Option Investor

Daily Newsletter, Tuesday, 6/17/2014

Table of Contents

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

Market Wrap

Waiting on Yellen

by Jim Brown

Click here to email Jim Brown

The market was pretty quiet as traders held their positions ahead of Yellen's press conference on Wednesday.

Market Statistics

The Dow and S&P edged slowly higher ahead of the FOMC announcement and Yellen press conference. However, the Nasdaq and the Russell 2000 surged ahead and provided a sentiment boost to the overall market. When the small caps and tech stocks are leading it suggests the big caps are poised to make new highs as long as Yellen does not disappoint.

That is a big IF because the spike in inflation as represented in the CPI this morning could cause some uneasiness around the FOMC conference table this week. How Yellen addresses that point in the meeting statement and the press conference could either power the market higher or send it off the cliff.

The Consumer Price Index (CPI) for May rose +0.4% overall and the core rate rose +0.3%. This was the seventh straight month of gains. While that may not sound like much the monthly gains from February to May were +0.1%, +0.2%, +0.3%, +0.4%. Are you seeing the trend there? The core rate progression since February was +0.1%, +0.2%, +0.2% and +0.3%. The Fed can't say this time that it is only the headline rate increasing while the core rate remains muted. Both are moving in the same direction and picking up speed.

The real kicker is the 12 month inflation rate. In February it was +1.1%, March +1.5%, April +2.0% and May +2.1%. The core rate rose from 1.6% to 1.9% over the same period.

Energy prices rose +0.9% in May. The food and beverages rose +0.5% and the food at home component rose +0.7% and the biggest gain in three years. The trailing 12 month rise was +2.5% for overall food prices.

The recent spike in oil and natural gas prices is going to cause havoc with overall prices in the coming months. There is almost no way we won't see a continued surge across the board and the Fed is not going to be happy. They continually claim that inflation is subdued and will remain low for a long time. Over the last four months that claim is starting to wear thin.

There is a growing number of analysts that believe the Fed will have to accelerate its timetable for rate increases and possibly even end QE earlier than expected. This makes the FOMC statement and press conference this week especially troublesome. They have to mention the rising inflation and how they view the coming months. This could be a touchy topic and the market should be concerned.

As you can see in the chart below inflation has been abnormally low since the recession and there were a couple spikes that eventually faded. I expect the FOMC to say this is another spike as a result of the snapback in demand from the harsh winter and factors like the rising energy prices that will eventually fade.

Also weighing on the FOMC meeting will be the drop in new residential construction for May. The headline number came in at 1,001,000 compared to April at 1,071,000. Estimates were for 1,036,000 new homes. That -6.5% drop from April in what should be the busiest part of the building season is definitely troubling. Single family starts declined from 664,000 to 625,000 and multi-family starts fell from 407,000 to 376,000.

The decline in activity was nationwide and not just one region. The Southern region did buck the trend with a +7.3% increase in starts. Permits fell -6.4% to 991,000 and now -1.9% below year ago levels.

Analysts tried to use the weather excuse again saying the surge in April was the snapback in starts and not really a new trend. They may be right since starts in January were 897,000, February 928,000 and March 950,000. The weather did depress the late winter months since December, not normally a big month, did register 1,034,000 starts. The three month lull was definitely weather related and that lends credence to the snapback theory in April.

Regardless of the weather the Fed will be discussing the weakness in housing along with their future plans for cutting stimulus.

The calendar for tomorrow is highlighted by the FOMC announcement and the Yellen press conference. The worry for me is how Yellen handles the rising inflation in the press conference and the potential for an accelerated end to QE. Potential changes to the current QE taper are extremely unlikely but always a possibility.

This could be a pivotal meeting for the Fed. The economics are slowly improving and earnings estimates for Q2 are nearing four times the +2.4% growth in Q1. There is some incentive for the Fed to stand pat and just let the QE expire at the current pace because ending it early could upset the markets before the economic rebound becomes self sustaining.

Thursday's Philly Fed Survey would normally be a highlight for the week as the first major manufacturing report for June but it will probably be lost in the whirlwind of headlines left over from the FOMC events and the Iraqi war.

Friday is a quadruple witching and that is normally bullish. However, the week in June after the quadruple witching has been down 21 of the last 24 years. There is probably some technical explanation for the decline but it may be as simple as the arrival of the summer vacations and investors are cashing out and heading for the beach.

Also on the calendar for Wednesday is the Amazon smartphone announcement. The phone is widely rumored to have 3D features thanks to six tracking cameras that feature facial recognition to tilt the images depending on how the phone is held in relation to your face. Amazon is expected to sell the phones for just over cost and that could upset the current balance in the smartphone market.

On the downside there is a rumor that they signed an exclusive agreement with AT&T for service. That would be a negative since the AT&T network is less dense with large blocks of the country having spotty service. Amazon has been having talks with the major carriers in Europe but no word on which one has the best chance for getting the contract.

Samsung had a 31% market share of the 288 million phones shipped internationally in Q1. Apple had 15%. If you only count the USA Apple had 37% with Samsung at 29%. Amazon is not going to suddenly gain a large percentage of the market. If they are lucky they may gain 2-3% over the first year but they have a lot of competition from Microsoft, Nokia and the dozen or more Asian competitors.

Amazon is hopeful that phone users will take a picture of a product in a store and then instantly buy it on Amazon. That would be the best outcome for Amazon and they would be happy to give the phones away at cost if all the users would become Amazon buyers.

With all the Amazon products the one they make the most money with is rarely heard. This is their cloud services division. They sell space on their servers to anyone with a very low entry fee as in FREE. Once you get hooked and start adding additional servers, memory capacity, processors, etc the free price becomes a monthly commitment that grows and grows and grows. Now Amazon Web Services has FIVE times the COMBINED computing capacity of the next 14 service providers according to Gartner Group. Five times the next 14 providers. The amount of scale is unbelievable. Some analysts expect Amazon to eventually sell more in annual cloud services than they will in retail merchandise. They sold $41 billion in retail products in North America alone in 2013. The average person does not have a clue how big Amazon really is.

SunTrust Mortgage (STI) agreed to pay $968 million to settle a federal probe into improper mortgage originations. SunTrust is the seventh largest mortgage originator. The settlement also covers 49 attorneys general so they will not have to worry about a new problem cropping up at the state level. In the settlement the bank said it improperly originated loans in the 2006-2012 period where loans did not have the proper documentation or verifications. Basically SunTrust wrote loans to anyone who applied just like every other mortgage bank. STI has previously set aside $1.2 billion to resolve the legal issues. Five other banks paid $25 billion to settle similar allegations in 2012.

SolarCity (SCTY) caught fire today after they agreed to buy Silevo for up to $350 million. The purchase price is $200 million plus an additional $150 million upon achievement of certain milestones. Silevo manufactures solar panels. Last week the Commerce Department announced tariffs on solar panels made in China and SolarCity gets their panels from China. CEO Elon Musk said the move was to gain control over their own panel costs and to manufacture them to fit SolarCity applications.

Musk said despite the excess of panels in the market today, with the majority coming from China, there is still a shortage of quality "unsubsidized" high efficiency panels to compete with the fossil fuel energy supplied by gas and coal. The Chinese tariffs would raise panel prices from 72 cents per watt to more than 80 cents. Musk said the majority of the excess panels on the market are low efficiency. Silevo has a manufacturing plant in China. However, they have plans underway to build a larger plant in New York using the proven manufacturing techniques they developed in China. With the SolarCity buyout the plant is expected to be upsized. Musk said "our intent is to combine what we believe is fundamentally the best photovoltaic technology with massive economies of scale to achieve a breakthrough in the cost of solar power. At a targeted capacity of more than 1 gigawatt within the next two years, it will be one of the single largest solar-panel production plants in the world. This will be followed in subsequent years by one or more significantly larger plants at an order of magnitude greater annual production capacity."

Some analysts called this the "Tesla-zation" of SolarCity. Tesla is taking control of their battery supply by building a $5 billion giga-factory. Now Musk is putting SolarCity in charge of making their own panels and being in charge of their own destiny by constructing multiple giga-factories for solar panels. If anyone can make this project it is Elon Musk.

Flash memory maker Fusion-IO (FIO) got a flash deal from SanDisk (SNDK) on Monday. Sandisk offered to buy FIO for $1.1 billion in cash and the deal is likely to close in Q3. Fussion-IO makes flash memory solutions for PCs using the PCI-e interface. It is a really high dollar, high performance product for users that need lots of fast memory rather than waiting on a slow disk drive. The PCIe-based SSDs are in high demand for online transaction processing and data warehousing.

The announcement was on Monday but SNDK shares not only spiked on the news on Monday but again today. The street really likes this deal.

Adobe (ADBE) reported earnings after the bell and the stock rocketed from $67.50 to $74 on the news. Net income rose +16% to $88.5 million or 17 cents per share. Excluding one-time items the earnings rose to 37 cents and analysts were looking for 30 cents. Revenue rose +6% to $1.07 and analysts were looking for $1.03 billion. Adobe said it had 2.3 million paid Creative Cloud subscribers, up from 464,000 just three months ago.

For the current quarter Adobe projected earnings of 22-28 cents and analysts were expecting 27. While that forecast was weak apparently the other metrics made up for it.

American Airlines (AAL) said it was cutting flights to Venezuela because the country is holding $750 million in revenue and won't release the funds because of the country's financial problems. American said starting July 2nd it was cutting flights from 48 per week to only 10. They will only fly from Miami and they are dropping the existing flights from New York, Dallas and San Juan, Puerto Rico.

The International Air Transport Association, a trade group for major world airlines, said Venezuela is holding $4 billion in airline money because of the currency problems. The government gets to say what companies get to use dollars and for what reason. Apparently airfares are not an approved reason. The government tries to force companies to use the local currency but the exchange rate is so bad it does not work. Air Canada and Air Alitalia have suspended all flights and Panama's Copa has reduced services. Several other U.S. airlines have also restricted flights because the government won't release their money.

Last month the government let six Latin American airlines repatriate revenue from 2012 and 2013. Otherwise Venezuela would barely have any service today. Airlines from America are not likely to get any money soon. America is the great satan according to the late Hugo Chavez and his successor Maduro is keeping the tradition going by refusing to pay American companies operating in Venezuela. Several oil companies have already pulled out and some of their rigs were nationalized by Maduro, meaning they no longer belong to the companies and cannot be removed from Venezuela.

AAL shares rose +2% on the news.

You probably won't be surprised to learn that the war in Iraq is still in progress. The battle between Sunni and Shia has been ongoing for 1,300 years so it is not likely to end soon. The U.S. said it was sending 275 soldiers to Iraq to protect the embassies. The Iraq embassy has more than 5,000 employees and it is the largest in the world. With the ISIS only 40 miles away from Baghdad today I am sure those employees are getting nervous. However, Baghdad is now an armed Shia city and the potential for the ISIS to take it over is practically nonexistent. The biggest threat to Baghdad now is car bombs as a demoralizing weapon.

The price of crude oil peaked at $107 as I expected because the potential impact to Iraq's crude production is very small. The slide in crude prices and the lack of any major headlines out of Iraq took the weight off the equity markets. I predicted the headlines would have little impact on the markets this week because it is now old news.

Despite the Fed's sleeping potion that has removed nearly all volatility from the equity markets the indexes sleepwalked a little higher today. The S&P traded in a 10 point range to close at 1,942 and -1 point below the intraday high. The extremely low volatility on the S&P is the worst in 35 years. It has gained only 12 points in the last three days and remains -9 points below its historic high close at 1,951.

That lack of volatility could disappear on Wednesday afternoon as Yellen speaks. There is a very good possibility her press conference could send the markets in a sprint in either direction or both. The post announcement direction is normally a head fake. After a few minutes the indexes normally reverse and head off in the opposite direction. The following day is also known as a reversal day after the analysts have all night to post their ideas on what the Fed really said and how it will impact the market.

The S&P has support at 1,925 and resistance at 1,951 and the odds are very good we will touch one of those numbers this week.

The Dow is slowly edging higher as it tries to shake off that huge bout of profit taking from last week. The spike was out of context with the prior gains and was begging to be sold. That consolidation appears to be fading and the index is slowly retaking the lost ground.

The various Dow components have turned mixed after a strong majority were positive over the last four months. The Dow is moving higher but it is on the back of a few strong gains and it is not broad based. That could easily change but it suggests some investors are still lightening the load for the summer.

The Dow is a long way from the resistance highs at 16,970 with initial support at 16,700.

The Nasdaq Composite returned to the scene of the crime today with the retest of resistance at 4,344. This time the index did not recoil as a result but hugged that resistance level the rest of the day. The small -7 point drop at the close was profit taking from the lack of a breakout. Astute investors saw the stall and facing the FOMC on Wednesday they cashed in a few chips.

I view the decent gain and minimal selling on the resistance touch as bullish.

The Russell 2000 rallied nearly a full percent to also touch strong resistance at 1,180 without a material decline after it was reached. I view the strong performance by the Russell and the Nasdaq as very positive for market sentiment. If the Russell were to move over 1,180 I think it would cause significant short covering.

Wednesday is sure to be a pivotal day in the markets. We can only hope that Janet Yellen continues her Empress of the Doves imitation and the market is pleased. She will have a tight rope to walk and her inexperience in FOMC press conferences has gotten her into trouble before. Let's hope she is at home practicing right now.

The market should go directional by next week. The FOMC uncertainty will be over and the headlines from Iraq should continue to diminish. Unfortunately, the week after the June expiration has been down for 21 of the last 25 years. While it may or may not happen again in 2014 we should plan accordingly.

As I said last week I believe we are in "buy the dip" mode until proven wrong. After the FOMC events there may be no headlines on the horizon to push the market in either direction but the ones that count are never expected as we saw with Iraq. We are headed into the summer doldrums season so try not to overload your accounts with longs. Summer corrections can be ugly. However, summer rallies are always unexpected and the short squeezes on low volume are always fun.

Enter passively, exit aggressively!

Jim Brown

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New Plays

All Eyes On The Fed Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:

The market has been melting higher again. Trading activity will likely slow to a crawl tomorrow just ahead of the Federal Reserve's announcement around 2:00 p.m. Eastern time.

After the announcement the market could be volatile as traders try to sort through the Fed's comment on economic activity and the Fed's updated forecast for growth. We have the added bonus of Janet Yellen's press conference after the interest rate decision is released.

We are not adding any new trades tonight.

A few stocks at the top of our watch list are:

In Play Updates and Reviews

Small Caps Showing Strength

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 index was showing relative strength today with a +0.8% gain. Yet the index's rally did stall near last week's high and resistance at 1180.

MSFT hit our entry trigger. SAIA hit our stop loss.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $41.87 change: +0.81

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +4.0%

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

06/17/14: The rebound in the airline stocks continued on Tuesday. AAL outperformed some of its peers with a +1.97% gain. Shares are now testing short-term resistance near $42.00 and its 10-dma.

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: 49.79 change: +0.15

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

06/17/14: AOS snapped a five-day losing streak with today's +0.3% gain. We are still on the sidelines.

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: 13.98 change: +0.56

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +16.0%

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

06/17/14: The oversold bounce continues with a +4.1% gain today. ARWR is testing what could be short-term resistance near the $14.00 mark.

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: 52.00 change: -0.30

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 1.5%

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

06/17/14: DOW seems pretty clear about forecasting a move lower. I am expecting shares to find support near $50.00. More conservative traders may want to use a higher stop or just exit altogether.

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: 49.32 change: -0.53

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

06/17/14: FL almost hit our entry point today. The stock spiked to $50.10 this morning and then spent the rest of the day fading lower. If shares do not recover soon we will likely remove FL as a bullish candidate.

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: 11.16 change: -0.08

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 8.3%

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

06/17/14: FLEX dipped to short-term technical support at its 10-dma today. I don't see any changes from my prior comments. Yesterday we raised the stop loss to $10.75. More conservative traders may want to just take profits now. 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: 63.02 change: +0.18

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

06/17/14: Today marks a new all-time closing high for IR. Yet shares remain under their intraday highs from January this year. IR does look poised to push higher. 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: 41.68 change: +0.18

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: -0.4%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

06/17/14: MSFT saw some volatility today. Shares fell toward their 30-dma near $40.35 this morning and then bounced. The rebound carried MSFT to a new multi-year high and hit our suggested entry point at $41.85 before trimming its gains.

MSFT did get some good news in a roundabout way. The NPD Group, a marketing-research firm, reported that video game hardware, software, and accessories rose +52% in May 2014 from May 2013 to $586 million. Hardware sales alone surged +95% from a year ago. The two biggest players in the video game hardware space are Sony's Playstation and MSFT's Xbox. NPD didn't breakdown the company-specific numbers but a +95% improvement for the group should be good news for Xbox sales.

Our MSFT trade is open. I would be tempted to launch positions now but you might want to wait for a new relative high (above 41.91 or 42.00).

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?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike

NN Inc. - NNBR - close: 25.31 change: +0.27

Stop Loss: 23.75
Target(s): To Be Determined
Current Gain/Loss: + 0.2%

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

06/17/14: NNBR managed to outperform the market with a +1.0% gain but the rebound stalled near its 10-dma, which is worrisome. 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

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

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +0.3%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

06/17/14: SFTBY gapped open lower at $36.68 this morning. Shares appeared to bounce near their 40-dma. I do not see any changes from the newsletter's Monday night new play description.

Investors can launch positions now. More conservative traders may want to wait for a rally above $38.50 before initiating positions.

Earlier Comments: June 16, 2014:
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.

Current Position: Long SFTBY stock @ $36.68

06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

Super Micro Computer, Inc. - SMCI - close: 24.90 change: -0.68

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +11.9%

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

06/17/14: After yesterday's almost 11% rally shares of SMCI saw some profit taking today (-2.6%). 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: 51.66 change: +0.57

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 1.4%

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

06/17/14: Good news! After yesterday's unexplained display of relative weakness WFC managed to recover most of it with a +1.1% bounce on Tuesday.

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: 54.74 change: +0.03

Stop Loss: 55.50
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

06/17/14: TJX continues to drift sideways. The stock is not moving fast enough for us. More conservative investors may want to just abandon ship and exit now. We are moving our stop loss down to $55.50.

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*

06/17/14 new stop @ 55.50
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


Saia, Inc. - SAIA - close: 42.82 change: -1.46

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: -6.7%

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

06/17/14: Our SAIA trade has been stopped out.

I don't see any news to explain the spike down in SAIA right at the opening bell. The stock dipped to $41.92 before almost immediately bouncing back toward $43. Our trade was closed at $42.90.

closed Position: long SAIA stock @ $46.00 exit $42.90 (-6.7%)

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

Sep $50 call (SAIA140920C50) entry $1.75 exit $0.50* (-71.4%)

06/17/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
06/09/14 triggered @ 46.00
Option Format: symbol-year-month-day-call-strike