Option Investor

Daily Newsletter, Tuesday, 9/30/2014

Table of Contents

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

Market Wrap

Russell Closes on the Lows

by Jim Brown

Click here to email Jim Brown

The Russell 2000 hit a four-month low at the close dragging the other indexes lower.

Market Statistics

The cartoon below from Hedgeye says it all. The Russell 2000 is crashing and dragging the rest of the markets with it. The Russell is now down -8% since its 1,208 high close on July 3rd. The index declined -1.45% today alone or -16 points.

More than 50% of the small caps and Nasdaq stocks are already in a bear market with individual declines of -20% or more. Small cap declines are actually worsening. This will be resolved one of two ways. Either the big caps will eventually catch the same decline virus and race to catch up OR the Russell will hit the 10% correction level at 1,087 and dip buyers will show up in volume and reverse the trend.

The S&P-100 big cap index ($OEX) is down only -1.9% from its September 18th closing high at 2,011. The Nasdaq 100 big cap index ($NDX) is down only -1.3% from its high close at 4,103. We definitely have a wide divergence between large and small stocks and the small and midcap stocks (-5.1%) make up the majority of the market. Traders and market reporters may focus on the Dow and S&P but even at 500 stocks in the S&P that is only 11% of the broader market where the Russell 2000 is 45% of the market.

The advance-decline line on the small caps is plunging and shows no signs of improving. The MACD is in full retreat and fully bearish.

On the economic front there was some dramatic news. The Consumer Confidence headline number declined from 93.4 in August to 86.0 in September. This decline erased all the gains from Q3 and confidence is at the lowest level since May. The major cause for the decline was a sudden turnabout in the outlook for jobs. Fewer respondents said jobs were plentiful and more respondents said jobs were hard to get.

Both condition components declined sharply but the expectations component declined the worst. The present conditions component declined from 93.9 to 89.4. The expectations component declined from 93.1 to 83.7. That is a huge drop of nearly -10 points.

Those planning on buying a home declined from 5.3% to 4.9%. Auto buyers declined from 13.5% to 12.0%. Appliance buyers rose from 45.7% to 51.3%. The drop in the home buyers is probably related to the seasonal swings. Kids are back in school and nobody wants to move.

Those who thought jobs were plentiful declined from 17.6% to 15.1%. Those who thought jobs were hard to get rose only slightly from 30.0 to 30.1 but look at the total percentage compared to those who thought jobs were plentiful. Twice as many think they are hard to get.

Conflicts in Ukraine and the Middle East are probably weighing on confidence but there are no specific questions in the survey related to geopolitical concerns.

The job concerns could be a signal the payroll numbers this week may not be very strong. However, with more than one million people being hired for the holiday shopping season the next two months should show gains.

The Intuit Small Business Employment Index was basically unchanged in August. The index rose only +0.01% but compensation rose +0.59%. The index showed that employers were not hiring additional workers but to compensate the existing workers were working longer hours and that boosted the compensation metric.

Average monthly compensation rose to $2,791 or $33,500 per year. Average worker hours rose +0.6% to 25.3 hours per week.

Case Shiller home prices rose +6.7% in July and the lowest rate of gain since late 2012. This compares to the +8.1% gain in June. The mortgage financing problem along with declining wages in the U.S. are impacting consumers ability to buy homes. This reduces competition for existing inventory and prices decline.

The Texas Service Sector Outlook Survey rose from 22.8 in August to 27.5 in September. The revenue component was the biggest driver with a rise from 21.0 to 26.9. However, the employment component declined from 13.2 to 11.9. Are we seeing a trend here with the employment components in all the reports weakening?

On the positive side the retail sales sub-index rose from 14.9 to 35.5 and the highest level in seven years. The retail labor market index declined -4.9 points to 10.8. The Texas recovery is still progressing nicely compared to the rest of the country. Cheap labor, cheap real estate and a business friendly climate is attracting businesses from all over the country where taxes and wages are obscene. If only Texas could do something about the weather. I lived in Dallas for more than 40 years and the summers are brutal.

The Eurozone inflation number this morning was +0.3% and in line with market forecasts and well below the ECB target of 2.0%. As Europe moves closer to deflation the potential for the ECB to move to full-blown QE is increasing. Having the ECB buy government bonds would still be difficult with Germany dead set against it but fear of deflation is a powerful motivating factor. The ECB meets on Thursday to consider action and there is likely to be something new in the post meeting announcement and press conference.

The ADP Employment report is due out on Wednesday and expectations are for a decline from 204,000 to 198,000 jobs. There are whisper numbers in the 175,000 range. The Nonfarm Payrolls on Friday are expected to rise from 142,000 to 203,000. We could have a downside surprise here with the declines in the employment components from other reports. This is the 800 pound gorilla that investors may be trying to avoid by moving to the sidelines ahead of the report.

The dollar index continues to rise to new four-year highs. This is crushing commodity prices and will lower inflation in the USA. However, it is going to be a big worry to the companies that do business overseas. More than 50% of the S&P earnings come from overseas and all of our products just became more expensive. Exports will slow but imports should pickup because our dollar will buy more.

Crude prices imploded on the rising dollar, slowing European economy, falling consumer confidence, weak economics from China and rising OPEC production. Libya, Saudi Arabia, Angola, Nigeria and Iraq all increased production in September. WTI declined -$3.40 for the day. However, it is common for hedge funds to pull money out of commodities at the end of each quarter. This sharp decline in WTI could have been just some liquidation by a couple major funds. With the dollar and production rising it was a good day to exit on the headlines if you had bought the prior dip in mid-September. The $90 level is very strong support and although there are some analysts projecting a decline to $85 any dip to that level would be brief. OPEC has already said they will probably cut production quotas for 2015 because of the additional supply and decline in prices.

Brent crude declined another $2.45 to $94.80 and that is below the comfort level for OPEC members. Saudi Arabia and others need oil above $95 in order to continue their budgets and pay for their social programs to keep the Arab Spring at bay. Brent hit $113 in June and it has declined nearly $20 in almost a straight line. This means gasoline will be cheaper in the coming weeks and could easily move under $3 nationwide.

In stock news Ebay reversed the position it has held all year and agreed to spin out PayPal as a separate company in 2015. EBAY shares rallied $4 on the news for the biggest gain in two years.

The Ebay CEO has said in multiple interviews over the last year that PayPal and Ebay were better together than they would be separately. This was in response to an attack by Carl Icahn to try and split the company. Icahn never gave up and apparently he has convinced management to take the plunge.

The spinoff opens several doors for M&A. The new Apple Pay process is going to impact Google Wallet and Amazon's payment system. It is entirely possible that PayPal becomes an immediate acquisition target by either of those entities in an effort to offset the impact from Apple Pay. PayPal is entrenched in the online retail world and especially for Amazon it would be easy for them to integrate Paypal into the Amazon system.

Ebay could also become an acquisition target. With their $70 billion market cap today cut in half or even by two-thirds after the PayPal exit they could also become M&A bait. Alibaba could snap them up like a mid afternoon snack and immediately Alibaba has a huge foothold in America and numerous other countries.

PayPal will be free to establish relationships with other companies that were reluctant to embrace the Paypal system since they were part of Ebay. Splitting off removes the Ebay stigma from PayPal.

Several analysts were talking down Ebay after today's spike saying there was nothing else they could do to increase their value. Meanwhile others like Dan Loeb were racing to acquire a large stake because they think the PayPal spinoff will be huge and unlock significant value both in the spinoff and in the potential acquisition binge that could follow it.

I am with Loeb. I think spinning PayPal off will unlock a huge amount of value. Once it hits the public market the stock could move significantly higher. It is a sure bet that at least one post spin entity and probably both will be acquired within 12 months for a hefty premium.

FedEx (FDX) said it was going to buy back 15 million shares. The company must be feeling prosperous even after buying new trucks, planes and facilities to increase capacity. FDX and UPS also got a boost from China when Premier Li pledged to "open up" and move towards internationalizing the country's package delivery business. The government is embracing online shopping as a way to increase internal consumption and let the country rely less on exports.

The State Council chaired by Premier Li posted a statement late Wednesday saying the parcel delivery business will be "fully opened-up" to "create a fair and competitive business environment in which domestic and foreign-financed enterprises receive equal treatment."

Currently e-commerce sites use so-called "kuaidi" couriers to move products inside China. UPS and FDX are licensed to serve only a few limited areas. That will be expanded to nationwide. Li said the licensing requirements would be "simplified" to promote "the orderly and healthy development of the industry." Since January 1st more than 8.1 billion packages have been delivered in China according to government data. Most packages were delivered by Shentong, YTO, SF Express and ZTO. Li said that mergers with existing domestic shippers would be encouraged to improve industry efficiency. An underlying goal of the liberalization is "to create conditions that stimulate consumption by supporting businesses," FDX has been operating on a limited basis in China since 2003 and UPS since 2005.

Apple (AAPL) shares recovered from last Thursday's drop after China approved the iPhone 6 for sale in China. Sales will begin on October 17th. Reportedly Apple had to make plenty of promises and disclose numerous technical details in order to get the phone approved. China's approval cited "national security concerns" as the reason for the delay in approval. Analysts expect between 12-16 million will be sold in Q4 in China.

Despite positive gains today Apple shares are still experiencing post announcement weakness.

We are rapidly moving towards the Q3 earnings cycle and we are in the period where earnings warnings are plentiful. Today those were limited and mostly positive.

Schnitzer Steel (SCHN) said it expected earnings of 28-32 cents per share and analysts were looking for 20 cents. Shares of SCHN rallied +5.6% after a month long decline.

1-800-Flowers (FLWS) said it now expects earnings of 45-50 cents with $1.1 billion in revenue compared to prior estimates of 29 cents on $803 million in revenue. Shares were unchanged on the day.

Synacor (SYNC) reaffirmed estimates for Q3 revenue of $25-$26 million and full year of $100-$103 million. This was in line with consensus estimates. Shares were flat.

Intuit (INTU) said it was expecting a loss of 20-21 cents on revenue of $620 million. This was in line with consensus estimates. Shares were flat.

Moody's (MCO) now expects $3.95 to $4.05 per share for 2014 compared to consensus estimates of $3.98. Shares were up +39 cents.

Westport Innovations (WPRT) warned that 2014 revenue would now be $130-$140 million compared to prior forecasts of $175-$185 million. Consensus estimates were for $178.7 million. Shares declined -2.5% on the news to punctuate a two-month decline.

American Science and Engineering (ASEI) warned it now expects a loss for the quarter compared to analyst estimates for a 19 cent gain. Shares lost -2.5%.

Walgreen (WAG) reported earnings that were in line at 74 cents on sales that rose +6.2% to $19.1 billion. The company said margin pressures from increased Medicare and Medicaid prescriptions was being addressed they were still able to increase their market share by 30 basis points to 19%. Shares were down fractionally on the news.


This market analysis is going to be short tonight because nothing has changed. The Russell is in free fall and the other indexes could not capitalize on a morning rally that lifted the Dow +130 points off its lows to top at 17,145 at 11:30. That went from a -55 point decline to +73 point gain but the gains did not stick with the Dow closing down -28 points. That was a triple digit move up and a triple digit move down in the space of 2.5 hours. There is nothing bullish about that.

The S&P traded in a 16 point range between 1969 (-9) and 1985 (+7) and then closed near the bottom of the range at 1972 after a -16 point slide intraday. For the last four days the S&P has hovered around the 1970 price magnet but the lack of a sustainable rebound is troubling. Bulls will point to the 1969 level and claim support is holding but without a move over 1985 soon the bears will eventually become cocky and start piling on in expectations of a support break.

Only 39.8% of the S&P stocks are trading over their 50-day averages.

The Dow has tested support at 16,950 several times and each time it has held. Unfortunately it also tested resistance at 17,150 and that has been rock solid as well. The Dow closed near the bottom of its 128 point range at 17,042. For today the 17,000 interim support level did hold but the lack of a sustainable bounce suggests it will be tested again.

The Nasdaq Composite closed at 4,493 and near the low for the day. This is very close to the six-week low at 4,464 that was set at the open on Monday. The Nasdaq chart is bearish and it appears to be setting up for a lower low in the coming days.

However, the Nasdaq 100 ($NDX) continues to cheat the bears. The index has come within a few points of testing support at 4,000 several times but always rebounds immediately. I called the NDX the canary in the market coal mine in the weekend commentary with the 4,000 level critical support. As long as that level holds the rest of the Nasdaq is not likely to slip much lower. If 4,000 breaks that would signal a change in sentiment and selling could accelerate across all the indexes.

The advance-decline line on the Nasdaq is also in full retreat. This is extremely bearish.

The Russell 2000 is in free fall. Support at 1110 broke and the index appears to be targeting 1096 and 1082 with 1087 as the 10% correction level. As long as the Russell is leading the markets lower the outlook is the same. I do expect at least a trading bounce at 1096. The R2K has now broken below the common averages including the 300-day at 1126.

Futures were down -6 earlier tonight on news of the first Ebola case in the USA. A man that traveled through Africa a couple weeks ago came down with symptoms and was admitted to Presbyterian Hospital in Dallas. He tested positive and now they are rounding up everyone he came into contact with over the last couple of weeks. The disease can remain dormant in an incubation period for up to 21 days. This means dozens of people can be infected before the carrier realizes he has the disease. Fortunately it requires physical contact with the carrier and the exchange of bodily fluids. While that sounds easy to avoid a sneeze can infect a room full of people. Improper sanitary methods can allow common items to be touched with infected hands. I am not a doctor but I don't think the disease has much of a chance of spreading in the USA. We can be proactive whenever it is discovered and we have the best medical science in the world.

There have been reports of suspected terrorists trying to extract blood and liquids from corpses and accumulating bloody clothes and linens. Let your imagination run wild with those possibilities.

I remain bearish until proven wrong or the Russell hits 1087. Any bounce from that level will have to be watched carefully for traction. I remain confused as to why the big caps are clinging so stubbornly to the high ground. That would seem to suggest that a bounce by the Russell would immediately power the big caps back to the highs. Just remember that QE ends in 30 days and every QE end we have had to date has produced a market decline even when we knew it was coming.

After today's decline from the highs I am less confident a short squeeze is forthcoming.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Consistently Missing

by James Brown

Click here to email James Brown


WESCO Intl. - WCC - close: 78.26 change: -1.09

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 306 thousand
Entry on September -- at $---.--
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WCC is part of the services sector. They distribute industrial equipment. Their website describes WCC as "WESCO Distribution is a leader in industrial supply with an extensive offering of electrical, data communications, general maintenance, repair, and operating (MRO) and electrical OEM products. We are more than just an electrical distributor; we are a company of procurement specialists, helping customers lower supply chain costs, increase efficiency through WESCO Value Creation and save energy with green and sustainability initiatives. Our network of branches delivers industrial supply products fast, and our vast catalog of supplier partners enables WESCO to be your one-stop shop for electrical and MRO products."

Unfortunately for shareholders the stock peaked back in January this year. WCC produced a lower high in June. After a two-month drop WCC bounced but the bounce failed early September under resistance near $86.00, resistance at its simple 200-dma and resistance at the 50% retracement of the decline.

This trade isn't just about the technical picture. WCC has missed Wall Street's earnings estimates every quarter this year starting with its quarterly report announced in January, then April, and most recently in July. When WCC reported its July results management also lowered their 2014 guidance.

We are not the only ones who think WCC is bearish. The most recent data listed short interest at 13% of the 44.1 million share float. The point & figure chart is bearish too and forecasting at $64.00 target.

Today's drop was fueled by strong volume and shares are poised to break down under its late July low. Tonight we are suggesting a trigger to buy puts at $77.75.

Trigger @ $77.75

- Suggested Positions -

Buy the NOV $75 PUT (WCC141122P75) current ask $1.80

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

New Targets & New Stops

by James Brown

Click here to email James Brown

Editor's Note:

We are updating a handful of stop losses and exit targets tonight.

LVS hit our stop loss.

Current Portfolio:

CALL Play Updates

Centene Corp. - CNC - close: 82.71 change: -1.01

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.2 million
Entry on September -- at $---.--
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

09/30/14: The market's major indices retreated on Tuesday and CNC followed them lower. We are looking for a breakout higher.

Earlier Comments: September 29, 2014:
Managed healthcare companies are finally starting to reap the benefits of the Affordable Care Act. Shares of CNC have soared +40% in 2014 and ended today's session at another record high.

Who is CNC? According to a company press release, "Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and services to government sponsored healthcare programs, focusing on under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long Term Care (LTC), in addition to other state-sponsored/hybrid programs, and Medicare (Special Needs Plans). The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, care management software, correctional systems healthcare, in-home health services, life and health management, managed vision, pharmacy benefits management, specialty pharmacy and telehealth services.

The Affordable Care Act could add up to seven million new healthcare clients to the system. That number is expected to surge to nearly 25 million new healthcare clients in the next decade.

At the same time there are 26 states expanding their Medicaid coverage. Right now companies like CNC are in the sweet spot as more and more states turn over their Medicaid patients over to managed-care firms like CNC. The IBD reports that CNC could see increased business from Texas, Michigan, South Carolina.

CNC has been consistently beating Wall Street's earnings estimates (at least the last four quarters). Their earnings report in April beat estimates on both the top and bottom line. They did it again in July with earnings and revenues coming above expectations. Management then raised their 2014 guidance. Since that report FBR Capital has raised their price target on shares of CNC to $90 and Oppenheimer has raised their price target to $93. The point & figure chart is even more bullish and forecasting a long-term $108 target.

We like the relative strength and the healthcare market trends certainly favor CNC. We're suggesting a trigger to buy calls at $84.05.

Trigger @ $84.05

- Suggested Positions -

Buy the NOV $85 call (CNC141122c85)

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

Deckers Outdoor - DECK - close: 97.18 change: -1.33

Stop Loss: 95.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 665 thousand
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

09/30/14: DECK also followed the market lower. This stock has found technical support at its rising 20-dma multiple times in the last month. Shares settled near its 20-dma today so it could bounce tomorrow.

I don't see any changes from the weekend newsletter's new play description.

Earlier Comments: September 27, 2014:
DECK is part of the consumer goods sector. The essence of the company is making shoes. Many look at DECK and think of just one brand - Ugg. It's true that Ugg accounts for 80% of sales but DECK is growing. They have a number of brands and its Teva brand saw sales jump more than 25% last quarter. Its Sanuk brand had sales improve +19.6% last quarter.

According to a company press release, "Deckers Brands is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's portfolio of brands includes UGG, I HEART UGG, Teva, Sanuk, TSUBO, Ahnu, MOZO, and HOKA ONE ONE. Deckers Brands products are sold in more than 50 countries and territories through select department and specialty stores, 126 Company-owned and operated retail stores, and select online stores, including Company-owned websites. Deckers Brands has a 40-year history of building niche footwear brands into lifestyle market leaders attracting millions of loyal consumers globally."

DECK is developing a healthy trend of beating Wall Street's earnings estimates. The last couple of quarters have seen beats by at least 15%. Many on wall street believe DECK should continue to see healthy margin improvements.

The company's latest earnings report was in July. It was their Q1 for fiscal year 2015. Wall Street expected a loss of $1.31 a share. DECK reported a loss of $1.07. Revenues soared +24.3% to a record $211.5 million, significantly above analysts estimates. Management then raised their EPS and revenue guidance for 2015.

This earnings improvement has powered the stock to new multi-year highs. The $90.00 level was significant resistance and now DECK is testing potential round-number resistance at $100. A breakout could spark some short covering. The most recent data listed short interest at 17.3% of the small 33.49 million share float. The point & figure chart is bullish and forecasting at $116 target and a move over $100 would produce a new triple-top breakout buy signal.

Tonight we're suggesting a trigger to buy calls at $100.25.

Trigger @ $100.25

- Suggested Positions -

Buy the NOV $105 call (DECK141122C105)

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

Facebook, Inc. - FB - close: 79.04 change: +0.04

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: + 0.9%
Average Daily Volume = 33 million
Entry on September 25 at $78.75
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: FB garnered some positive analyst comments this morning and a new $95 price target. Shares traded to new highs but gains were fading early afternoon. That's the second bullish analyst call in two days.

Earlier Comments: September 23, 2014:
Facebook is the dominant social media company on the planet. Their social networking platform has 1.23 billion monthly active users and hundreds of millions of daily active users.

The stock was showing relative strength today and appears to be ignoring the market's three-day decline. Helping fuel the rally today (+1.9%) was news of a new ad platform. The Wall Street Journal broke the story and CNBC followed up with news on FB's new ad platform called Atlas. This new program will provide marketers with more tools on measuring the impact of their advertisements' success and helping them better target the right audience. The Atlas program will also tracks users across the web.

Google is the king of online advertising and its sales are about five times what FB's are currently. Yet FB has a huge advantage because they have so many details about each of its users. Plus, FB can track users across multiple devices from desktop PCs to mobile devices like your smartphone.

Yesterday FB was making headlines with news on its virtual reality system. Many pundits harpooned FB for spending $2 billion to buy Oculus, a leading VR design firm, back in March. Proponents say FB is planning ahead for the long-term future were VR could be huge. FB did unveil a new prototype VR headset called "Crescent Bay" and the company plans to launch a new full-scale consumer device in 2015.

This is a new all-time closing high for FB. If this rally continues we want to hop on board. Tonight I'm suggesting a trigger to buy calls at $78.75. We're not setting an exit target yet but I will note the point & figure chart is bullish and forecasting at $91.00 target.

- Suggested Positions -

Long 2015 Jan $85 call (FB150117c85) entry $3.07

09/25/14 triggered @78.75
Option Format: symbol-year-month-day-call-strike

Mallinckrodt Public Limited Co. - MNK - close: 90.15 change: +0.23

Stop Loss: 86.45
Target(s): To Be Determined
Current Option Gain/Loss: -11.6%
Average Daily Volume = 4.85 million
Entry on September 17 at $87.25
Listed on September 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: MNK rallied back toward yesterday's highs before fading lower this afternoon. Shares managed to show some relative strength with a +0.25% gain. I am not suggesting new positions at the moment.

Earlier Comments: September 11, 2014:
MNK is considered a drug maker but the stock is outperforming its peers in both the drug industry and the biotech industry. The S&P 500 is up about +8% in 2014. The pharmaceutical index (DRG) is up +13.1%. The biotech index is up +34.8% thus far in 2014. Yet MNK is up +64.4%.

The company describes itself as "a global specialty pharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents."

"Areas of focus include analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians, and autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities."

"The company's Specialty Pharmaceuticals segment includes branded and specialty generic drugs and active pharmaceutical ingredients, and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has more than 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2013 revenue totaled $2.2 billion."

The company had seen a few key milestones this year. They recently finished their $5.6 billion acquisition of Questcor. In August the stock was added to the S&P 500 index. MNK's earnings report in May was better than expected and management raised their guidance. Their latest earnings report was August 7th. Wall Street expected a profit of $0.85 a share on revenues of $610 million. MNK delivered a profit of $1.20 a share with revenues up +14.6% to $653 million. Management raised their guidance again for both their 2014 EPS and revenue estimates.

MNK's Chief Executive Officer and President, Mark Trudeau, commented on their quarterly results saying,

"This has been another exceptionally strong quarter in what is shaping up to be a very promising year for Mallinckrodt. This performance is being driven by the strength of our Specialty Pharmaceuticals segment in both Brands and Specialty Controlled Substance Generics, as well as streamlined costs from our on-going restructuring initiatives, leading to meaningful top-line and bottom-line growth. We continue to be pleased with the performance of our base business and recently added OFIRMEV, and look forward to closing the acquisition of Questcor in the coming weeks."

The current rally in MNK stock has lifted shares to all-time highs. The September 5th move looked like a potential bearish reversal yet there was no follow through lower. Instead MNK has been consolidating sideways. If shares continue to march higher it could spark some short covering. The most recent data listed short interest at 29.3% of the small 53.9 million share float.

We are not setting a target tonight but the point & figure chart is forecasting at $90.00 target. We are suggesting a trigger to buy calls at $87.25.

*consider smaller positions* - Suggested Positions -

Long OCT $90 call (MNK141018C90) entry $3.00*

09/25/14 new stop @ 86.45
09/22/14 new stop @ 85.65
09/20/14 new stop @ 84.65
09/17/14 triggered @ 87.25
Option Format: symbol-year-month-day-call-strike

Union Pacific Corp. - UNP - close: 108.42 change: -0.11

Stop Loss: 106.90
Target(s): To Be Determined
Current Option Gain/Loss: -19.0%
Average Daily Volume = 2.5 million
Entry on September 17 at $108.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: Railroad stocks were showing relative strength earlier today. Unfortunately the rally in UNP failed at short-term resistance near $110. The stock reversed to close nearly unchanged on the session.

I am not suggesting new positions at this time.

Earlier Comments: September 16, 2014:
If you believe the U.S. economy is getting better then transports should perform well. Dow Theory suggests we can't have a significant rally without the transports. Thus far the group has shown leadership this year with the Dow Jones Transportation average up +15.1% in 2014. The railroads have been a strong part of that leadership.

UNP is one of the biggest. The company has been around for 150 plus years. They have over 46,000 employees, more than 8,200 locomotives, and pull nine million carloads a year.

According to the company website, "Union Pacific operates North America's premier railroad franchise, covering 23 states in the western two-thirds of the United States. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner."

Believe it or not but the shale gas and shale oil energy boom in the U.S. has played a part in the railroad strength. U.S. energy production has soared with the Energy Information Administration reporting U.S. crude oil production at 8.5 million barrels a day in June. That's the highest production since July 1986. A lot of that crude oil gets moved by train.

Back in 2008 only 9,500 carloads a year were crude oil. Today that has surged to over 407,000 railcars of crude oil a year.

The railroad group continues to see strong traffic in 2014. The upcoming harvest will also put more demand on the railroads. American farmers are looking at a record-breaking crop this year.

Currently shares of UNP Have been consolidating sideways at all-time highs just under the $108.00 level. Tonight we're suggesting a trigger to buy calls at $108.25.

- Suggested Positions -

Long NOV $110 call (UNP141122C110) entry $2.15*

09/20/14 new stop @ 106.90
09/17/14 triggered @ 108.35, gap higher. Trigger was $108.25
*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

PUT Play Updates

Autoliv, Inc. - ALV - close: 91.92 change: -1.59

Stop Loss: 95.05
Target(s): exit when ALV hits $90.25
Current Option Gain/Loss: +124.2%
Average Daily Volume = 392 thousand
Entry on September 16 at $98.45
Listed on September 15, 2014
Time Frame: 4 to 6 weeks
New Positions: see below

09/30/14: The sell-off in ALV seems to be accelerating with another -1.7% decline today. We are setting an exit target at $90.25. We will also move the stop loss down to $95.05.

Earlier Comments: September 15, 2014:
The auto part makers have been a bright spot in the market over the past year and a half or so. It looks like the group is starting to diverge. Stocks like DLPH, TRW, and LEA still look relatively strong. Yet BWA and ALV have broken down.

Who is ALV? According to their website, "For over 60 years, Autoliv has focused on one very important issue: saving lives. Our innovative products save 30,000 lives every year and prevent 10 times as many injuries. We are first and foremost a safety technology company. In the world of automotive occupant safety, we were the first to introduce the two- and three-point seat belt system and airbags for front and side impacts. We were also the first to launch pyrotechnic belt pretensioners and pedestrian protection systems. We develop, manufacture and market airbags, seatbelts, steering wheels, passive safety electronics and active safety systems such as radar, night vision and camera vision systems. We also produce anti-whiplash systems, pedestrian protection systems and integrated child seats. Autoliv Inc. is the result of a merger in 1997 of the Swedish company Autoliv AB, and the U.S. company Morton ASP."

Earnings momentum may have peaked. The company's most recent earnings report back in July was a miss. Wall Street expected a profit of $1.55 a share but ALV only delivered $1.45 with profits falling -2% from a year ago. Revenues did come in above expectations at $2.38 billion. Yet the sell-off on earnings may have started the current correction in ALV stock.

Technically shares look bearish. ALV produced a double top with the peaks in June and July. The bullish breakout past resistance near $104 in early September proved to be a bull trap. Now ALV is breaking support at its simple 200-dma and its long-term bullish trend (see weekly chart below).

Tonight we're suggesting a trigger to buy puts at $98.45.

- Suggested Positions -

Long OCT $95 PUT (ALV141018P95) entry $1.65*

09/30/14 plan to exit our put when ALV hits $90.25
09/30/14 new stop @ 95.05
09/22/14 new stop @ 98.25
09/16/14 triggered @ 98.45
Option Format: symbol-year-month-day-call-strike

Cummins Inc. - CMI - close: 131.98 change: -0.87

Stop Loss: 135.05
Target(s): To Be Determined
Current Option Gain/Loss: +18.6%
Average Daily Volume = 1.26 million
Entry on September 23 at $134.65
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: CMI sank to new relative lows today. We are adjusting the stop loss to $135.05. More conservative traders may want to use a stop closer to $134 instead. I am not suggesting new positions at current levels.

Earlier Comments: September 22, 2014:
CMI is in the industrial goods sector. The stock has been in a long-term albeit choppy up trend since mid 2012.

Company describes itself as, CMI, "a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 48,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,800 dealer locations. Cummins earned $1.48 billion on sales of $17.3 billion in 2013."

CMI is actually developing a bullish trend of beating Wall Street's estimates and raising guidance. Unfortunately investors seem to have forgotten about this growth. Shares have been underperforming since CMI peaked in June. It's been a steady trend of lower highs.

It does not help that Dow-component Caterpillar (CAT), considered a competitors for CMI, recently warned of slowing sales around the world.

Technically CMI's recent oversold bounce just failed at the $140.00 level. The stock has also broken down below a long-term trend line of support (see the weekly chart below).

Last week's low was $134.77. Tonight we're suggesting a trigger to buy puts at $134.65. We are not setting an exit target yet but the point & figure chart is bearish with a $114.00 target.

- Suggested Positions -

Long DEC $135 PUT (CMI141220P135) entry $5.90*

09/30/14 new stop @ 135.05
09/23/14 new stop @ 138.25
09/23/14 triggered @ 134.65
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Harley-Davidson, Inc. - HOG - close: 58.20 change: -1.14

Stop Loss: 60.55
Target(s): Exit when HOG hits $55.50
Current Option Gain/Loss: +35.1%
Average Daily Volume = 1.6 million
Entry on September 29 at $59.75
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: The sell-off in HOG is accelerating with a -1.9% decline following yesterday's breakdown under support. We are moving our stop loss down to $60.55. We are also setting an exit target at $55.50.

Earlier Comments: September 27, 2014:
It looks like shares of HOG have run out of gas. The company is an American icon. Their website describes themselves as "Harley-Davidson Motor Company produces custom, cruiser and touring motorcycles and offers a complete line of Harley-Davidson motorcycle parts, accessories, riding gear and apparel, and general merchandise." The made in America label still resonates with many consumers, especially overseas. Unfortunately sales appear to have hit a pothole.

HOG's Q1 results were reported back in April and the numbers were better than expected. The stock gapped higher and hit new multi-year highs. Yet a week later HOG had peaked. Shares have been building a trend of lower highs ever since its late April high.

The latest earnings report was in July. While earnings were above expectations HOG's revenues were a hair below estimates. Management said that market share fell 260 basis points to 50.3%. More importantly management lowered their 2014 full year shipping guidance from a range of 279K-284K down to 270K-275K. This has resulted in some analysts lowering estimates and their ratings on the stock. Shares have also struggled.

HOG is now trading new 2014 lows. It's also testing significant support in the $60.00 level. A breakdown under $60 could send HOG toward $55 or even $50. The point & figure chart is bearish and currently suggesting at $49.00 target.

Technically shares of HOG have built a bearish head-and-shoulders pattern (easily seen on the weekly chart). The $60 level support is the neckline for this bearish sell signal. Tonight we're suggesting a trigger to buy puts at $59.75.

- Suggested Positions -

Long NOV $60 PUT (HOG141122P60) entry $2.33

09/30/14 plan to exit puts when HOG hits $55.50
09/30/14 new stop @ 60.55
09/29/14 triggered @ $59.75
Option Format: symbol-year-month-day-call-strike

iShares Russell 2000 ETF - IWM - close: 109.35 change: -1.68

Stop Loss: 112.10
Target(s): exit when IWM hits $108.50
Current Option Gain/Loss: +111.1%
Average Daily Volume = 29.0 million
Entry on September 10 at $114.85
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: The bounce in small caps have reversed and the IWM is now under support near $110. The next support level should be the $108 area.

We are setting an exit target to close this trade at $108.50. Tonight we're also adjusting the stop loss down to $112.10.

Our put option has more than doubled in value so more conservative investors may want to just take profits now.

Earlier Comments: September 9, 2014:
The S&P 500 made it 14 days in a row without a move of more than 0.5% on a closing basis. Jonathan Krinsky at MKM Partners noted this occurrence yesterday. Krinsky said the last time we saw a streak this long was 1995. To find a streak longer than 14 days you have to go back to 1969, which saw a run of 20 days in a row. Today would have been the 15th day but stocks started to move and the direction was down. Small cap stocks were leading the way with the Russell 2000 falling -1.1% versus the -0.6% drop in the S&P 500.

Market watchers were blaming the rising dollar and new fears that the Federal Reserve might raise rates sooner than expected. There is speculation that the Fed might drop its "considerable time" guidance for low rates in its policy statement at the Fed meeting scheduled for next week.

Whatever the reason small caps look vulnerable and underperformed on above average volume today. We want to hedge our bullish bets with a put position on the IWM just in case the market does start to correct lower. Investors might be growing nervous about the 9/11 anniversary on Thursday. You could call this put a little 9/11 market insurance.

Tonight we are suggesting a trigger to buy puts at $114.85.

- Suggested Positions -

Long OCT $115 PUT (IWM141018P115) entry $2.70

09/30/14 plan to exit when IWM hits $108.50
09/30/14 new stop @ $112.10
09/23/14 new stop @ 113.05
09/22/14 new stop @ 114.35
09/10/14 triggered @ 114.85
Option Format: symbol-year-month-day-call-strike

Lennox Intl. - LII - close: 76.87 change: -0.83

Stop Loss: 79.55
Target(s): To Be Determined
Current Option Gain/Loss: +10.2%
Average Daily Volume = 391 thousand
Entry on September 22 at $79.25
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: The early morning gains in LII reversed and the stock closed at new 2014 lows. We will move the stop loss to $79.55.

Earlier Comments: September 20, 2014:
LII is in the industrial goods sector. Unfortunately for shareholders the stock is significantly underperforming with a -6.1% decline in 2014. That compares to a +4.1% gain in the XLI industrials ETF and a +4.2% gain in the Dow Industrials.

This is a simple momentum trade. After a three-year rally from its 2011 lows near $25 the stock traded near $95.00 in early 2014. Shares have since been struggling. Traders started selling the rallies. Now LII has broken down below its simple 200-dma and its long-term up trend (see weekly chart below). The last few days have seen LII create a "death cross" with the 50-dma crossing under the 200-dma.

This past week saw the oversold bounce in LII fail near prior support near $82.00 and its 300-dma. Friday's low was $79.33. I'm suggesting a trigger for bearish positions at $79.25. Potential support looks like $75.00 and $70.00. Currently the Point & Figure chart is suggesting at $68.00 target.

- Suggested Positions -

Long DEC $80 PUT (LII141220P80) entry $3.90

09/30/14 new stop @ 79.55
09/23/14 new stop @ 80.25
09/22/14 triggered @ 79.25
Option Format: symbol-year-month-day-call-strike

Pentair Plc - PNR - close: 65.49 change: -0.68

Stop Loss: 68.65
Target(s): To Be Determined
Current Option Gain/Loss: +22.2%
Average Daily Volume = 2.0 million
Entry on August 26 at $68.90
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: PNR continues to sink but the option didn't move that much. In fact the option spread actually got worse. I'm not suggesting new positions at this time.

Earlier Comments: August 23, 2014:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

- Suggested Positions -

Long Nov $70 PUT (PNR141122P70) entry $3.60*

09/06/14 new stop @ 68.65
08/26/14 triggered @ 68.90
Option Format: symbol-year-month-day-call-strike

Starbucks Corp. - SBUX - close: 75.46 change: +0.19

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: -28.7%
Average Daily Volume = 3.6 million
Entry on September 23 at $74.25
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: SBUX is still trying to bounce and managed a +0.25% gain but shares remain under resistance at the $76.00 level. Wait for a reversal under $76 before initiating new positions.

Earlier Comments: September 22, 2014:
Summer is over and fall is officially here. That has many consumers thinking of hot coffee and seasonal fare like SBUX's pumpkin spice lattes. Unfortunately Wall Street doesn't appear too keen on SBUX, if you're looking at the share price action.

This company is in the services sector. They are a global power house as a specialty retailer of what some might consider overpriced coffee and sugary drinks with too many calories. After 30 years in business they have grown to more than 20,000 stores and over 180,000 full time employees.

The stock peaked in late 2013. It looked like the correction was over back in April this year and SBUX did rally from $68 to $79 by July. Yet the stock has been dead money the last several weeks and now it's starting to underperform the market.

That spike you see on the daily chart was a reaction to its Q2 earnings results. The recent breakdown under $76 is bearish and the oversold bounce just failed near this level. Today's intraday low was $74.33. We're suggesting a trigger to buy puts at $74.25.

- Suggested Positions -

Long NOV $72.50 PUT (SBUX141122P72.5) entry $1.60*

09/23/14 triggered @ 74.25
*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

Tupperware Brands Corp. - TUP - close: 69.04 change: -0.66

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +42.8%
Average Daily Volume = 399 thousand
Entry on September 22 at $71.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: Bearish momentum in TUP continues with a -0.9% decline following yesterday's breakdown under $70.00.

Earlier Comments: September 20, 2014:
TUP was founded back in 1946 and over the last 60 years the company has grown from their plastic food prep and storage line into multiple brands.

According to the company website, "Tupperware Brands Corporation is the leading global marketer of innovative, premium products across multiple brands utilizing a relationship based selling method through an independent sales force of 2.9 million. Product brands and categories include design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand and beauty and personal care products through the Armand Dupree, Avroy Shlain, BeautiControl, Fuller Cosmetics, NaturCare, Nutrimetics, and Nuvo brands."

Unfortunately this year has not been the best for TUP's stock price. The company missed earnings expectations and lowered guidance back in January. You can see the market's reaction with the big drop in late January on the chart.

It took three months but TUP slowly clawed its way back toward resistance near $85 and its simple 200-dma. That area proved to be a lid on the stock price. Then in July the company disappointed again. It's Q2 earnings report disclosed that profits fell -38% to $47.6 million, down from $76.3 million a year ago. Management then lowered its full year guidance when they reported earnings and shares plunged again.

The weekly chart has produced a bearish head-and-shoulders pattern. The daily chart doesn't look healthy either. The Point & Figure chart is bearish and suggesting at $58.00 price target.

There is short-term support near $72.00. I'm suggesting a trigger to buy puts at $71.75.

- Suggested Positions -

Long 2015 Jan $70 PUT (TUP150117P70) entry $2.59

09/23/14 new stop @ 72.25
09/22/14 new stop @ 72.80
09/22/14 triggered @ 71.75
Option Format: symbol-year-month-day-call-strike


Las Vegas Sands - LVS - close: 62.21 change: +2.06

Stop Loss: 62.65
Target(s): To Be Determined
Current Option Gain/Loss: +118.0%
Average Daily Volume = 4.6 million
Entry on August 27 at $67.40
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

09/30/14: Some of the casino stocks rallied today following news out of Macau. Macau gaming officials reported today that gaming revenues for the area would be down -12% from a year ago, a significant decline that reaffirms the trouble Macau casinos are having. Casino stocks with heavy Macau exposure like LVS should have been down today on this news.

However, in what was likely a carefully timed release the China Daily newspaper reported that the government's corruption crackdown was winding down, at least in Macau. The report said they had resolved prominent issues. What does that mean? Business Insider probably said it best. It means the party is back on in Macau and just in time for China's week long National Holiday that lasts from October 1st through the 7th.

Shares of LVS and WYNN surged today. LVS hit an intraday high of $62.99, which was enough to tag our stop loss at $62.65.

- Suggested Positions -

OCT $65 PUT (LVS141018P65) entry $1.50* exit $3.27** (+118.0%)

09/30/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
09/22/14 new stop @ 62.65
09/06/14 new stop @ 64.65
09/02/14 new stop @ 68.25
08/27/14 triggered @ 67.40
*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