highs. The point & figure chart is forecasting a long-term target of $63.00.

Tonight BRCM closed at $41.44 with a high of $41.49. I am suggesting a trigger to open bullish positions at $41.60. The $40.00 level is short-term support so we'll put our stop loss at $39.45.

- Suggested Positions -

Long BRCM stock @ $41.60

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

Long 2015 Jan $43 call (BRCM150117C43) entry $1.55*

09/19/14 triggered @ $41.60
*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

chart:


Hewlett-Packard Company - HPQ - close: 36.79 change: -0.22

Stop Loss: 35.90
Target(s): To Be Determined
Current Option Gain/Loss: -1.0%
Entry on September 19 at $37.17
Listed on September 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11.1 million
New Positions: see below

Comments:
09/20/14: Our new play on HPQ was also triggered on Friday morning. The plan was to open bullish positions at $37.15 but shares gapped higher at $37.17 instead. The rally briefly traded above its 20-dma and then reversed. While our trade is now open I would hesitate to launch new positions. We might see a better entry point on a bounce from $36.00 or wait for a new relative high above $37.38.

Earlier Comments: September 17, 2014:
Old technology giants are have recaptured the market's attention. The S&P 500 is only up about 7% this year. Yet companies like Intel (INTC) are up +34%, Microsoft (MSFT) is up +25%, and HPQ is up +29.5%. HPQ covers a lot of ground in the technology sector.

According to the company website, "HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. With the broadest technology portfolio spanning printing, personal systems, software, services and IT infrastructure, HP delivers solutions for customers’ most complex challenges in every region of the world."

What that marketing talk is trying to say is HPQ has got you covered. They make computers, computer peripherals, printers, servers, software, data storage. Plus, they offer cloud services, big data solutions, and cyber security. They are also expected to introduce a 3-D printer in the future.

Technically shares of HPQ have been slowly marching higher with investors consistently buying the dips. You can see the technical support at the stock's rising 50-dma. Now after a two-week pullback investors have started buying the pullback in HPQ again.

We want to hop on board if HPQ confirms this reversal higher. Tonight we're suggesting a trigger to open bullish positions at $37.15. We're not setting an exit target tonight but I will note the point & figure chart is forecasting at $47 target.

- Suggested Positions -

Long HPQ stock @ $37.17

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

Long 2015 Jan $40 call (HPQ150117C40) entry $0.83*

09/19/14 triggered on gap higher at $37.17, entry point was $37.15
*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

chart:


Southwest Airlines - LUV - close: 34.56 change: -0.67

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: +3.9%
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:
09/20/14: LUV gapped open on Friday morning but the rally didn't last. Shares topped out at $35.49 and spent the rest of the day losing altitude. LUV post a -1.9% loss on Friday but still marked its sixth weekly gain in a row.

What is troubling is Friday's performance has created bearish engulfing candlestick reversal pattern. The nearest area of potential support is $34.00 and its 10-dma.

Tonight we'll move our stop loss up to $32.95.

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

09/20/14 new stop @ 32.95
09/18/14 new stop @ 32.75
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

chart:


Morgan Stanley - MS - close: 35.76 change: -0.37

Stop Loss: 33.90
Target(s): To Be Determined
Current Option Gain/Loss: + 2.9%
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:
09/20/14: MS also encountered some profit taking on Friday with a -1.0% decline. Shares still managed their seventh weekly gain in a row. We can look for short-term support near the $35.00 area. Tonight I'm moving our stop loss up to $33.90.

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*

09/20/14 new stop @ 33.90
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

chart:


Microsoft Corp. - MSFT - close: 47.52 change: +0.84

Stop Loss: 44.75
Target(s): To Be Determined
Current Option Gain/Loss: +7.8%
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:
09/20/14: MSFT, like MS above, also marked its seventh weekly gain in a row. The difference is that MSFT ended on an up note. Shares rallied through resistance near $47.00 to close at multi-year highs.

Tonight we're raising the stop loss on MSFT to $44.75. More conservative traders may want to use a stop closer to $46.00 instead.

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

09/20/14 new stop @ 44.75
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

chart:


Pilgrim's Pride - PPC - close: 32.09 change: -0.18

Stop Loss: 29.85
Target(s): To Be Determined
Current Option Gain/Loss: +1.7%
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:
09/20/14: PPC is flirting with seven-year highs. Traders bought the dip on Friday but shares still lost -0.5%. Tonight we'll adjust the stop loss up to $29.85.

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*

09/20/14 new stop @ 29.85
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

chart:


WhiteWave Foods Co. - WWAV - close: 36.58 change: -0.69

Stop Loss: 35.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.8%
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:
09/20/14: WWAV erased Thursday's gains with a -1.85% drop on Friday. Shares have closed below short-term support at the 10-dma. 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

chart:




BEARISH Play Updates

AGCO Corp. - AGCO - close: 46.09 change: -0.32

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.3%
Entry on September 18 at $46.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 976 thousand
New Positions: see below

Comments:
09/20/14: AGCO hit new 2014 lows on Friday. This move looks like a new bearish entry point.

Earlier Comments: September 16, 2014:
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.

- Suggested Positions -

Short AGCO @ $46.25

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

Long NOV $45 PUT (AGCO141122P45) entry $1.25*

09/18/14 triggered @ 46.25
*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:


Mobile Mini, Inc. - MINI - close: 37.33 change: -1.20

Stop Loss: 40.10
Target(s): To Be Determined
Current Option Gain/Loss: + 3.8%
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:
09/20/14: MINI's reversal from the $40.00 level continues. Friday's display of relative weakness (-3.1%) is a good sign and shares broke support near $38.00.

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

chart:


Transocean Ltd. - RIG - close: 34.08 change: -1.07

Stop Loss: 37.55
Target(s): To Be Determined
Current Option Gain/Loss: +10.8%
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:
09/20/14: RIG continues to underperform the broader market and lost another -3.0% on Friday. These are new 10-year lows for RIG. Tonight we're adjusting the stop loss to $37.55. More conservative traders may want to use a significantly lower stop.

If you look at RIG's long-term charts I suspect the stock might see a bounce once it nears $33.00.

Note: Our 2014 October puts are up about +450%. Traders may want to take some money off the table if you're holding these.

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*

09/20/14 new stop @ 37.55
09/17/14 new stop @ 38.05
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

chart: