Option Investor

Daily Newsletter, Monday, 6/16/2014

Table of Contents

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

Market Wrap

Ahead Of The Fed

by Thomas Hughes

Click here to email Thomas Hughes
The US markets quietly bubbled on Iraq speculation...and the FOMC meeting starting tomorrow.


The major markets were fairly quiet today as events in Iraq drew attention from economics and an impending FOMC meeting. Al Quaeda linked militants have taken control of more of Iraq since last week and are closing in on new targets. According to speculation the drive to retake parts of Iraq by the sunni forces may result in a three way split of the country. Also according to reports, 90% of Iraqi oil production remains unaffected centered as it is in the Kurdish north. Asian and European markets were quiet in the overnight session as traders there awaited the outcome of the current Iraq situation as well as a new development in the Ukraine. New reports have it that Russia has stopped shipments of natural gas and other products to the Ukraine and is now requiring prepayment.

Futures trading was indicated mildly lower in the earliest part of the day, the S&P 500 at -4.5 around 8AM. At 8:30AM a round of better than expected economic data helped to lift the futures trade a little bringing the S&P up to around -2 going into the open. At the bell the markets opened as expected with the SPX around -2 points. This held for the first few minutes of trading until the IMF released its latest report on the state of the US economy. The IMF lowered its outlook for 2014 GDP to 2% and suggested that we should raise the minimum wage. The market drifted lower for about 15 seconds and then quickly found today's support and bounced back and then into the green by 9:40AM. The SPX hit its intraday high around 10:20 and then spent the rest of the day ranging between the early low and high with the Friday close very near the mid point of today's price action and closing levels.

Another reason the market seemed to pause today is the FOMC meeting scheduled to start tomorrow. The meeting is expected to produce no changes to the taper but may (probably) will provide some insight into when interest rates may begin to rise. There is also some other key data out this week that may help the market find some support such as the Housing Starts, Building Permits and CPI tomorrow and then Jobless Claims, Leading Indicators and Philly Fed on Thursday. Yet another reason the market may have entered this week so timidly is triple witching. This week is triple witching options expiration and may come with additional volatility that is completely unrelated to geo political situations.

The Economy

There were a few notable economic events today besides the IMF report, which turned out to be a non event based on market reaction. First up this morning was Empire State Manufacturing. The index rose more than expected to 19.28, ahead of the previous months 19. Analysts had expected a drop to 15. This months reading is the highest level of Empire region manufacturing since June of 2010. There were areas of strength and weakness within the report but all segments showed growth. New orders jumped to 18.36 from 10.44 last month. Shipments, inventory and employment all dipped but remain positive and expansionary. Empire is one of the earliest gauges of manufacturing on a month to month basis and could foreshadow strength in other regions.

Net Long Term TIC flows was reported as -24.2 billion. The previous month saw a gain of roughly $4 billion. TIC flows measures the net inflow/outflow of foreign investment in the US. TIC flows is also a lagging indicator by 2 months.

Industrial production rose in May by 0.6%. This is in line with expectations and better than the previous month. April production was revised lower to -0.3%. Capacity utilization was also better than expected, rising to 79.1% versus the expected 79% and the previous 78.9%.

The National Association of Homebuilders Housing Market Index also rose more than expected. The index rose to 49 from 45 and 3 points better than the expected reading of 46. Any reading above 50 is expansionary for this index. This is the first significant up tick in the index for several months and shows that builder sentiment may be thawing with the summer season. There are still some reasons for caution within the report such as “limited availability of labor” which makes no sense to me...unless they mean labor in the local market and/or skilled and qualified labor. The three components that make up the index all rose as well; the current conditions to 56, the current expectations to 59 and buyer traffic to 36. Buyer traffic being the notable area of weakness.

Moody's survey of Business Confidence, which has been strong all year, is even more upbeat than usual. The survey is conducted by noted economist Mark Zandi. The summary kicks off with the statement “Strong business confidence shows no sign of wavering” and goes on to report that there were few negative responses and for the third week no business says that present conditions are bad. Business still report that sales, pricing and employment are strong. Mr. Zandi's conclusion; the survey represents an economy growing above its potential.

Merger Monday

Today was another Monday filled with M&A activity. There were at least a half dozen deals in the news today with tax inversion the topic of choice. Medtronic is buying Covidien for $42.9 billion in cash and stock, $93.22 per share. The merger will result in Medtronic moving its headquarters to Ireland and possible receiving tax benefit from the move. The deal is a significant premium to Friday's close and precipitated a 21% move in Covidien. Shares of Medtronic opened higher but sold off during the day and eventually closed down more than 1%.

The Gold Index

Gold trading hovered around Friday's closing prices just like the equities market. The flight to safety trade is faltering just like the fear driven sell off in equities. Traders and investors are trying to figure out just what the Iraq situation means for the global situation. Gold traded around $1275 all day with very little fluctuations. Early trading saw prices up near $1280 but that did not last long. The Gold Index trade in similar fashion, making a tight range with today's action. The index is above resistance but not looking to strong at this time. The index is overbought in the near term with weak momentum that may be peaking. Long term fundamentals do not support higher gold prices so I think direction for gold and the index may come down to Iraq. If the situation escalates gold prices will likely move higher and the index with it. However, Iraq is still near term for now, the FOMC and the data are both long term effectors of the market. Economic data supports the taper and the taper is supportive of the dollar and lower gold prices.

The Oil Index

Oil trading was really mild today considering the large gain in prices last week and the Iraq violence. The thing is, the violence is still not impacting actual oil production yet so far as I have heard. The major portion of the Iraq oil infrastructure in the Kurdish north west of the country and is at this time safe from the uprising. In fact, CNBC's own reporter on the scene said that she herself was “safe in Kurdistan”. WTI and Brent both traded within about a half percent of last weeks close with WTI trending toward the lower end of the daily range. The fear factor that drove oil prices to the current levels could come out of the market really fast if traders start to think that there will not be a significant threat or disruption to Iraqi oil. On the flip side Boone Pickens said that oil could go to $150 if the situation spins out of control and nothing is done about it.

The Oil Index traded to a new high today but without much strength. The index made a tight range and a very weak candle suggesting a near term top may have been reached. In the near term this view is subject to events in Iraq; a jump in oil could help send the Oil Index higher while at the same time a drop in oil prices could bring the index back to support. In the longer term the oil sector is in an uptrend and making new highs driven in part on geo politics but also on steadily improving economic data and the expected 2nd quarter rebound. The indicators are bullish and on the rise with plenty of room to move up provided hopes for increased oil profits remains high. In the near term it appears as if a correction or consolidation could be at hand with support at 1660, 1650 and 16250 on a break of the short term moving average.

Sector Watch

The Home Builders were one of today's leaders. The XHB Homebuilders Spyder gained more than .5% in today's session. The ETF made this move up from the short term moving average and helps to confirm support around the $31.50 level. The indicators are bearish in the near term but longer term analysis shows growing support along this level. Regardless, the ETF has been trading choppy in a range over the past 12 months at least and faces plenty of technical resistance. Today's NAHB data was enough to help bring in support but not enough to convince anyone that the housing market is truly strong. Tomorrow's data may help. First resistance I see will is at $33 and extends up to the $34 level.

The Utilities Spyder XLU gained more than 75% in today's session. This sector ETF made a fairly strong move higher in the early part of the day but met with resistance after lunch. A possible reason for this sectors attraction today is dividend. The utilities sector is a good one for finding decent returns. This sector hit a top in early May following a four month rally that has resulted in a 6 week sideways movement. This consolidation is beginning to look like a potentially bullish triangle, definitely one worth watching. The top of the range at $43.50 is current resistance, indicators are bearish at this time but rolling over into a potential buy signal. A break above resistance could result in a near to short term rally in utilities. Support at this time is along the lower edge of the triangle around $41.50-$42.00.

The Indices

The major indices basically tread water today. They all opened marginally lower, moved a little lower, then bounced into the green only to find resistance and then move back down to close very near to opening prices. Intraday ranges were very tight and volumes were low, supposedly caused by Iraq but probably more by the FOMC. Iraq is a serious situation but for now is still only a near term fear. The FOMC, their outlook, the economy, corporate profits, the taper and rising interest rates are long term.

The SPX traded in the aforementioned tight range, slightly above the 30 day moving average. The indicators have just turned bearish and look to be indicating a test of support. Support is along the moving average about 20 points lower and the trend line close to 1900-1910. High oil prices and Iraq headlines could help to bring the index down to support, especially ahead of the fed meeting. The long term trend is up so for now I am still buying on the dips.

The Dow Industrials also traded in a tight range, just above the short term moving average. Unlike the SPX, the blue chips are trading just above a much stronger looking support level. Just below the moving average is the previous all time high and a zone that I consider to be strong support. Like the SPX the indicators are turning bearish but are very weak. The MACD is barely in the red, a break below support would of course increase that. Stochastic is pointing down but still high in the range. There may be some more down side in the next couple of days but I also think that the Dow will find support when and if it does. Current support level is 16,750 with next at 16,680 and 16,600.

The Nasdaq Composite was today's leader with a whopping 0.24% gain. The tech heavy index suffered the least during last weeks Iraq sell off and is now nearest to making new highs. The indicators here are weakening but still bullish. MACD is still above the zero line and stochastic, although pointing down, is still high above the upper signal line. Price action in the index appears to be consolidating in the short term for a push up to test the long term high but is subject to Iraq news in the very near term.

The Dow Transports were the worst performing of the major indices today and the only one closing in the red. The Trannies lost close to a quarter percent. The indicators are firmly bearish and pointing to a test of support and possible return to the long term trend line. The index is sitting on the short term moving average which is good for near term bulls but a break below that could easily see the index move to the trend line about 250 points below.

Tomorrow look out for new developments in Iraq and economic data. Iraq is more likely to drive short term direction while the data will give a hint to the long term direction. After that the Fed and what they say will be the important market mover of the week.And don't forget about options expiration.

Until then, remember the trend!

Thomas Hughes

New Plays

Telecom-Technology Conglomerate

by James Brown

Click here to email James Brown


SoftBank Corp. - SFTBY - close: 37.08 change: -1.02

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

FYI: SFTBY is scheduled to hold its annual shareholder meeting on June 20th.

*launch positions now*

Suggested Position: buy SFTBY stock @ (the opening bell)

note: SFTBY does not have options.

Annotated chart:

In Play Updates and Reviews

SMCI Surges To New Highs

by James Brown

Click here to email James Brown

Editor's Note:
Shares of Super Micro (SMCI) surged to new highs today. The rest of the market was slowly drifting higher.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $41.06 change: +0.68

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +2.0%

Entry on May 28 at $40.25
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: see below

06/16/14: AAL was outperforming its peers today with a +1.6% gain. The stock appears to be bouncing from its 30-dma. In the news AAL has come to a tentative agreement with the Machinists union covering more than 11,000 mechanics. It's a three-year deal that needs to be approved by union members.

I am not suggesting new positions at the moment.

Earlier Comments: May 17, 2014:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

current Position: Long AAL stock @ $40.25

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

Long Aug $40 call (AAL140816C40) entry $2.65*

06/14/14 new stop @ 38.85
05/28/14 triggered @ 40.25
*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

AO Smith Corp. - AOS - close: 49.64 change: -0.29

Stop Loss: 47.90
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 577 thousand
New Positions: Yes, see below

06/16/14: AOS tested short-term support near $49.00 and bounced. If shares do not see any follow through higher we will likely remove AOS as a candidate.

The newsletter is suggesting an entry trigger at $51.25.

Earlier Comments: June 9, 2014:
AOS is in the industrial goods sector. The company manufactures water heaters and boilers for the residential and commercial markets. The company's most recent earnings report was April 22nd. Their results were mixed but Wall Street liked it anyway. Analysts were expecting a profit of 53 cents a share on revenues of $557.84 million. AOS delivered a profit of 54 cents on revenues of $552.2 million for the quarter. Evidently these results were good enough to spark three upgrades the next day.

What investors like is AOS' growth rate and steady business. About 85% of AOS sales come from its replacement business. Water heaters have a limited lifespan and eventually need replacing. AOS also has exposure to new construction. As the U.S. economy improves and construction increases then it should be more new business for AOS. Earlier this year there were concerns about a slowdown in the U.S. real estate market but most recent data suggests that housing starts were up 13 percent month over month in April. We also saw new permits to build houses hit their highest levels in five years. As housing construction improves it will boost AOS' business.

In their last earnings report AOS management said business was strong enough that they passed along a small price increase to help offset rising steel costs.

AOS is also seeing growth in both India and China. Their sales in China surged +25% last quarter. As more and more Chinese move from the rural west to the coastal cities and join the middle class it will boost demand for luxuries like water heaters.

Analysts like the stock because AOS is showing strong earnings growth. Earnings grew +36% last year and estimates suggest they will have a compound growth rate of almost 18% over the next four years.

Technically shares of AOS just broke out past round-number, psychological resistance at the $50.00 mark. We want to see a little follow through so we're suggesting a trigger to open bullish positions at $51.25. The $55.00 level is overhead resistance but we think AOS can hit new highs before the year is out.

Trigger @ $51.25

Suggested Position: buy AOS stock @ (trigger)

FYI: We're not listing any options for AOS. The bid/ask spreads on the longer-term options are too wide to play.

Arrowhead Research - ARWR - close: 13.42 change: +1.09

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +11.4%

Entry on May 27 at $12.05
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

06/16/14: The volatility in ARWR continues with a +8.8% bounce today. This morning before the opening bell it was announced that ARWR will be added to the Russell 3000 index.

I am not suggesting new positions at this time.

Earlier Comments: May 19, 2014:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Current Position: Long ARWR stock @ $12.05

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

Long Sep $12.50 call (ARWR140920C12.5) entry $3.40*

06/09/14 the intraday pullback today might be a short-term top. Our trade is up +20% and investors may want to take some money off the table
05/27/14 triggered @ 12.05
*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

The Dow Chemical Co. - DOW - close: 52.30 change: -0.10

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 2.0%

Entry on May 27 at $51.25
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.5 million
New Positions: see below

06/16/14: Monday was a quiet day for shares of DOW with the stock churning sideways in a narrow range. It looks like shares are poised to decline toward what should be support in the $50.00-51.00 area.

More conservative traders not willing to take the chance that DOW doesn't bounce near $50.00 may want to use a stop loss closer to the $51.50 region. We're leaving our stop at $49.75 for now.

Earlier Comments: May 24, 2014:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. As Wall Street searches for returns and yield DOW will likely continue to show up on their radar screen.

The company has been doing a good jog on maintaining cost controls and returning capital to shareholders. The Q1 2014 earnings report showed net profits surged +75% from a year ago. The first quarter was their sixth consecutive quarter of year-over-year earnings growth.

Dow has raised their dividend by 15% and now sports a 3.0% yield. They plan to complete a $4.5 billion stock buyback program in 2014.

In spite of higher feedstock and energy costs DOW still managed to see margins grow. They expect 2014 to see this margin growth gain further momentum.

Wall Street has been upgrading the stock and raising earnings forecasts.

Shares of DOW are in a long-term up trend (see weekly chart below). Yet the last couple of months have seen shares consolidating gains in a sideways move near $50. This consolidation looks like it's about over. DOW is poised for a breakout higher.

Current Position: Long DOW stock @ $51.25

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

Long Sep $50 call (DOW140920C50) entry $2.88*

06/14/14 new stop @ 49.75
05/27/14 triggered @ 51.25
*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

Foot Locker, Inc. - FL - close: 49.85 change: +0.41

Stop Loss: 46.90
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: Yes, see below

06/16/14: FL showed some relative strength with a +0.8% gain. The stock looks poised to breakout past resistance near $50.00 soon.

Earlier Comments: June 5, 2014:
FL is in the consumer goods sector. The company is a retailer focused on footwear and athletic apparel. As of February 2014 they had 3,473 stores.

This is one retailer that did not seem to be affected by the harsh winter weather that so many retailers blamed for their poor Q1 performances. FL actually beat analysts estimates on both the top and bottom line when they reported earnings on May 23rd. FL is developing a trend of beating Wall Street's estimates.

Their Q1 results were a net profit of $1.11 per share on revenues of $1.87 billion. Consensus estimates were $1.06 on revenues of $1.79 billion. FL also said their comparable-store sales surged +7.6%. Analysts were only expecting +6% improvement. Gross margins also improved +0.4 to 34.6 percent.

Rising revenues, rising same-store sales, rising gross margins all sound like a great recipe for new highs on the stock, which is what we're seeing today. Wall Street thinks there is more upside ahead. Recent analysts comments suggest FL will be able to keep the momentum alive.

Tonight shares of FL are hovering just below psychological, round-number resistance at $50.00. We're suggesting a trigger to open bullish positions at $50.25. If triggered we'll start with a stop loss at $46.90, under its 50-dma. We are not setting a target tonight but a good area to aim for is probably the $55 region.

Trigger @ $50.25

Suggested Position: buy FL stock @ (trigger)

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

Buy the Aug $50 call (FL140816C50)

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

Flextronics Intl. - FLEX - close: 11.24 change: -0.08

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 9.1%

Entry on June 00 at
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.9 million
New Positions: see below

06/16/14: FLEX was seeing some profit taking today with a -0.7% decline. I have been suggesting that investors take money off the table the last few days. Tonight we are moving our stop loss up to $10.75. I am not suggesting new positions here.

Earlier Comments: May 31, 2014:
FLEX is in the technology sector. The company is the second largest contract electronics manufacturer. They make electronic components for some of the world's biggest companies like Apple, Samsung, Cisco Systems, Google, IBM, and Microsoft.

FLEX reported earnings on April 30th and results beat Wall Street's estimates on both the top and bottom line. EPS was 24 cents, 4 cents above consensus estimates. Revenues rose 27% from a year ago to $6.72 billion for the quarter, well above analysts' estimates. Operating income surged +72% from a year ago.

Just a few days ago the stock broke out past major resistance in the $9.75 region following its analysts day. FLEX appears to be making improvements that will bring about better margins and earnings growth. The most recent quarter saw gross margins improve 170 basis points.

The company ended the quarter with $1.59 billion in cash and cash equivalents and have continued to deliver on their strong stock buyback program. FLEX has already repurchased 9% of its outstanding shares in fiscal 2014. Value investors also love FLEX's strong free cash flow, which is the highest among its peers at more than 12% FCF. The company looks poised to outperform its peers with EPS growth of +27% by the end of 2016 versus average growth of +20% from its rivals.

current Position: Long FLEX stock @ $10.30

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

Long Oct $10 call (FLEX1018C10) entry $0.80

06/16/14 new stop @ 10.75
06/07/14 set target at $11.75
06/03/14 triggered @ 10.30
Option Format: symbol-year-month-day-call-strike

Ingersoll-Rand Plc - IR - close: 62.84 change: +0.54

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below

06/16/14: IR looks strong today with a +0.8% bounce back toward its recent highs. Shares look poised to breakout past resistance near $63.00 soon. I don't see any changes from my earlier comments.

Earlier Comments: June 10, 2014:
IR is in the industrial goods sector. They operate two business divisions, their Climate and Industrial segments. The climate business accounts for the majority of their sales as they compete in the heating, ventilation, and air conditioning markets. They're best known for their Club Car, Ingersoll Rand, Thermo King, and Trane brand names.

The company has been consistently growing earnings with EPS growth of +28% from 2011 to 2013. They've also seen operating margins improve over the same three-year period. Their most recent earnings report in April beat analysts' estimates by three cents with a profit of 29 cents a share. Revenues were up +3.2% from a year ago to $2.72 billion. Orders were up +5% for the quarter while margins in its climate business rose 210 basis points.

Steady revenue growth and margin growth sound like a pretty good deal if you're bullish on the stock. Management followed up their earnings news by raising their guidance on the second quarter this year.

Weather was a factor in the first quarter but now that we're into summer any increase in construction should be a boon for IR. In yesterday's new play (AOS) we noted that the U.S. real estimate market looks poised for improvement. Housing starts were up 13 percent month over month in April. New permits to build houses hit their highest levels in five years. This should all point to improved sales for IR's HVAC business.

We know that somebody is bullish on IR. The last couple of weeks have seen some pretty big option bets. Thousands of July calls options have been purchased expecting IR's rally to continue over the next few weeks.

Technically we are seeing IR rebound from its long-term up trend. The last four months have also built what appears to be an inverse head-and-shoulders pattern, which forecasts a $69-70 target.

The January 2014 high near $63.50 could be resistance. We're suggesting a trigger to buy calls at $63.75. We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

Trigger @ $63.75

Suggested Position: buy IR stock @ (trigger)

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

buy the Sept $65 call (IR140920C65)

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

Microsoft Corp. - MSFT - close: 41.50 change: +0.27

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: Yes, see below

06/16/14: MSFT continued marching higher on Monday. The stock looks poised to breakout soon. There is no change from the weekend newsletter's new play description.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

MSFT is currently hovering just below resistance near $41.65. I am suggesting a trigger to open bullish positions at $41.85. More conservative investors may want to wait for a rally past $42.00 before initiating positions.

Trigger @ $41.85

Suggested Position: buy MSFT stock @ (trigger)

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

Buy the 2015 Jan $45 call (MSFT150117c45) current ask $1.07

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

NN Inc. - NNBR - close: 25.04 change: -0.19

Stop Loss: 23.75
Target(s): To Be Determined
Current Gain/Loss: - 0.8%

Entry on June 04 at $25.25
Listed on June 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 153 thousand
New Positions: see below

06/16/14: NNBR continued sinking after Friday's bearish reversal. However, shares did hold near round-number support at $25.00. We are concerned that NNBR could be ready for a correction lower. More conservative investors will want to raise their stop loss.

I am not suggesting new positions at this time.

Earlier Comments: June 2, 2014:
NNBR is in the industrial goods sector. The company makes precision bearing and metal components, industrial plastic, and rubber products. They sell components to the aerospace, agriculture, automotive, construction, energy, industrial, marine, and medical industries.

NNBR's big rally in 2013 has continued into 2014. This year has been a bit of a roller coaster ride for the stock. The rally really picked up steam in early May after NNBR reported earnings on May 6th.

Wall Street was expecting a profit of 29 cents a share on revenues of $1.1.3 million. NNBR delivered 31 cents a share with revenues rising +9.3% to $102.5 million. The 31-cent net profit is a +47.6% surge from a year ago. The company said its gross margins rose 110 basis points to 21.7%.

News on NNBR is pretty quiet but industrial stocks have been leading the market higher. Rising revenues, rising profits, and rising margins sound like a good recipe for further appreciation.

Currently NNBR is hovering below round-number resistance at the $25.00 mark. We are suggesting a trigger to open bullish positions at $25.25.

We're not setting a bullish target tonight but I will point out that the point & figure chart is forecasting a long-term bullish target of $49. I also want to note that it's possible, but unlikely, that NNBR could see potential resistance at its all-time highs at $26.75 set 18 years ago back in May 1996.

Current Position: Long NNBR stock @ $25.25

06/13/14 Caution! Friday's move looks like a potential bearish reversal
06/07/14 new stop @ 23.75
06/04/14 triggered @ 25.25

Saia, Inc. - SAIA - close: 44.28 change: -0.25

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: -3.7%

Entry on June 09 at $46.00
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 239 thousand
New Positions: see below

06/16/14: Today's drop in SAIA doesn't look that bad on the surface with a 25-cent decline. Unfortunately today's dip left shares closing under their 20-dma, which has been short-term support. Readers may want to tighten their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
SAIA is in the services sector. The company runs trucking service to handle shipments between 100 and 10,000 pounds. They were formerly known as SCS Transportation.

The S&P 500 index ended the week at record highs. The transportation stocks have been leading the market higher. The Dow Jones Transportation Average also closed at all-time highs. The latest economic data has been mixed with the most recent Q1 GDP estimate revised lower. Yet data from the transport industry suggest a growing economy. Rail traffic has been strong and trucking traffic has also been improving.

Cass Information Systems reported that trucking shipments in May were up +3.6% year over year and up 1% from the prior month. Thus far trucking companies have seen freight shipments in the first five months of 2014 hit their best levels "since the end of the Great Recession" (source: IBD).

The first quarter was rough for a lot of companies but not for SAIA. The company delivered its Q1 results on April 25th and beat Wall Street's top and bottom line estimates in spite of the harsh weather. Analysts are expecting SAIA's earnings to grow +30% this year and +24% in 2015.

On May 20th SAIA said LTL tonnage per day rose +7.5% in April compared to a year ago. Halfway through May their LTL tonnage was up more than 8%. If this keeps up the company is likely to deliver another strong quarter of earnings.

Current Position: long SAIA stock @ $46.00

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

Long Sep $50 call (SAIA140920C50) entry $1.75

06/09/14 triggered @ 46.00
Option Format: symbol-year-month-day-call-strike

Super Micro Computer, Inc. - SMCI - close: 25.57 change: +2.48

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +14.9%

Entry on June 09 at $22.25
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 467 thousand
New Positions: see below

06/16/14: Bulls were stampeding in shares of SMCI today. The stock gapped open higher at $23.52 and then surged to a +10.74% gain to close at new all-time highs.

SMCI was already up five weeks in a row. Shares definitely look short-term overbought here. More conservative investors may want to take some money off the table. I am not suggesting new positions at this time.

Earlier Comments:
SMCI is in the technology sector. The company makes high performance servers (computers). The stock has been stuck in the $8.00-18.00 trading range for years. That changed back in January when SMCI reported earnings that beat analysts' estimates on both the top and bottom line. If that wasn't enough SMCI's management also raised their guidance. Shares soared to all-time highs on this news. You can see the spike higher in January.

When investors turned sour on high-growth and momentum names this past spring shares of SMCI corrected sharply but now it's back and poised to challenge its highs. That's because SMCI has delivered another strong quarter of growth.

SMCI reported its Q3 results on April 22nd. Wall Street was expecting a profit of $0.27 per share on revenues of $335.19 million. SMCI bested estimates with a profit of $0.37 per share and revenues soared +34.5% to $373.8 million. Management then guided higher for the current quarter and raised its top and bottom line estimates above Wall Street's estimate. It was their second straight quarter of record highs for revenues and earnings.

Analysts have started revising their numbers on SMCI as the company is growing faster than its rivals. Some might consider SMCI cheap with a P/E at 20.

The point & figure chart is bullish and forecasting at $25 target.

current Position: long SMCI stock @ $22.25

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

Long Oct $22.50 call (SMCI141018C22.50) entry $2.25*

06/16/14 SMCI rallies +10.7%
06/09/14 triggered @ 22.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Wells Fargo & Co - WFC - close: 51.09 change: -0.81

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 0.3%

Entry on June 02 at $50.94
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 13.5 million
New Positions: see below

06/16/14: I have been warning readers that WFC looked headed for the $50-51 zone. Shares were moving that direction in a hurry today with a -1.5% decline. WFC stalled near $51.00 this afternoon. I am not convinced the pullback is over. The stock should find stronger support near $50.00 and its 50-dma (currently 49.85). We will try and reduce our risk by moving the stop loss to $49.70.

Earlier Comments: May 31, 2014:
WFC is in the financial sector. They are a major, money center bank, headquarter in San Francisco with annual revenues of $81.72 billion and net income of over $21.5 billion. The financial sector has been a strong performer these last couple of weeks and WFC has helped lead the group higher.

Currently WFC is up +11.8% year to date. Its closest rivals are all negative for the year. Bank of America (BAC) is down -2.75%. JPMorgan Chase (JPM) is off -4.98%. Citigroup (C) is down -8.7% for 2014. WFC says business is good and they expect it to get better. The bank reported that credit quality has been improving. They managed to reduce their loan loss reserves in the first quarter and they expect this trend to continue in 2014.

At WFC's recent analyst day their CFO said they want to raise how much money they return to shareholders. They'd like to pay out 55 percent to 75 percent of net income back to shareholders as dividends and stock buybacks. That's up from 34% in 2013 but the new capital plans are subject to regulatory approval.

The shareholder friendly management at WFC is probably just one reason that Warren Buffet likes this company. WFC is Berkshire Hathaway's largest holding. Some have suggested that WFC is the best way to benefit from any long-term rebound in the U.S. housing market and consumer spending.

In recent news WFC says it is poised to end some of its legal troubles surrounding the robo-signing scandal during the housing crisis. It could final settle this issue for $67 million fine and put this issue behind it.

Technically shares of WFC looks very bullish with a long-term up trend. This past month has seen WFC breakout past key resistance at the $50.00 level. Shares ended the week at a new all-time high.

Current Position: Long WFC stock @ $50.94

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

Long Oct $50 call (WFC141018C50) entry $2.31

06/16/14 new stop @ 49.70
06/09/14 new stop @ 48.75
06/02/14 trade begins. WFC gapped higher at $50.95
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 54.71 change: -0.08

Stop Loss: 57.10
Target(s): To Be Determined
Current Gain/Loss: -0.2%

Entry on May 28 at $56.41
Listed on May 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

06/16/14: TJX quietly drifted sideways today.

I am not suggesting new positions at this time.

Earlier Comments: May 27, 2014:
TJX is in the services sector. The company runs off-price apparel and home fashion retail outlets with brand names under T.J.Maxx, Marshalls, HomeGoods, and more. TJX has over 1,000 locations.

Retail has had a tough time this year. Disappointing Q4 Christmas shopping season results were then followed by one of the worst winter seasons in years. TJX has not been immune to the issue. The company reported Q4 earnings results and missed estimates and then lowered guidance for Q1 and full year 2015. They did it again just a few days ago when they reported their Q1 results. TJX missed estimates on both the top and bottom line and then management lowered their guidance for 2015 again.

Shares collapsed last week following the new earnings earning and the oversold bounce has already failed. TJX has also broken down through some long-term bullish trend lines (see weekly chart below).

There are a few analysts saying the sell-off is overdone and traders should buy this weakness but no one seems to be listening. There could be more analysts coming out and trying to call a bottom on TJX, which might spark some short-term rallies but the path of least resistance is down.

Currently the point & figure chart is bearish and forecasting at $45 target.

current Position: short TJX stock @ $54.61

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

Long Oct $52.50 PUT (TJX141018P52.50) entry $1.70*

05/28/14 trade begins. TJX opened at $54.61
*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