Option Investor

Daily Newsletter, Tuesday, 10/7/2014

Table of Contents

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

Market Wrap

European Growth Does Matter

by Jim Brown

Click here to email Jim Brown

Mario Draghi needs to quit talking and start walking towards additional ECB stimulus or all of Europe will be back in a recession soon.

Market Statistics

German industrial output fell -4.04% for August and the worst reading since January 2009 and the financial crisis. Analyst estimates were for a drop of -1.5%. Germany is considered the strongest economy in Europe but their GDP for Q2 declined -0.64%. The odds are very good the Q3 decline will be even worse with the country falling back into recession.

Last week German manufacturing PMI dropped into contraction territory a 49.9 and a 15 month low. New orders fell at the fastest pace since 2012. Some of this is related to the Russian sanctions but the entire EU is seeing economic activity shrink briskly. It is almost inconceivable that Europe can avoid a recession.

With the dollar at 4 year highs and the European economy in trouble it is going to be a serious drag on Q4 earnings and probably some Q3 earnings were depressed due to the double whammy. Europeans don't have the money to spend on our products and those that do want to buy are faced with higher costs due to our dollar strength. This is a recipe for U.S. earnings weakness in the months ahead.

The IMF cut global growth forecasts from 4.0% to 3.8% for 2015 and +3.3% for 2014. The IMF said U.S. growth was supporting the global forecast. The IMF expects U.S. growth will be +2.2% in 2014 compared to prior estimates at +1.7%. The fund expects the Fed to raise rates in the middle of 2015 and they believe the current accommodative monetary policy remains appropriate.

The IMF expects Europe to grow by +1.3% in 2015, down from prior estimates of +1.5% but higher than the +0.8% expected for 2014. However, "We see the major risk in the stalling of the euro zone" and "the risk of recession is there." European authorities should increase infrastructure spending to boost growth. If inflation does not improve in the EU the central bank should purchase sovereign bonds to stave off deflation, according to the IMF.

Estimates for Japan were cut from +1.1% growth to +0.8%. Brazil was cut from +1.3% to +0.3% with 2015 growth cut from +2.0% to +1.4%. China's expectations were cut to +7.4% this year and +7.1% for 2015.

The IMF also warned about the risk of rising geopolitical tensions and a financial market correction as stocks reach "frothy" levels. The IMF has apparently taken a cue from Janet Yellen when she warned about over valuations in small caps several weeks ago. The IMF said it is concerned some investors may be "under pricing risk" and not "fully internalizing the uncertainties surrounding the macroeconomic outlook and their implications for the pace of withdrawal of monetary stimulus in some major advanced economies. (USA)

The fund warned that Ukraine would be in recession in 2015, Russia would be stagnant or worse, and the Middle East would see severe economic impacts from the military strife in Iraq, Syria and Libya. They left out the economic impact from Ebola in West Africa.

Last week IMF Director Christine Lagarde warned that officials have to act to prevent a prolonged period of sluggish growth, a trend she called the "New Mediocre."

European markets moved lower on the weak economic news and that carried over into the U.S. markets. Friday's short squeeze was erased and markets closed on their lows.

The negative open was also influenced by comments from Kansas Fed President Ester George Monday night. She said "the time has come" for Fed officials to start talking seriously about boosting short term interest rates. "Starting this process sooner rather than later is important. If we wait for employment and inflation to reach our stated goals they we risk having to move faster and steeper in interest rates in a way that is destabilizing to the economy in the long term." George is a noted hawk and has lobbied for higher interest rates in recent speeches but every time it tends to roil the markets.

The economics were light today. The weekly chain store sales rose only +0.1% after a -0.2% decline last week. This number is usually ignored.

The Job Openings Labor Turnover Survey (JOLTS) for August showed a slight increase in the openings rate from 3.3% to 3.4%. The number of available jobs rose to 4.8 million and the highest level since the survey began in 2001. Despite the rise in openings the number of hires fell from 4.9 million in July to 4.6 million. The JOLTS report was ignored as a lagging indicator since September payroll reports have already been released.

Consumer credit rose only $13.5 billion in August, down from a +$21.6 gain in July. The August number was the slowest rise since November. Consumers appear to be hesitant to take on additional debt in an economy where wages are shrinking and food and healthcare prices are rising. This is another contrarian indicator for rising spending for the holiday season. If consumers are hesitant to add to credit card debt the holiday sales forecasts could be too high.

The calendar for Wednesday is headlined by the FOMC minutes from the last meeting. With multiple Fed heads speaking out on their views about raising rates or keeping them low the recent meeting was probably contentious. With QE ending in three weeks that will require a statement change and the minutes could have some revelations on both topics. Today's market decline could have been influenced not only by the warnings from Europe but also fear over the minutes.

Geopolitical concerns include not only Iraq, Syria, ISIS, Libya, Russia and the Ukraine but North and South Korea, Pakistan and India. India and Pakistan traded mortar and small arms fire across the border between Kashmir and Pakistan for the second day. Both are nuclear countries.

Five Indian civilians were killed and 34 injured in heavy fire from across the border in Pakistan. India returned heavy retaliatory fire and the battle has been raging for two days. Pakistan targeted 40 BSF border outposts and adjoining villages throughout the night. More than 15 Pakistani civilians were killed in return fire from India. The India Times reported that BSF forces fired 1,000-1,200 shells into Pakistan overnight. Cross border firing occurs routinely but not to this degree of severity.

Warships from North & South Korea traded warning shots after a North Korean ship violated the western sea boundary. There were no casualties and the North Korean ship returned to North Korean waters. The situation in North Korea is very unstable today. The current figurehead leader Kim Jong-Un has not been seen in public since Sept 3rd. There are rumors of a coup and the capital city Pyongyang is thought to be in lockdown. That could be to either prevent coup plotters from leaving the city or it could be an attempt by the successors to impose order after successfully seizing control.

Other rumors include Kim having surgery on his ankles as a result of being overweight and having diabetes. Kim missed the meeting of the Supreme People's Assembly last month and this is the first time since he took power in 2011. Whatever the situation the world will only find out long after it is over.

The North has declared 2015 as the year of unification and Seoul said on Tuesday the North has geared up for all out war by conducting tactical training sessions and boosting its attack capabilities. The North has doubled the number of training exercises compared to prior years. They boosted the number of portable rocket launchers to 5,100 with ranges of 60-200 km.

Back in the USA the National Retail Federation said holiday sales in Nov/Dec are expected to rise +4.1% and the biggest increase since 2011. Shop.org expects online sales to rise 8-11% to $105 billion, compared to an 8.6% rise in 2013. PwC said 50% of spending will occur in physical stores and 43% will be online. More than 58% of spending will be on gift cards, which is the hottest category next to clothing.

Not all outlooks are rosy. In a recent survey PwC said 84% of consumers are expecting to the same or less than in 2013. The average household spending is expected to decline from $735 to $684 according to the PwC survey. The lower spending is driven by families that make less than $50,000 annually and now represent 67% of American shoppers. That is up from 65% in 2013 and 63% in 2012. With food prices and medical costs constantly rising it is cutting into the available funds for holiday spending. Those earning under $50,000 expect to spend only $377, down from $435 in 2013. Shoppers said they will be increasingly price conscious and that will make this shopping season even more promotional than ever.

Crude oil declined again on the possibility of a recession in Europe. We have seen a long list of geopolitical concerns surrounding multiple oil producing countries and prices have not risen. With Saudi Arabia declaring a price war last Friday (Link to Price War article) we have risk of WTI declining to $85. This war is not only on other nations in OPEC but also against the USA. Since the cost to produce oil from shale and from oil sands is high they can halt development in the U.S. if they push prices low enough.

Brent declined to $92 and a level that has been support for the last four days. It is as though oil traders don't believe Saudi Arabia is serious and they are testing them. The good news is that U.S. gasoline prices will be under $3 soon and that will free up from extra cash for consumers to spend during the holidays.

The decline in energy prices is a plus for the consumer but it will push headline inflation even lower.

If the Fed is going to end QE in three weeks and raise rates in early 2015 then why are treasury yields collapsing? The yield on the ten-year declined to 2.35% and a five week low. We appear to be moving into a risk off posture with money flowing out of stocks and back into treasuries even though the six month view is for rising rates.

I think we are seeing the impact of the end of QE. Every QE program to date has caused a significant decline in the market when it ended and there is no reason for this one to be different. Yellen has already said QE will end in October and this is October. The market is simply anticipating the October 29th announcement. The end has been so widely telegraphed and the rally since the beginning of QE3 in January 2013 so pronounced that it is only reasonable to expect a similar decline.

The contrarian view is that prosperity is "breaking out" as Art Cashin has been saying. At this point it may be "sneaking out" but the economy in the U.S. is still in growth mode. That means any real dip will be bought and some of those yearend forecasts over 2,000 still have a chance to come true.

Shaded entries are revisions with the original target following their name.

Earnings warnings are flying fast. Agco (AGCO) shares fell -11% after the company warned of weaker than expected demand. The company cut its forecast for the full year to $4.10-$4.30 per share, down from $5.00. During Q3 the farm equipment company said demand declined to weaker than anticipated levels and they were compensating by making aggressive cuts in production schedules and expenses. Shares of Deere (DE) declined -3% on the AGCO warning.

The Container Store (TCS) fell to a historic low after reporting $193.2 million in revenue that missed estimates by about $6 million. Adjusted earnings rose +38.7% to 11 cents and in line with expectations. Same store sales declined -0.4% and well below estimates. The company tried to soften the blow by bragging about their TCS Closets initiative. The closet makeover line is launching across the country and the average sales price is $1,200 compared to the average ticket sale in the rest of the store at $60. Apparently nobody was excited with shares falling -25%.

SodaStream (SODA) warned that Q3 revenue would be about $125 million compared to analyst estimates for $154.1 million. The CEO said "we are very disappointed in our recent performance." He cited lower than expected demand as the reason. Analysts believe the soda machine is a limited audience product. With U.S. consumers drinking less soda every year those that wanted an in home dispenser have probably already bought one. Shares fell -22% on the news.

The demise of SodaStream and the settlement of a suit over the Vitaminwater brand helped push Coca-Cola (KO) to a 16 year high at $43.93. This is its second highest close ever with the highest close at $43.97 back on July 14th, 1998.

Glass maker GT Advanced Technologies (GTAT) announced bankruptcy unexpectedly on Monday and shares declined -90%. On Tuesday shares rebounded over 100% at one point but ended with a 51% gain. If you decline -90% on one day and rebound +100% on the next the first thought is that it recovered all its losses. Sorry, while the numbers are similar the results are not. GTAT declined from $10 to $1 on Monday. A +100% rebound from $1 only gets it back to $2. It would take a +900% rebound to get it back to the $10 level. The rebound came on a rumor that Apple was a large creditor having advanced GTAT cash to build the sapphire glass screens in quantity. Traders were hoping Apple would just acquire the company out of bankruptcy. If that happened the odds are good shareholders would be wiped out. Realization of that fact caused the share price to fade from the $2 high to close at $1.22.

Earnings guidance on Tuesday was very lopsided. Silicon Motion (SIMO) was the only company to give positive guidance. Shares rallied +5% on the news.

Four companies issued inline guidance. Integrated Silicon Solutions (ISSI), Landec (LNDC), Mistras (MG) and International Speedway (ISCA).

Five companies issued negative guidance. Yum Brands (YUM) warned that 2014 earnings would be in the range of $3.15-$3.27 compared to prior guidance of "at least $3.56." Analyst estimates were for $3.38. YUM shares fell -2.3% on the news.

Other companies warning were Christopher Banks (CBK), Haverty furniture (HVT) and AGCO and SODA, which I covered earlier.


It was not a fund day to be holding equities. The indexes gapped lower at the open, leveled out slightly midday and then plunged into the close. The Dow closed at a two month low at 16,719. Ditto on the Nasdaq at 4,385 and S&P at 1,935. The Russell closed at 1,076 and a 12 month low. All closed at their lows for the day.

The selling in the big cap indexes is accelerating with the Dow and Nasdaq losing -1.6% and the S&P -1.5%. That was very close to the -1.7% decline on the Russell 2000. I know you have read it here many times that the small caps lead in both directions and they are definitely leading us lower. The drop to a 52-week low is a technical breakdown that should lead to further selling. The close under the prior lows of 1,082 is a break of support and another technical sell signal. I hope we are not targeting a 20% correction but that level would be 965.

The S&P closed at 1,935 and well under all the stair step levels we have discussed over the last several weeks. The decline stopped right above the uptrend support from June 2013. The intraday low last Thursday was 1,926 and we are still about 10 points over that level. We are still well above the 1,904 level we saw in August. While the selloff is painful it is still just a hiccup until the long term uptrend support and that August low is violated. We have tested that long term support several times in the last two years and it has always held. However, QE was not ending in those prior tests. Make no mistake this is a critical juncture for the market.

Support is now 1,926 and 1,900.

The Dow is in breakdown mode. The prior support at 16,800 has been severely broken and the 200-day average at 16,585 is the next logical support followed by 16,368. There were nine Dow components that lost more than $2. Coke's historic high was the only positive stock in the index.

Support at 16,725 was pierced at the close by only 6 points so that level is still in play.

Fortunately the Nasdaq still has several levels of near term support but the chart is still bearish. The 4,344 and 4,371 levels have been tested several times and that range has halted several declines. We now have long term uptrend support at 4,385 that is similar to the long term chart on the S&P. If this level holds we could see a decent rebound because it is so clearly visible to any trader with a charting system. Conversely, should this uptrend support fail it could weaken sentiment significantly and target a decline to 4,000.

The Russell 3,000 (R3K), the largest 3,000 stocks in the market, is approaching an interesting convergence of support with the August lows and the 200-day average. The last time it traded below the 200-day average was November 2012. The decline last Thursday came within 3 points of the 200-day at 1,138 and we closed at 1,146 today. This would be a logical place for a rally after a retest. However, sentiment will have to change in a hurry.

The Transports ($TRAN) are still well above support at 8,000 despite two days of declines. The -209 drop today was significant on a sentiment perspective because oil prices are at the lowest level since April 2013. Transports should be bullish on the significant drop in crude prices. Q4 is normally bullish for transports because of the airline traffic and package shipments. For them to sell off that hard today suggests market sentiment is failing. Traders should watch this chart for confirmation of any further Dow declines. If the transports are weak as well then the Dow's future is bleak.

In the weekend commentary I showed a short term chart for each of the major indexes illustrating the failure of Friday's short squeeze right at downtrend resistance. Obviously that was a key inflection point. The weakness on Monday and the sharp decline today have pushed the indexes back into oversold conditions. We never know what causes these waterfall declines. It could have been a couple hedge funds exiting their long positions due to the weakness in Europe or a serious case of margin call selling or both. The point is that the markets are oversold again and a short squeeze could breakout at any moment. If one were to develop traders will be watching where it fails. If it remains below that downtrend resistance then it is just a blip and there is likely more selling to come.

The markets rarely move in a straight line in either direction. With the recent history pattern of 4% declines and then a rebound we have to think that traders are looking for another repeat. Despite all the apparent fury of the recent declines and the significant increase in volatility the Dow is only down -3.2% from its closing high of 17,279. That is hardly a material decline. Of course the Russell is off -10.9% and now in correction territory. Everyone is holding their breath that the Russell halts its decline there and frees the large caps to resume their upward trajectory.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Driver Assisted Tech & Industrial Goods

by James Brown

Click here to email James Brown


Mobileye N.V - MBLY - close: 55.47 change: +1.22

Stop Loss: 51.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 9.0 million
Entry on October -- at $---.--
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The future of hands free driving is a lot closer than you might think. MBLY is leading the charge. Its technology is already in more than three million cars made by companies like BMW, General Motors, and Tesla.

What exactly does this technology due? DAS stands for driver assistance systems. Sometimes you might see it called ADAS for advanced driver assistance systems. This new technology helps drivers avoid collisions with other vehicles, pedestrians, bicyclists, and more while also alerting the driver to road signs and traffic lights.

The company website describe Mobileye as "a technological leader in the area of software algorithms, system-on-chips and customer applications that are based on processing visual information for the market of driver assistance systems (DAS). Mobileye's technology keeps passengers safer on the roads, reduces the risks of traffic accidents, saves lives and has the potential to revolutionize the driving experience by enabling autonomous driving."

MBLY said their technology will be available in 160 car models from 18 car manufacturers (OEMs). Further, Mobileye's technology has been selected for implementation in serial production of 237 car models from 20 OEMs by 2016.

The company is already developing a system for autonomous driving or hands free driving. They currently plan to launch an autonomous system in 2016 that will work at highway speeds and in congested traffic situations.

MBLY stock came to market in August this year. Demand was strong enough that they upped the number of shares available from around 27 million to 35.6 million shares. They raised the IPO price from the $22 range to $25. This valued MBLY at $5.3 billion. The first day of trading saw MBLY opened at $36.00. Today shares are up more than 50% from their first day of trading and up about +120% from its IPO price of $25. On a side note the float is now 151.7 million shares with outstanding shares at 212 million.

It's easy to see why investors are optimistic on MBLY. Annual revenues have soared from $19.2 million in 2011 to about $120 million a year today. The stock's rally has soared past Wall Street's initial round of price targets in the $42-49 range. There have been a couple of firms raising their targets.

Bears have been arguing that the valuations on MBLY are insane. As of today MBLY's market cap is about $12 billion. Bulls would argue that MBLY has first-mover advantage in this field. That's true. MBLY has a near monopoly on the ADAS market. However, the bearish case here would mean any new competitors could quickly take market share.

The New York Post recently ran an article discussing how the White House might be a bullish tailwind for MBLY. The National Highway Traffic Safety Administration issued a research report that estimated ADAS type of technology could eliminate almost 600,000 left-turn and intersection crashes a year. Following this report the White House said they would draft new rules that required this sort of tech in new vehicles.

The momentum certainly favors the bulls. Traders bought the dip today in spite of the market's weakness. The stock can be volatile and the option spreads are a little wide. I would consider this a more aggressive trade.

We are suggesting a trigger to buy calls at $56.55.

Trigger @ $56.55

- Suggested Positions -

Buy the NOV $60 call (MBLY141122c60) current ask $4.20

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

Daily Chart:


Vulcan Materials Co. - VMC - close: 57.28 change: -1.23

Stop Loss: 60.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 976 thousand
Entry on October -- at $---.--
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VMC is in the industrial goods sector. The are the largest producer of construction aggregates in the United States. They are also a major producer of aggregate-based construction materials. Put it altogether and VMC produces crushed stone, sand, gravel, asphalt and ready-mix concrete.

The stock has languished for years after peaking near $125 a share back in 2007. It looked like the stock has turned a corner back in 2011 but that rally now appears to be in trouble. More recently VMC peaked under $70 back in March this year. It's been slowly chopping sideways since then in the $60-70 zone. The recent weakness might suggest a trend change for the worse.

The selling pressure has pushed VMC stock under multiple layers of support. It could get a lot worse. The market's recent weakness has been stoked by fears of a global growth slowdown. Bulls could argue that nearly all of VMC's sales are inside the U.S. and the U.S. economy is still growing. That's true. Evidently investors don't care.

Today's display of relative weakness (-2.1%) left shares of VMC testing its long-term trend line of higher lows dating back to 2011. A breakdown here could mean a much longer and larger correction lower. Tonight we're suggesting a trigger to buy puts at $56.90.

Trigger @ $56.90

- Suggested Positions -

Buy the NOV $55 PUT (VMC141122P55) current ask $1.55

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Accelerate Lower

by James Brown

Click here to email James Brown

Editor's Note:

Market weakness is getting worse as stocks delivered another widespread decline.

CNC and LNG have been removed.

Current Portfolio:

CALL Play Updates

iShares Russell 2000 ETF - IWM - close: 106.92 change: -1.79

Stop Loss: 106.35
Target(s): To Be Determined
Current Option Gain/Loss: -23.7%
Average Daily Volume = 36.8 million
Entry on October 02 at $108.35
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/07/14: It was another ugly day for the U.S. stock market. The small cap ETF lost another -1.6%. This is the lowest close of 2014 and looks like a bearish breakdown under support. If there is any follow through lower tomorrow we will likely see the IWM hit our stop loss at $106.35 (honestly I suspect odds of that are pretty high).

Nimble traders may want to switch directions and buy puts on the IWM and target a drop toward $100.00.

Earlier Comments: October 1, 2014:
Buy low, sell high. That's the traditional form of investing boiled down to its essence. The challenge can be the buy low part. Market pundits like to say buy when everyone else is selling. That was definitely the case today with the entire market in sell mode. All the major U.S. indices were down more than -1.3%. The only bright spot seemed to be utilities, which investors were using as a safe haven trade.

People were blaming a parade of negative headlines behind the market weakness. The day started off okay with a better than expected showing in the monthly ADP Employment change report came in at +213,000 new private-sector jobs in September. That was above estimates for +205K. Unfortunately the U.S. ISM manufacturing gauge dropped to 56.6 when economists were expecting 58.2. Germany's PMI slipped into negative territory (below 50.0) for the first time since June 2013. Then there were all the headlines about the first official case of the Ebola virus in the U.S. and how many people the infected person may have exposed before being quarantined in the hospital in Dallas. The market is made up of people and people tend to be irrational. A widespread outbreak of Ebola in the U.S. is extremely unlikely but it makes for great headlines on your TV screen.

The small cap index and ETF are in correction territory. IWM is only down -5.2% year to date but down -10% from its June closing high near $120. Make no mistake - the daily and weekly charts for the IWM look bearish. If this sell-off continues it would paint a very ugly technical picture. However, the IWM is short-term oversold and due for a bounce. If you were going to bet on a rebound then buying at support is the place to do it. That's why we are proposing tonight's trade.

I do consider this a more aggressive trade since normally when you try to catch a falling knife you get hurt. We're suggesting a trigger to buy calls on the IWM at $108.35 with a stop loss at $106.35.

- Suggested Positions -

Long DEC $110 call (IWM141220c110) entry $3.11

10/07/14 Readers may want to exit now, the IWM looks poised to hit our stop soon
10/02/14 triggered @ 108.35
Option Format: symbol-year-month-day-call-strike

Mallinckrodt Public Limited Co. - MNK - close: 91.32 change: -1.97

Stop Loss: 89.45
Target(s): To Be Determined
Current Option Gain/Loss: - 1.6%
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

10/07/14: Caution! MNK might be reversing lower. Shares of MNK have been showing relative strength for weeks. Unfortunately it looks like the market's weakness is finally starting to weigh on MNK. Today's -2.1% pullback in MNK is the third day in a three-day bearish reversal pattern. If you're a candlestick chart reader the pattern is called an "abandoned baby" pattern. Tonight we'll move our stop loss to $89.45.

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*

10/07/14 new stop @ 89.45, potential bearish reversal pattern
10/04/14 new stop @ 87.70
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

PUT Play Updates

Flowserve Corp. - FLS - close: 66.34 change: -1.84

Stop Loss: 70.10
Target(s): To Be Determined
Current Option Gain/Loss: +40.6%
Average Daily Volume = 813 thousand
Entry on October 06 at $68.45
Listed on October 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/07/14: FLS is accelerating lower with a -2.69% drop today. We'll move our stop loss down to $70.10. More conservative investors may want to use a lower stop. I am not suggesting new positions at this time.

Earlier Comments: October 4, 2014:
FLS is part of the industrial goods sector. The company is headquartered in Texas and has grown to 16,000 employees in over 50 countries. The company makes pumps, valves, seals, and provides services to the power generation, oil & gas, chemicals, and general industries.

FLS' rally from its 2011 low peaked back in early 2014. A slowdown in the global economy is impacting sales. The last couple of quarters have seen FLS miss revenue estimates and report declining sales. Now after six months of lower highs shares of FLS has broken down from a huge consolidation pattern. Goldman Sachs may have seen this coming when they put a "sell" rating on the stock back in June.

FLS is currently down four weeks in a row and the last few days have seen the stock break down under support near $70.00. More importantly it has broken support at its long-term trend line of support dating back to its 2011 low.

FLS was also showing relative weakness on Friday. Instead of bouncing with the market shares underperformed with a -1.5% decline on almost double its average volume. The point & figure chart has turned bearish and is forecasting at $60 target.

Tonight we are suggesting a trigger to buy puts at $68.45.

- Suggested Positions -

Long NOV $70 PUT (FLS141122P70) entry $3.20

10/07/14 new stop @ 70.10
10/06/14 triggered @ 68.45
Option Format: symbol-year-month-day-call-strike

Lithia Motors Inc. - LAD - close: 78.98 change: -2.88

Stop Loss: 85.25
Target(s): To Be Determined
Current Option Gain/Loss: +4.5%
Average Daily Volume = 384 thousand
Entry on October 07 at $81.40
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/07/14: Our new trade on LAD is off to a good start. We wanted to buy puts at the opening bell. Shares gapped down at $81.40 and then plunged to a -3.5% decline on the session.

We are not setting an exit target yet but I would not be surprised to see LAD drop toward $72.50 or $70.00.

Earlier Comments: October 6, 2014:
LAD is part of the services sector. They run one of the largest auto dealerships in the U.S. with 28 brands and over 100 stores. That was before their recent merger news.

Back in June shares of LAD soared on news they were buying DCH Auto Group USA in a deal valued near $360 million. Purchasing DCH will add 27 more locations including some on the East Coast. Earnings are expected to rise about $0.70 a share (a year).

Car sales in the U.S. have been soaring. Consumers have been buying cars at the fastest pace since 2006. So why have auto-related stocks rolled over? It could be multiple factors.

CarMax (KMX), the one of the largest dealer in the U.S. recently saw its stock crash on a disappointing earnings report. The company said they were seeing consumers hit by tougher financing standards, which was impacting sales. If banks are getting tougher on car loans it's going to impact the whole industry.

LAD has had pretty strong revenue growth but now it's starting to face tougher year over year comparisons.

The group did see a bounce last week on news that Warren Buffett's Berkshire Hathaway was getting into the car business. Berkshire is buying the Van Tuyl Group of auto dealers, which is the country's biggest privately owned dealership. Van Tuyl has 75 dealerships, so it's smaller than LAD. What made the auto dealer stocks rally was Buffett's comments that he sees long-term value in the industry and plans to buy more over time. Berkshire certainly has the money to buy someone like LAD (current market cap about $2 billion) but that doesn't mean it's an immediate acquisition target.

Shares of LAD were breaking key support near $75.00 and its 200-dma before the Buffett-inspire bounce. Now the rebound is failing under resistance near $85.00.

Tonight we're suggesting investors buy puts immediately on Tuesday morning with a stop at $85.25.

- Suggested Positions -

Long NOV $80 PUT (LAD141122P80) entry $4.40*

10/07/14 trade begins. LAD gaps down at $81.40
*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

Lennox Intl. - LII - close: 76.37 change: -0.43

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: +15.3%
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

10/07/14: LII only lost -0.5% versus the -1.5% drop on the S&P 500. The trend in LII is down but relative strength makes me nervous. I'm not suggesting new positions at this time.

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

10/01/14 new stop @ 78.25
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

Oceaneering Intl. Inc. - OII - close: 62.25 change: -0.38

Stop Loss: 65.10
Target(s): To Be Determined
Current Option Gain/Loss: -15.5%
Average Daily Volume = 1.6 million
Entry on October 06 at $62.35
Listed on October 04, 2014
Time Frame: We will likely exit prior to earnings on Oct. 29th
New Positions: see below

10/07/14: The intraday bounce in OII rolled over. I would use today's move as a new entry point for bearish positions.

Earlier Comments: October 4, 2014:
The price of crude oil hits its 2014 peak in late June. The steady decline in crude oil has pressure nearly all of the energy-related stocks lower including oil services names. As a matter of fact the oil service names have fared even worse with the OSX oil service index down -9.4% for the year.

OII is underperforming its peers with a -20% decline this year. The company provides an array of oil services with hundreds of remotely operated vehicles (ROVs). A company press release describes OII as "a global oilfield provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology expertise, Oceaneering also serves the defense, entertainment, and aerospace industries."

The weakness in oil is expected to get worse, which should keep the pressure on oil and oil service stocks like OII. Shares of OII recently broke support near $65.00. The oversold bounce has already rolled over and shares are hitting 18-month lows. The point & figure chart is bearish and forecasting at $47.00 target.

Friday's intraday low was $62.47. We're suggesting a trigger to buy puts at $62.35.

- Suggested Positions -

Long NOV $60 PUT (OII141122P60) entry $1.48

10/06/14 triggered @ 62.35
Option Format: symbol-year-month-day-call-strike

Pentair Plc - PNR - close: 63.85 change: -1.49

Stop Loss: 67.05
Target(s): To Be Determined
Current Option Gain/Loss: +58.3%
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

10/07/14: The bounce in PNR has reversed with today's -2.2% decline. Shares look poised to test their 2014 lows near $63.00 soon.

I'm not suggesting new positions at this time. Earnings are coming up on October 21st.

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*

10/01/14 new stop @ 67.05
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: 74.05 change: -1.09

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: + 1.8%
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

10/07/14: SBUX is moving towards the bottom of its recent trading range. The key will be a breakdown under $73.75. If you're looking for an entry point consider waiting for a drop under $73.75.

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: 68.80 change: -1.12

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +31.2%
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

10/07/14: The recent bounce in TUP has failed. Shares are on the verge of breaking down to new 2014 lows. More conservative investors might want to move their stop closer to the $71.00 level.

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

WESCO Intl. - WCC - close: 76.97 change: -2.07

Stop Loss: 80.55
Target(s): To Be Determined
Current Option Gain/Loss: - 5.1%
Average Daily Volume = 306 thousand
Entry on October 01 at $77.75
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/07/14: The oversold bounce in WCC is failing. Traders could buy puts now or you could wait for a drop under last week's low near $76.40.

Earlier Comments: September 30, 2014:
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.

- Suggested Positions -

Long NOV $75 PUT (WCC141122P75) entry $1.95*

10/01/14 triggered @ 77.75
*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


Centene Corp. - CNC - close: 79.98 change: -0.66

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: see below

10/07/14: The market sell-off is getting worse. While CNC only lost -0.8% versus the -1.5% in the S&P 500 the short-term trend in CNC still looks down.

Our CNC trade has not opened yet. Tonight we are removing the stock from the newsletter.

Trade did not open.

10/07/14 removed from the newsletter, suggested entry was $84.05


Cheniere Energy, Inc. - LNG - close: 73.84 change: -2.71

Stop Loss: 76.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on October -- at $---.--
Listed on October 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

10/07/14: Energy stocks are getting crushed. The bounce in LNG has failed. Our trade has not opened yet so we are removing LNG as an active candidate.

Trade did not open.

10/07/14 removed from the newsletter. Suggested trigger was $80.35