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Daily Newsletter, Saturday, 10/4/2014

Table of Contents

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

Market Wrap

Job Squeeze

by Jim Brown

Click here to email Jim Brown

The payroll report energized the market for a Dow gain of +208 points but all the indexes rallied only to downtrend resistance.

Market Statistics

The Nonfarm Payrolls for September came in much better than expected at +248,000 compared to estimates for +215,000. Even better the unexpectedly low August reading of +142,000 was revised to +180,000 and the +212,000 reading for July was revised up to +243,000. This was a total gain of +671,000 jobs for the last three months. Over the last 12 months the gain was 2.635 million jobs or an average of roughly 219,000 jobs per month with the Q3 average at +224,000 and Q2 average at +267,000. This year is on pace to be the best year for jobs since 1999.

The unemployment rate declined from 6.1% to 5.9% thanks to a gain of +232,000 jobs in the separate Household survey and a decline of -97,000 in the workforce. Unfortunately the workforce participation rate fell to 62.7% and a new 36 year low. More than 92.6 million people are not in the labor force and that was an increase of +315,000 over August. Yes, 232,000 people found jobs but another 315,000 dropped out of the workforce. There are officially 9.3 million unemployed but the U6 number that includes all categories of unemployed declined only slightly to 11.8% or 18.6 million.

Click here for bigger charts


Sectors contributing to the payroll gains included retail +35,000, business and professional services +81,000, leisure and hospitality +33,000. Government payrolls rose by +12,000. While the rising number of jobs is slightly Fed negative the average hourly earnings were flat at zero. Over the last three months the average is only +0.1% growth thanks to a +0.3% rise in the prior month. Without wage inflation the Fed will not be in any hurry to raise rates.

The BLS has a "diffusion index" that covers 249 component industries and supplemented by a 141 industry index for manufacturing. The index is helpful in assessing the overall state of the economy and functions as a leading indicator of manufacturing employment levels. I explained this index because it is going in the wrong direction. The index declined from 62.7 last month and 67.8 the prior month to 57.8 in September. This indicates the breadth of job creation is narrowing. We got good news in the number of new jobs but bad news that the number of industries that are hiring is shrinking.

The majority of the new jobs in September went to the age 55 and older category. The number of unemployed in that age group declined from 1.549 million to 1.332 million. The unemployment rate for that category fell from 4.6% in August to 3.9% in September.

While there were things not to like about the payroll report the majority of it was positive. Jobs are increasing and the economy continues to strengthen. September's headline number will be revised again next month but nobody will care. The headline was all that mattered.


If you are really into the numbers here is a snapshot of the changes since December 2007 and just before the recession.

Number of total jobs 146.3 million vs 146.6 million today. A +300,000 gain.

Total number of unemployed 7.6 million vs 9.3 million today, +1.7 million more.

Unemployment rate of 5.0% compared to 5.9% today.

U6 unemployment 8.8% vs 11.8% today, +3 points higher today.

Average hourly earnings $24.33 vs $24.53 today, up a whopping 20 cents.

Employed part time for economic reasons 4.6 million vs 7.1 million today, up +2.5 million.

Employed part time for economic reasons as % of labor force 3.0% vs 4.6%.

Labor force participation rate 66.0% vs 62.7% today, -3.3%.

There was another economic report on Friday but the news was trumped by the reaction to the payroll report. The ISM Nonmanufacturing (Services) Index for September declined slightly from 59.6 to 58.6. The index was poised to break out to a five year high last month but the September weakness killed that possibility for at least another month.

On the component front the new orders declined from 63.8 to 61.0 and backorders fell from 54.5 to 52.0. Anything over 50 is still expansion. Employment rose from 57.1 to 58.5 and the highest reading since 2005 and exports spiked from 52.5 to 57.5. Overall business activity declined from 65.0 to 62.9. Prices paid fell from 57.7 to 55.2 and confirming there is no inflation in sight.

This was still a decent report despite the minor declines. The economy in the services sector is still growing but painstakingly slow. Twelve of the 17 industries reporting said they expanded in September. The five that contracted were arts, entertainment and recreation, mining, educational services, public administration, and other services.

The ISM Manufacturing on Wednesday declined from 59.0 to 56.6. New orders declined from 66.7 to 60.0 and order backlogs fell from 52.5 into contraction at 47.0. Employment declined from 58.1 to 54.6. Clearly the manufacturing sector is softening a little faster than the services sector but still moving slowly higher.


The economic calendar for next week is fairly bland on economic reports. There are several but nothing the market really worries about. The big event is the FOMC minutes on Wednesday. This was the last meeting before QE is to end later this month so the minutes will be scanned for references to ending QE and what happens after QE is over. The "considerable period" phrase was undoubtedly discussed. This is the most important event for the week.

Earnings begin for Q3 with YUM Brands on Tuesday and Alcoa, Costco and Monsanto on Wednesday. This is the preshow ahead of act one that begins the following week.


There were so many Fed speakers next week I had to put them in a separate calendar. There are two notable speakers. Bernanke will speak on Wednesday and the new Vice Chairman Stanley Fischer will speak on Thursday. I view Fischer as the biggest speech of the week. He has been relatively quiet since his addition to the Fed and I see him as Yellen's successor. I personally don't see Yellen staying around too long because the kitchen is going to heat up relatively quickly and I think she will decide the hot seat is more than she bargained for and announce her retirement. I could be wrong but I am betting the new president in 2017 will get to appoint a new Fed head as one of his/her first duties.


There were two new splits announced last week by SNN and CALM. Of the two the CALM split may be worth playing. Shares jumped on the announcement to a new high.


The payroll report overshadowed all the regular news but reporters still managed to slip in an Ebola story a couple times an hour. The patient in Dallas, Thomas Duncan, is still in the hospital in serious condition. His partner and her 13-year-old son and two 20-something nephews left their apartment where they had been quarantined for 4 days and are now living in a donated private residence. In the apartment they had been sleeping on the three beds where the infected patient had slept along with piles of dirty linen and infected surfaces in every direction.

On Friday a hazmat team in full body suits showed up to decontaminate the apartment. They filled several 55 gallon drums with the contaminated linens and clothing and removed three mattresses from the apartment before they hosed it down with disinfectant. Duncan had thrown up outside the apartment on the way to the ambulance so all traces of that had to be disinfected as well.

A doctor studying Ebola said an infected person is a virus factory producing up to a hundred million virus particles per milliliter of blood. Coughing, sneezing, spitting, vomiting, etc puts everyone around them at risk of a stray splatter that could infect them.

More than 50 people are being isolated and "monitored" as a result of some serious mistakes in the patient's diagnosis and treatment. Monitoring means a health care professional shows up twice a day to take their temperature and ask them questions about how they feel.

The patient's partner, identified as Louise Troh, has a daughter who is married. The daughter and husband both helped care for the patient in the days before he was hospitalized and are now reported to be showing signs of Ebola. That suggests there will be another circle of contacts to be monitored.

Elsewhere Howard University Hospital in Washington has admitted two patients with Ebola like symptoms had traveled to Nigeria recently. Officials in Georgia have isolated a man with Ebola like symptoms that had recently been in Africa. An NBC News cameraman with a confirmed case of Ebola is on his way back to the U.S. and will be hospitalized in Nebraska.

I strongly believe that other than a few random cases there will not be an epidemic in the USA. Now that the event in Dallas has awakened the healthcare community they should be a lot more proactive about questioning and testing anyone showing symptoms even close to those with Ebola. Right now, bad news sells, and the news agencies are blasting the headlines to capture viewer attention.

Sales of 3M particulate respirators, starting at $22, were up +4,004% over the last month according to Amazon. Soap.com said sales of hand sanitizers rose 20% over just the last week. Dupont said sales of gloves, eye protection, face masks and fluid resistance gowns and suits were soaring. They were doing everything they could to assure supplies and were shifting inventories from other locations to areas of need. Production has been tripled on some items. Amazon said multiple books dealing with surviving Ebola had risen 49% over just the last 24 hours. Sales of Tyvek suits and respirators were soaring. Lifesecure, sellers of pandemic-protection products saw a "several hundred percent" increase in sales.

Stock news

Tesla (TSLA) was up for the second day after Elon Musk tweeted on Thursday "About time to unveil the D and something else." That prompted a new wave of speculation on what that could mean. Some believe it is a new model. Others believe it refers to "dual motor" or all-wheel drive. Currently Tesla's are two-wheel drive. The Model X SUV due out in late 2015 is dual motor all-wheel drive. The picture he tweeted with it had a date of Oct 9th, which is assumed to be the date of an announcement.


Tesla shares had declined from $285 when Musk made the comment about being overpriced to $235 on Wednesday. His tweet caused a $15 bounce and added $1.8 billion to Tesla's market cap. Elon was smart and made the Tweet just as shares returned to their long term uptrend support. If you are a gambler you still have three days to enter a position ahead of Tesla's Oct 9th announcement.


Musk gets more headlines for Tesla with a single tweet than Nissan can get with millions of dollars in advertising. You probably don't know this but the Nissan sells about twice as many of its Leaf electric vehicle than Tesla sells Model S vehicles. Of course the Leaf is $35,000 and the Model S $85,000. According to Claudia Assis at MarketWatch the numbers below are the sales figures for September for all of the major electric car models.


Palo Alto Networks (PANW) rallied $6.50 on Friday after Piper Jaffray gave it a buy rating with a $110 price target. After JP Morgan's giant hacking disaster the new field of security technology companies are seeing money flow their way. Piper surveyed 39 resellers and found that PANW and FireEye (FEYE) were clearly outperforming the rest of the group. Other recent ratings on PANW were Janney Capital and Roth Capital both with buy ratings.


GoPro shares recovered slightly from their Thursday crash but there is still a cloud hanging over the stock. GoPro crashed -6.9% on Thursday after JP Morgan said it was releasing 5.8 million shares from lockup in order to gift the Jill and Nicholas Woodman Foundation. Traders immediately thought the stock was going to be sold and they hit the sell button. After the crash the bank and the founder Nich Woodman said the shares were not going to be sold. The timing of the gift was for tax reasons and there was a short window of opportunity to gift the shares before the lockup expired in December.

Some analysts have claimed as much as 40% of the GoPro float is short. That is a huge amount especially on a stock that up until Thursday only went up. The lackluster +$1.50 gain on Friday suggests the GoPro bulls are still cautious. There was actually positive news on Friday as well. The company said it was releasing its new HERO4 premium camera with sales to begin this weekend. They announced a new deal with Best Buy that will triple GoPro's in-store presence with a 12-foot display and a 40-inch monitor. Jonathan Harris, Senior Vice President of Intergalactic Sales, the additional space would provide a compelling experience for customers in Best Buy stores.


Apple (AAPL) shares continue to struggle despite positive news about China and the new iPad announcement due out on October 16th. On Friday Deutsche Bank cut Apple's rating to hold saying Apple is running out of catalysts. Apple has a very large installed base of iPhone 4s that should be prime upgrade candidates. However, the analyst felt estimates for iPhone sales were still too optimistic. "We expect supply constraints to limit unit shipments through year-end."

Jefferies analyst, Sundeep Bajikar, initiated coverage on Monday with a hold rating. He said Apple's premium products has served them well but overall device growth is slowing and weighted towards the lower price points.

Apple is also expected to announce a delay in delivery of the Apple Watch. Reportedly there are manufacturing problems that are slowing development.

While Apple is expected to announce a larger 12.9 inch iPad the iPhone 6+ is expected to cannibalize iPad sales. The 6+ is huge and nearly the size of a mini tablet.

Another problem facing Apple today is the high radio frequency (RF) output of the new iPhone 6 units. The web is buzzing with worries over the RF dangers. Apple has warned repeatedly about the dangers of RF in its prior phones. Analysts believe these warnings ar ejust insurance against some future suit if somebody came down with cancer.

However, the FCC has a legal limit of 1.6 watts per kilogram (W/kg). The iPhone 6 and 6+ have a 1.18 W/kg rating when positioned near a users head. However, when Wi-Fi and Bluetooth are running simultaneously the rating jumps to 1.58 W/kg and just barely below the legal limit. For comparison the Samsung Galaxy Note 3 has a rating of 0.35 W/kg. The buzz on the Internet is a caution against carrying an iPhone 6 in your pocket where your organs don't have a thick skull to protect them from RF radiation.

Apple shares have fallen out of their uptrend support channel and could be headed to $95 soon.


Global Payments (GPN) reported earnings on Thursday of $1.22 compared to estimates for $1.15. In addition they raised their full year guidance. Shares spiked about $4 on a bad day in the market. On Friday Morgan Stanley upgraded GPN to neutral and raised the price target from $66 to $74. While that was not a glowing upgrade the stock rallied another $4 to close at $76 and a new high.


JP Morgan (JPM) disclosed that 76 million customers and 8 million small businesses had their contact information stolen in the data breach between June and August. The data stolen was names, addresses and email addresses but account numbers, passwords and personal information like social security numbers were not. Despite the inability to get the account numbers the breach is still a significant problem. Having 84 million email addresses and the name/address to go with it is a perfect opportunity to setup numerous phishing operations in an attempt to get the good stuff.

A phishing email is a fake email sent to you that appears to come from a reputable source. In this case they could send you an email with your identifying information and format the email to look like it came from JP Morgan Chase. "We would like to warn you that we experienced a data breach and we are emailing all our customers asking them to validate their accounts. Please click this link and log into your account and verify your identity." By clicking their link to a phony JP Morgan/Chase website where you put in your login id and password they have effectively stolen that info and now they can access your account and remove all the money.

Late Friday we learned that multiple state Attorneys General are launching inquiries into the breach and we know they will eventually find some way to fine or penalize the bank for billions of dollars.


I think we have a bigger problem than just some hackers trying to steal and sell financial information. The New York Times said nine other banks were also infiltrated by the same group of hackers. The tracks they left point to a group working out of Russia that appears to have connections to the Russian government according to administration officials briefed on the matter.

Some American officials speculate the breaches were intended to send a message to Wall Street and the U.S. about the vulnerability of the digital network and some of the world's most important banking institutions. One senior intelligence official said "It could be retaliation for the sanctions" but they could also have mixed motives with the intention of profiting off the data they stole.

JP Morgan's security team first learned about the intrusion in late July but it took them until late August to close all the entry points and delete the code left by the hackers across 90 different servers. Analysts are still puzzled on how the hackers gained administrative privileges that allowed them access to that many servers. The Treasury Dept and Secret Service have been working with JPM since the hack was discovered to try and track down the perpetrators.

Here is the challenge nobody is talking about. If they had administrative privileges they could have deleted every file on the servers forcing JP Morgan to reload backups and rebuild databases. Even worse, instead of deleting the files they could have simply modified the information in every record and the changes might not have been apparent for days or weeks and could have been propagated into the daily backups making them worthless as well. Changing email addresses, street addresses, etc, would make the records worthless and things like bank statements, updated credit cards, etc, would have been mailed to the wrong addresses and cause all kinds of problems. Having to get in touch with 76 million customers and have them correct their information on file would be an insurmountable task. Basically, with administrative access they could have caused JPM and the other nine banks significant amounts of grief that could have taken years to correct. NYT article here

If you have recently been turned down for a mortgage loan don't feel too bad. Ben Bernanke revealed in an appearance on Thursday that he was recently turned down for a loan to refinance his house. In the interview he told Mark Zandi he was "unsuccessful" in trying to refinance his mortgage. When the audience laughed he said, "I am not making this up. I think it is entirely possible that lenders have gone a little bit too far on mortgage credit conditions."

He bought his house in 2004 with two loans with one of them an ARM. The five year ARM was scheduled to adjust higher in 2009 and he refinanced his mortgage of $685,000 into a new loan. In Sept 2011 he refinanced again with a 30-year at 4.25%. He did not say why he was refinancing again or for how much only that he was turned down. With the iron clad qualification rules today he had two strikes against him. He recently left his job of 8 years so a lender could not verify employment. Since his main form of income is speaking engagements where he gets $50,000 for an hour of work he is now self employed and that requires two years of history and more stringent credit guidelines. He also received more than $1 million for a book deal with publisher W.W. Norton. I am sure Bernanke is credit worthy but the current mortgage application process has been called the equivalent of a "financial colonoscopy."

Markets

A +200 point rally is normally a good thing but under some conditions it is not enough. The market was significantly oversold and given the depth of the drop on Thursday to 16,675 you would have expected a stronger bounce. This would be especially true since traders should have wanted to close short positions before the weekend. Friday was a short squeeze that halted at downtrend resistance on all the major indexes.




The Russell 2000 decline to 1,078 and -10.7% from its 1,208 high on July 3rd was much sharper than the declines in the big cap indexes. If the rebound on Friday had legs we should have seen the Russell post larger percentage gains than the big caps. That did not happen with a +0.76% rebound compared to +1.24% on the Dow, +1.11% on the S&P and a whopping +2.12% spike on the Dow Transports.

Also, the Russell rebound was strictly a short squeeze. The Russell gapped open to 1,106 and closed at 1,105. The late morning creep higher to 1,109 evaporated almost immediately while the Dow and S&P actually rose in the afternoon. If the small caps are going to continue to lead you would have wanted them to climb into the close.

The S&P broke through multiple support levels to hit 1,926 on Thursday. The rebound recovered 41 points to 1,967. That is still well below the prior support, now resistance, at 1,980. The S&P did retest the bottom of the uptend channel I diagrammed last week. In theory this was a perfect retest of the long term trend because the low was right to that long term support and the rebound was immediate as in each of the last several tests. That also corresponds to the support of the 150 day average at 1,928. However, if these levels are tested again and do not hold it would suggest a much lower low and longer period of contraction.



The Dow plunged to 16,674 on Thursday and rebounded back over 17,008 on Friday. Despite that +334 point rebound it still finished the week with a -103 point loss. I would be thrilled if the rebound continued but it would encounter strong resistance again at 17,150.

The Dow was helped by monster gains in Goldman Sachs of +$5 and $2 gains in Visa, Boeing and IBM. Only one stock was negative and that was Caterpillar.

The only moving average that counts on the Dow is the 200-day currently at 16,578. That average has halted every dip over the last two years. Since the decline stopped about 100 points shy of that level we could see some further weakness. It is not mandatory but the risk is there.

Interim support is 16,800 with resistance 17,150.




The Nasdaq chart is still bearish with strong resistance at 4,485 and 4,510. The decline to 4,367 was intraday with a return to a positive close on Thursday. The rebound was led by the Nasdaq big caps. The payroll report caused a short squeeze on Friday with the opening high at 4,471 and the close at 4,474. That is a text book short squeeze pattern with no follow through.

I will remain bearish on the Nasdaq until it moves back over 4,510. A further decline to 4,344 would be buyable.



The Nasdaq 100 ($NDX) was my canary for the market last week and the support at 4,000. When that level broke I thought we would see a bigger drop. The NDX panic low on Thursday at 3,934 was instantly bought and the index rebounded to close the day with a gain but with a second consecutive close under 4,000. The 3,885 close appeared to be a negative omen but the short squeeze on Friday overwhelmed the sellers.

However, the NDX, which had been somewhat bullish until last week now has the same bearish chart pattern as the Composite and series of lower highs and lower lows. This is not a good sign for next week and another close under 4,000 would be a strong sell signal.


The Russell declined to levels that produced a rebound over the last year. However, after a 40% gain in 2013 it remains at risk for further profit taking. The 1,087 level was a 10% correction and the 1,082 level was the low on the prior two dips.

On the weekly chart the lower high in August suggests stronger negative bias exists that could push us lower. Any break of that 1,082 support level could prompt a much stronger decline possibly to bear market territory at 965.

The Russell 2000 has declined for five consecutive weeks and the worst streak since August 2011.


The Dow Transports rocketed higher as oil prices declined under $90. The index declined to the long term support of its 100-day average which has been a buy point in each of the last eight dips. Clearly investors bought that dip once again.

However, the transport rebound stopped at the 8,500 resistance level and that is where it will have to start on Monday. There is no room for a running start unless it pulls back at the open to build up some momentum for the next push higher.

The fourth quarter is normally bullish for the transports because of all the air travel around the holidays and the number of packages being shipped. This is a bullish index and could help offset the drag from the Russell 2000.


The NYSE Composite Index briefly traded below support at 10,500 before a lackluster rebound of 0.7%. The NYSE is in the same downward trend as the Russell 2000 and a return dip under 10,500 could be a trigger for an acceleration in selling. The 150-day average that is normally support has failed.


I would like to think the rebound on Friday stalled because traders did not want to go long over the weekend with an abundance of geopolitical headlines possible. Of course what I would "like" to think does not matter. The Russell and the NYSE Composite charts are still negative. Only the big cap indexes like the Dow and Nasdaq 100 still retain any bullish points.

The afternoon stall worries me and that could suggest another move lower on Monday. Whether it has any legs is the big question. At this point heading into the earnings cycle we could see the dip buyers turn aggressive and short circuit any major declines.

Random Thoughts

We are three weeks away from the end of QE and the current market weakness is probably related to that event although market commentators are not yet focused on it. The strong jobs report is just one more reason the Fed will have to modify their forward guidance at the October 28th meeting. Bullard said there is no way the Fed can not alter guidance, which means they have to get rid of the considerable period language and start suggesting the first rate hike will be in March instead of June. The end of every QE program has brought significant market declines. Why would this time be different? The market has now gone 1,100 days without a 10% correction. Fun times ahead!

The end of QE1 in 2010 caused a -13.2% decline in the S&P. QE2 ended in 2011 and the market declined -18% over the next three months.


Mario Draghi and the ECB failed to live up to expectations when they met last week. The tough talk by Draghi is no longer having any impact on the market and the declining European economy is going to be a drag on the world. This had one commentator saying Mario was Draghi-ing on the market.

Common is rotten to the Core. The vast majority of people reading this newsletter probably learned to add and subtract in math class by borrowing and carrying numbers. It was simple and quick and we all do it even to this day. However, that system is no longer taught or accepted in schools using the Common Core curriculum. This link is for everyone that does not understand why parents are so up in arms over Common Core. Can you subtract 38 from 325? This is how third graders are being taught to do this. Picture worth 1000 words

Inflation in Venezuela hit 63% last week with the bolivar currency exchange rate at 100 to $1 except you can't actually exchange them except on the black market. President Maduro continues to blame the "capitalist economic war" on the U.S. but he still accepts our dollars for the one million barrels of oil we buy from him every day. Airlines have quit flying there because the government won't give them the money paid for the fares and there is no jet fuel to refuel the planes.

In Iraq the ISIS army is on the move with the capture of two more cities close to Baghdad. It is only a matter of time before Baghdad itself is captured. Iraqi troops are melting into the desert to avoid confrontations with the ISIS army. A large number of Shiite civilians have been conscripted and armed to help defend Baghdad against the coming attack. However, there is no way to really defend against an army of suicide bombers that are willing to drive trucks filled with explosives into critical checkpoints and defense positions.

The $2 billion U.S. Embassy has 1,300 soldiers and special operations forces on hand for protection but once ISIS secures the outer edges of Baghdad they can lob artillery and mortar fire into the embassy at will. There is a real crisis brewing in Baghdad and a couple bombing strikes a day is not going to solve it. Once inside Baghdad's perimeter and the fighting goes house to house the airstrikes will be even more ineffective. Most of the military strategists in Washington believe time is running out to reinforce Baghdad with boots on the ground OR begin the evacuation of the embassy and all the personnel.

Additional payroll numbers. What is wrong with this picture?

In the last year the working age population rose by 2,278,000.

In the last year the labor force rose by 389,000.

In the last year those "not" in the labor force rose by 1,889,000.

That is a lot of people not working but not included in the unemployment rate. Over 100% of the decline in the unemployment rate over the last year has been from people dropping out of the labor force rather than strength in employment. The labor force increases by 217,000 people per month. We would have to create 217,000 jobs per month for the unemployment rate to remain flat. It is declining because fewer people are looking for jobs.

The Association of American Railroads (AAR) reported U.S. rail traffic for September was up significantly. Railroads originated 1,190,431 carloads in September, up +2.7% or 30,837 carloads over the same period in 2013. This was the seventh consecutive month of year-over-year gains and something that has not happened since early 2011. Intermodal traffic totaled 1,073,042 containers, up +4.5% or 45,803 units. The last three weeks of September were the three highest volume intermodal weeks in history for U.S. railroads. More info here

Q3 earnings are just ahead and with it comes Q4 guidance. That is expected to be rocky because of the sharp rise in the dollar. This impacts sales of products overseas and 50% of the S&P profits come from overseas sales. We can expect plenty of guidance warnings as a result of "currency translation" issues. Estimates for earnings growth for Q3 have declined from about +10% to +6.5% so the bar is not set too high.

A recent survey showed that 72% of Americans believe we are still in a recession. Wage growth over the last five years has been nonexistent and in many cases has declined because of the large number of workers competing for too few jobs. Home prices have not risen over mortgage balances in many areas and have trapped consumers in their existing homes. With one person in ten not working everyone knows somebody that is out of work. When a new McDonalds opens and gets 1,800 applicants for 40 positions you know the job market is tight.

The biggest fat finger trade ever happened in Tokyo last week. The trade resulted in orders for $617 billion in stock being cancelled. Shares in 42 major Japanese companies were hit by the error. The biggest single order was for 1.96 billion shares of Toyota worth 12.68 trillion yen. The trader initiating the bogus trade was not identified.

Pyongyang North Korea was said to be under lockdown as rumors swirled about a coup. Kim Jong-un has not been seen in public since September 3rd. Supposedly he is ill and some believe he has gout, diabetes and lung problems. Reportedly the Organization and Guidance Department (OGD) has stopped taking orders from Kim and are running the country. This is not a big change since they normally run the country anyway with little input from the figurehead in charge. However, it seems Kim may have overstepped his authority and has been cut out of the loop. There are so many rumors it is tough to know what is real.

With crude prices falling to less than $90 gasoline prices are plunging. The average price in the U.S. fell to $3.33 on Thursday and a four year low for this time of year. Gasoline prices are expected to decline to $3 or less in the coming weeks.

On the bright side October is normally the month where the market rebounds into year end. Market lows are typically made in October and rebounds then push it higher. October is known as the bear killer month because so many bear markets end in October.

Only 81 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"What's money? A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do."

Bob Dylan

 


New Plays

Memory Chips & Military Decoys

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Micron Technology - MU - close: 33.94 change: +0.13

Stop Loss: 32.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 25.6 million
New Positions: Yes, see below

Company Description

Why We Like It:
Micron is in the technology sector. The company makes memory chips (semiconductors). The company was founded in Boise, Idaho and incorporated back in 1978. The company website describes Micron as "a global leader in the semiconductor industry. For more than 35 years, Micron has dedicated itself to collaborating with customers and partners to engineer technology that drives innovation and transforms what’s possible."

"Micron offers the industry's broadest portfolio of silicon-to-semiconductor solutions—starting with foundational DRAM, NAND, and NOR Flash memory, and extending to SSDs, modules, MCPs, HMCs, and other semiconductor systems. This best-in-class technology powers leading-edge computing, consumer, enterprise server and storage, networking, embedded, automotive, industrial, and mobile products."

"As the only U.S.-based DRAM manufacturer, Micron leverages an expansive global footprint and proven technology leadership to make it easier for customers to try new things and gain competitive advantages in their markets."

The company has been a consistent performer on the earnings front. The last four quarterly reports in a row have seen MU beat Wall Street's estimates on both the top and bottom line. The revenue growth has been tremendous. Their most recent earnings report was September 25th.

Wall Street was expecting a profit of $0.82 a share on revenues of $4.15 billion. MU reported a profit of $0.82 cents with revenues up +48.7% to $4.23 billion.

MU's CEO Mark Durcan commented on the quarter saying, "We are pleased with the company's performance that resulted in record revenue and earnings for the year. Continued favorable market conditions and steady execution led to increases in sales volumes and another quarter of strong operating margins and earnings per share."

MU management then offered a bullish picture for the first quarter of 2014 and raised their revenue guidance thanks to strong demand for both DRAM and NAND memory.

September's earnings results sparked a wave of bullish analyst action. Several firms upgraded their price targets on MU (targets: $41, $43, $45, and $60). Many investors still consider MU cheap with a P/E of 11.8 and a forward P/E near 8.

The stock is currently testing multi-year highs near resistance in the $35.00 area. A breakout might spark a little short covering. The most recent data listed short interest at 10% of the 1.06 billion share float.

Tonight we are suggesting a trigger to open bullish positions at $35.15.

Trigger @ $35.15

- Suggested Positions -

Buy MU stock @ (trigger)

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

Buy the 2015 Jan $35 call (MU150117c35) current ask $2.37

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

Annotated Chart:

Weekly Chart:


NEW BEARISH Plays

Raven Industries - RAVN - close: 24.26 change: -0.22

Stop Loss: 26.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 121 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
RAVN is in the industrial goods sector. It's a small cap that does not get a lot of coverage on Wall Street. The company was founded in Sioux Falls, South Dakota back in 1956. Today they have three main business segments.

Their applied technology segment creates agricultural equipment to boost farm production. Their engineered film business creates high performance plastic films and sheeting. Their Aerostar business uses high-altitude balloons to make "of tethered aerostats, aerospace platforms, Vista radar systems and surveillance solutions, providing complete situational awareness for a multitude of needs." One of the company's more novel products is a line of military decoys that are essentially balloons shaped to look like tanks, jet fighters, and missiles.

Unfortunately business is struggling and the stock has plunged -41% year to date. Falling commodity prices has undermined demand for agricultural equipment. This could be a weak part of the business for the next few quarters. The Aerostar segment is also seeing revenue declines and it's not expected to improve any time soon.

RAVN is actually developing a trend of earnings misses. The company has missed Wall Street's EPS estimates three quarters in a row. They've missed the revenue estimate two of the last three quarters. RAVN management expects the current quarter to see double-digit declines in net income.

The current sell-off has created a sell signal on the point & figure chart that suggests an $18.00 target.

Tonight we are suggesting an immediate entry on Monday morning to open bearish positions. We'll try and limit risk with a stop loss at $26.25. More conservative investors may want to consider a stop closer to $25.00 instead. (NOTE: RAVN does have options but the bid/ask spreads are too wide to trade them.)

*Launch Bearish Plays on Monday Morning*

- Suggested Positions -

Short RAVN stock @ (the opening bell)

Annotated Chart:



In Play Updates and Reviews

Stocks Pare Weekly Loss

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market managed to trim its weekly loss with a relatively widespread bounce on Friday.

Our SNCR trade was triggered.


Current Portfolio:


BULLISH Play Updates

Interactive Brokers Group - IBKR - close: 25.52 change: +0.43

Stop Loss: 23.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 533 thousand
New Positions: Yes, see below

Comments:
10/04/14: We are finally starting to see some movement in IBKR. After consolidating near the $25.00 level the last few days IBKR surged +1.7% and rallied past its 10-dma on Friday. The intraday high was only $25.55. Our suggested entry point to open bullish positions will likely be hit on Monday at $25.60.

Earlier Comments: September 27, 2014:
IBKR was founded 37 years ago and has grown its business to where it executes almost one million trades a day. Barron's has rated IBKR the third best online broker three years in a row.

According to a company press release, "Interactive Brokers Group, Inc., together with its subsidiaries, is an automated global electronic broker that specializes in catering to financial professionals by offering state-of-the-art trading technology, superior execution capabilities, worldwide electronic access, and sophisticated risk management tools at exceptionally low costs. The brokerage trading platform utilizes the same innovative technology as the Company's market making business, which specializes in routing orders and executing and processes trades in securities, futures, foreign exchange instruments, bonds and funds on more than 100 electronic exchanges and trading venues around the world."

"As a market maker, we provide liquidity at these marketplaces and, as a broker, we provide professional traders and investors with electronic access to stocks, options, futures, forex, bonds and mutual funds from a single IB Universal AccountSM. Employing proprietary software on a global communications network, Interactive Brokers Group continuously integrates its software with a growing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention."

This year has not seen any significant increase in trading volumes at the exchanges. If anything volume has been mediocre at best. Yet IBKR has consistently reported stronger year over year DARTs the last several months. DARTs stand for daily average revenue trades. IBKR is also reporting improvement in customer accounts created. I will point out that IBKR is seeing tougher year over year comparisons for its monthly DARTs as the rate of improvement seems to be slowing yet this trend hasn't stopped the stock price.

Shares of IBKR have been consolidating sideways for months. The consolidation started last December when IBKR's 2013 stalled. Since then IBKR has been slowly churning sideways but that changed earlier this month with a bullish breakout to new multi-year highs. The point & figure chart has turned very bullish with a long-term target near $48.50.

The market's recent weakness has pulled IBKR low enough to retest prior resistance as new support. Friday's bounce could be an entry point. We are suggesting a trigger to open bullish positions at $25.60.

Trigger @ $25.60

- Suggested Positions -

Buy IBKR stock @ (trigger)

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

Buy the 2015 Jan $26 call (IBKR150117c26) current ask $1.10

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

chart:


Synchronoss Technologies - SNCR - close: 46.11 change: +0.74

Stop Loss: 42.89
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Entry on October 02 at $46.10
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 479 thousand
New Positions: see below

Comments:
10/04/14: As expected shares of SNCR continued to rally on Friday. Shares gapped open higher at $45.99 and then spiked toward $48.00 before paring its gains. After the initial volatility SNCR spent most of the day drifting sideways near $46.00. The stock did manage to outperform the major indices with a +1.6% gain. Our trigger to open positions was hit at $46.10 very early on Friday's session.

Earlier Comments: October 1, 2014:
The smartphone is becoming more and more ubiquitous. There were one billion smartphones sold in just 2013. Today's consumer is putting more and more of their selves and their data on their smartphone. What happens to all that data when a user loses their phone? Wireless companies have started storing user data in the cloud to solve that problem. SNCR is one such cloud solution provider to big wireless carriers.

The company website says "Synchronoss founded in December 2000, is a world leader in cloud solutions and software-based activation serving communication service providers across the globe. Our proven and scalable technology solutions allow customers to connect, synchronize and activate connected devices and services that empower enterprises and consumers to live in a connected world."

SNCR is also offering their cloud services straight to consumers. This has grown to millions of subscribers.

The company has been consistently beating Wall Street's earnings estimates. The last three quarters in a row have seen SNCR beat both the top and bottom line estimate. Revenues have been averaging +27% growth over the last three quarters. Its revenue growth for its cloud services has been growing about +75% (year over year) the last three quarters in a row.

This huge growth has helped lift shares of SNCR to multi-year highs. Shares have been relatively resilient during the market's current pullback. Traders bought the dip today and SNCR displayed relative strength with a +2.0% gain on Thursday. The stock looks poised to breakout and if that occurs shares could see some short covering. The point & figure chart is bullish with a $53 target.

Tonight we're suggesting a trigger to open bullish positions at $46.10.

- Suggested Positions -

Long SNCR stock @ $46.10

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

Long DEC $50 call (SNCR141220c50) entry $2.30*

10/02/14 triggered @ $46.10
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

CBS Corp. - CBS - close: 53.08 change: +0.74

Stop Loss: 54.25
Target(s): To Be Determined
Current Option Gain/Loss: + 3.1%
Entry on September 22 at $54.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.1 million
New Positions: see below

Comments:
10/04/14: Hmm... the oversold bounce in CBS almost looks like a potential bullish reversal. Yet shares still haven't tested short-term resistance at its 10-dma yet. We will leave our stop loss at $54.25 for now but I am not suggesting new positions.

Earlier Comments: September 20, 2014:
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.

- Suggested Positions -

Short CBS stock @ $54.75

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

Long 2015 Jan $55 put (CBS150117P55) entry $3.40*

10/02/14 new stop @ 54.25
10/01/14 new stop @ 55.05
09/30/14 new stop @ 55.65
09/22/14 new stop @ $56.35
09/22/14 triggered @ 54.75
*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:


Fluidigm Corp. - FLDM - close: 23.65 change: +0.03

Stop Loss: 26.05
Target(s): To Be Determined
Current Option Gain/Loss: +2.9%
Entry on October 01 at $24.35
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 290 thousand
New Positions: see below

Comments:
10/04/14: FLDM closed virtually unchanged on Friday. Bears can declare this a victory since the stock failed to participate in the relatively widespread market bounce. Broken support near $25.00 should be new resistance.

Earlier Comments: September 30, 2014:
FLDM is in the healthcare sector. The company makes microfluidic systems. It's part of the medical laboratories and research industry. The company was founded in 1999.

The website describes the company as "Fluidigm develops, manufactures, and markets life science analytical and preparatory systems for growth markets such as single-cell biology and production genomics. We sell to leading academic institutions, clinical laboratories, and pharmaceutical, biotechnology, and agricultural biotechnology companies worldwide. Our systems are based on proprietary microfluidics and multi-parameter mass cytometry technology, and are designed to significantly simplify experimental workflow, increase throughput, and reduce costs, while providing excellent data quality. Fluidigm products are provided for Research Use Only. Not for use in diagnostic procedures."

The stock looks like a momentum name that has lost its mojo. 2013 was an incredible year for the stock with a rally from the $15 area to almost $40. FLDM continued to push higher in the first quarter of 2014 and almost hit $50. Then someone yanked the rug out from beneath the stock in late March.

If you recall March was rough for high-growth and high-beta names in general. Once FLDM broke down in March the path of least resistance has been down with investors selling every major rally at resistance.

The company had a pretty good earnings report in May. Yet an earnings beat and raised guidance back in May failed to inspire any new buying. Instead shares sold off sharply. Their most recent earnings report in July showed a +57% surge in revenues but that failed to meet Wall Street's estimates. The company is still losing money on a net income basis.

Now FLDM is breaking down under significant support near $25.00. The next major support level is $20.00. The Point & Figure chart is very bearish and forecasting a long-term target near $10.00.

Traders could launch positions now. We are suggesting a trigger to open bearish positions at $24.35. You may want to consider using options. The most recent data listed short interest at 9.5% of the small 26.2 million share float.

- Suggested Positions -

Short FLDM stock @ $24.35

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

Long NOV $25 PUT (FLDM141122P25) entry $2.75*

10/01/14 triggered @ $24.35
*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:


Johnson Controls Inc. - JCI - close: 44.82 change: +0.14

Stop Loss: 46.05
Target(s): To Be Determined
Current Option Gain/Loss: + 1.3%
Entry on September 23 at $45.40
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: see below

Comments:
10/04/14: JCI briefly traded above potential resistance at $45.00 and its 10-dma before retreating by the close. Shares only managed a +0.3% gain versus the S&P 500's +1.1% gain on Friday. The outlook is still bearish but I would hesitate to launch new positions at the moment.

Earlier Comments: September 22, 2014:
The auto part makers were a bright spot in the market for quite a while. Yet JCI has been underperforming its peers for weeks. Now the whole group has reversed sharply lower.

Investors might be growing cautious as earnings growth slows down. Investor's Business Daily noted that the forecast for some of these auto parts makers is getting softer.

Technically the group appears to be rolling over and JCI could be leading the way lower with a bearish breakdown under a long-term trend of higher lows. It doesn't help that JCI now has a "death cross" with the 50-dma falling under its 200-dma, which itself is starting to roll over.

Today's low was $45.66. We are suggesting a trigger for bearish positions at $45.40.

- Suggested Positions -

Short JCI stock @$45.40

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

Long 2015 Jan $45 PUT (JCI150117P45) entry $2.25

09/30/14 new stop @ 46.05
09/23/14 triggered @ $45.40
Option Format: symbol-year-month-day-call-strike

chart:


Knowles Corp. - KN - close: 25.39 change: -0.14

Stop Loss: 28.05
Target(s): To Be Determined
Current Option Gain/Loss: +1.4%
Entry on September 30 at $25.75
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
10/04/14: KN's failure to join the market rally on Friday is good news for the bears. More conservative types might want to move their stop loss closer to the simple 10-dma (currently near $27.15).

Earlier Comments: September 29, 2014:
Knowles Corp. has been around since 1946 but until recently was part of Dover Corp. (DOV). Knowles (KN) was spun off early this year.

What exactly does KN do? According to a company press release "Knowles Corporation is a market leader and global supplier of advanced micro-acoustic solutions and specialty components serving the mobile communications, consumer electronics, medical technology, military, aerospace and industrial markets. Knowles has a leading position in micro-electro-mechanical systems microphones, speakers and receivers which are used in smartphones, tablets and mobile handsets. Knowles is also a leading manufacturer of transducers used in hearing aids and other medical devices and has a strong position in oscillators (timing devices) and capacitor components which enable various types of communication."

KN has sales of more than $1 billion a year. Yet revenues have been falling. It seems to be getting worse. Back in April they reported a -1% drop in revenues. Their last quarterly report showed a -5.3% decline in revenues.

Technically the stock has been stuck in a $28.00-34.00 trading range for months. That changed in the last few days. KN has broken down below the bottom of the range. Its recent attempt at an oversold bounce already appears to be failing.

Tonight we're suggesting a trigger to open bearish positions at $25.75, which would be a new low. We are not setting an exit target tonight but I will note the point & figure chart is bearish and forecasting an $18 target.

Bear in mind that KN does have slightly elevated short interest at more than 10% of the 85 million share float. You may want to consider put options instead of shorting the stock.

- Suggested Positions -

Short KN stock @ $25.75

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

Long NOV $25 PUT (KN141122P25) entry $1.20*

09/30/14 triggered @ 25.75
*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:


Mobile Mini, Inc. - MINI - close: 36.35 change: +1.30

Stop Loss: 37.30
Target(s): To Be Determined
Current Option Gain/Loss: + 6.3%
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:
10/04/14: Uh-oh! MINI is back above the $36.00 level and its 10-dma. Both of those should have been overhead resistance. I do not see any news to account for Friday's relative strength. The jobs report sparked a widespread market bounce and shorts may have panicked. MINI gapped open and then rallied to a +3.7% gain.

You could argue that our stop is a little bit too tight and we should move it above the 20-dma near $37.50 instead. However, we are choosing to leave it just above the late September bounce (in the $37.25 area). 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

09/30/14 new stop @ 37.30
09/25/14 MINI's failure to drop today might be a warning sign.
09/22/14 new stop @ 37.85
09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80

chart:


Transocean Ltd. - RIG - close: 30.15 change: -1.43

Stop Loss: 32.75
Target(s): To Be Determined
Current Option Gain/Loss: +21.1%
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:
10/04/14: Great news! RIG did not see any follow through on Thursday's bounce from $30.00. Instead shares reversed and plunged back toward the $30 area with a -4.5% drop on Friday.

CNBC noted that someone purchased 20,000 May $26 puts for $1.65 each. That's a $3.3 million bet that RIG will be under $24.35 by May 2015 expiration. Dan Nathan, on CNBC's Fast Money show, suspects that this might be some sort of hedge on a stock position.

Shares of RIG also caught the attention of traders on CNBC's Halftime show. Some argued that RIG looked cheap while others argue investors should wait. The pain isn't over yet. The cheap argument could get louder with RIG's P/E near 6.0 although this might turn into a value trap for bullish investors.

RIG is currently trading at 10-year lows. If the $30.00 level breaks the next key support levels are $25.00 and $18.75 or so.

Keep in mind that we only have two weeks left on our October $35 put option. The current bid/ask spread is $4.85/5.05.

I am not suggesting new positions at this time.

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*

10/02/14 new stop @ 32.75
10/01/14 new stop @ 33.10
09/30/14 new stop @ 33.75
09/27/14 investors may want to take some profits now
09/25/14 new stop @ 34.50
09/22/14 new stop @ 34.75
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:


The ExOne Company - XONE - close: 17.91 change: -1.09

Stop Loss: 22.55
Target(s): To Be Determined
Current Option Gain/Loss: +19.5%
Entry on September 29 at $22.25
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 523 thousand
New Positions: see below

Comments:
10/04/14: This has been an awful week for XONE bulls. Shares lost -21% in the last five days. This pushes the current drop to three weeks in a row. XONE is now below its IPO price of $18.00 a share.

The stock is very oversold and definitely due for a bounce but traders were selling the bounces on Thursday and Friday. More conservative investors may want to take some money off the table know. We are going to move the stop loss down to $22.55.

You know XONE will bounce eventually and when it does it could be a very big bounce considering all the short interest in this stock.

I am not suggesting new positions at this time.

Earlier Comments: September 27, 2014:
Stock prices are supposed to be driven by corporate earnings. It's tough to be bullish when a company continues to miss analyst expectations.

XONE is considered part of the industrial goods sector. They make 3D printers and associated materials. According to a company press release, "ExOne is a global provider of 3D printing machines and printed products, materials and other services to industrial customers. ExOne's business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for its customers using its in-house 3D printing machines"..."ExOne also supplies the associated materials, including consumables and replacement parts, and other services, including training and technical support, necessary for purchasers of its machines to print products."

Unfortunately for the bulls XONE has developed a pattern of missing earnings estimates. They missed estimates back in March, in May, and again in August this year. The most recent report was August 13th. Wall Street expected a loss of 18 cents a share. XONE delivered a loss of 32 cents. Revenues rose +21% to $11.2 million but that failed to meet expectations. XONE's gross profit plunged from $4.2 million a year ago to $2.5 million thanks to crashing gross margins.

Shares of XONE are now at record lows. The company held its IPO back February 2013. The IPO price was $18.00 a share and the first day of trading saw XONE gap open at $23.66 and close up at $26.52. Today XONE is below its opening trade and might be headed for $18.00.

I do consider this an aggressive, higher-risk trade because there is already a lot of short interest. The most recent data listed short interest at 52.8% of the very small 8.7 million share float. That significantly raises the risk of a short squeeze. Therefore traders may want to limit their positions or just choose the put options to limit risk.

Tonight we are suggesting bearish positions on Monday morning (no trigger).

*Higher Risk Trade: consider smaller positions* Suggested Positions -

Short XONE stock @ $22.25

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

Long NOV $20 PUT (XONE141122P20) entry $1.40*

10/04/14 new stop @ 22.55
10/01/14 new stop @ 23.05
09/30/14 new stop @ 25.05
09/29/14 trade begins. XONE gaps down at $22.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart: