Option Investor

Daily Newsletter, Thursday, 6/19/2014

Table of Contents

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

Market Wrap

Unsurprising FOMC

by Thomas Hughes

Click here to email Thomas Hughes
The Fed lowered its 2014 GDP expectations unexpectedly but the move was not surprising for the market which set another new high today.


Yesterday the Fed acted as expected and tapered another $10 billion. The unexpected part, at least by me, was a lower GDP forecast. The thing is, once I heard the news I was not that surprised. The IMF lowered its forecast earlier this month and considering the law of averages if the first quarter is lower than expected, as it was, then naturally the full year average will be lower even if the second, third and fourth quarter come in as expected. The good news is that the Fed also thinks that inflation is rising in line with their expectations and that a rebound in the economy is currently underway. This news sparked a rally to new highs that carried over into the international market and the overnight session. In Asia most markets were up around a half percent or so with the Shanghai one notable exception. The mainland Chinese index ended the session in the red. In Europe markets climbed about 0.75% on average, hindered in small part by the escalating situation in Iraq.

US futures trading was flat to negative in the earliest part of the day but moved into the green following the 8:30AM release of jobless claims data. Claims were a little under the predictions and inline with the long term trends of declining unemployment. At the open the market was flat to weak with the SPX hovering just over the break even line for the first thirty minutes of trading. At 10AM Leading Indicators and Philly Fed sent a ripple through the market that caused the SPX to move down to the low of the morning just below yesterday's closing price. Both indicators were positive, Leading just below expectations and Philly Fed just above. The rest of the day saw the indices drift slowly lower by about a quarter percent or less and then slowly drift higher into the close, regaining positive territory and leaving the SPX at another new high.

The Economy

On the headline initial claims for unemployment dropped more than expected. In reality the number was 1,000 claims lower than expected at 312,000. This is at the low of the 12 month range and at least helps to maintain the status quo in terms of the jobs market. Last weeks claims were revised higher by 1,000 for a net drop of 6,000 from last weeks report. The four week moving average also declined, by -3,750, to 311,750. On an unadjusted basis claims fell by -13,178 to 300,193, or -4.1%. Looking at the table provided by the DOL claims have been at or near the low of the range for most of this quarter. If jobs continue to increase at the rate they have been this figure could drop below the 300,000 level in the near future.

Continuing claims fell by -54,000 and hit a new low not seen since Oct 13, 2007, according to the revised and readjusted data. Last weeks figure was revised up by +1,000 as well. This figure has been in decline for over four months and could be accelerating. In the long term view total claims rose by 32,000 but remains near long term lows. On a state by state basis California led with an increase of 9,935 new initial claims, followed by Florida with 4,050 new claims. New Mexico and Nebraska led with declines of -332 and -162 respectively.

At 10AM Philly Fed and the Index Of Leading Indicators caused the market to turn to the red. Philly Fed was stronger than expected at 17.8, rising more than 2 points from last months 15.4 and 4 points higher from the expected 13.2. This is a strong sign the economy is rebounding. Within the report the employment index rose to 12 from 8 and new orders to 16.8 from 10. The prices paid index was a negative and a sign of inflation rising sharply to 35.

The Index of Leading Indicators rose less than expected, depending on who you listen to. The index gained 0.5%, in line with the consensus of 0.5% and ahead of the 0.3% gain in April and the 0.2% gain in March. The gains in the index were broad based and will likely pick up in the second half of the year according to the report. This is also the fourth month of positive readings and the third consecutive month of increases. The coincident index also rose by 0.3% in May, ahead of the 0.2% gain in April. The lagging index gained 0.4% last month versus the 0.3% in April. According to all three of these indices the current and previous months activity is stronger than expected and in line with the expected economic rebound.

The Dollar

The Fed's stance on the economy was not too surprising but the new speak on interest rates is a little. The economy is still growing enough to taper, strongly enough to expect that a rate hike might come sooner than anticipated but that conditions support the idea of lower rates longer than forecast. I think that this may be a veiled attempt at telling us not to expect too much, such as too much time before the hikes begin or too much of a hike when it comes. Not surprisingly this stance weakened the dollar somewhat causing it to drop below the 30 day moving average and approach support levels near the mid point of the 8 month trading range. The indicators are bearish and could carry the index to test support along the 80 level. There are now several weeks before the next important central bank meeting from the ECB and the BOJ. Until then economic data affecting Fed outlook could impact dollar values.

The Gold Index

Gold prices responded very well to the Fed's new interest rate agenda. Gold prices climbed mildly yesterday and then spiked up by more than $25 in the early part of the day and then as high as $45 in what can be described as a massive short covering rally. Gold prices are now trading around the $1315 level and a potential area for resistance. This move in gold is a little suspicious to me and could be a little knee-jerk in quality; the extent of the rally a little bit of an over reaction. Interest rates are still going to rise, probably sooner rather than later and we can expect they will stay low a long time after that. I think we pretty much knew that already. In the long term the economic trends are up and the rebound is underway which is going to lead us into higher interest rates. Plus, now that the Fed has lowered its GDP expectations they have opened up the possibility they will have to raise them again later if/as the economy strengthens and I don't think that would be a bullish catalyst.

The Gold Index naturally followed gold prices higher and has blown past the resistance level it was trading under last week. Today the index gained about 2.75%, forming a strong and long white candle rising up from the 30 day moving average on bullish indicators. Near term analysis looks pretty bullish for the index with a long term resistance level about 4% higher at $100. While bullish, the indicators, especially the MACD, is on the weak side. The rise in gold and the index is based on Iraq flight to safety with the added momentum of reaction to the new Fed stance either of which could dissipate quickly. The Iraq premium is a little harder to judge because who knows how the uprising will end? The Fed premium is tied to economic data and trader perception, economic trends are good and trader perception fickle.

The Oil Index

Prices for WTI hovered around the $106 level today in a mild session. Prices moved in a range roughly $0.25 above and below yesterday's close. Brent crude climbed higher by near a half percent as Iraq tension and violence raised the possibility of supply disruption. New developments today include increased international dissatisfaction with the Iraqui prime minister and US drones flying surveilance over hot zones. The Oil Index traded higher today as well, breaking the round number resistance of 1,700. The index is currently in an uptrend driven by improving economics and higher oil prices that have been inflated since the start of the Ukraine incursion. The indicators are bullish and supportive of higher prices at this time. 1,700 will be important for the index in the near term with support in the 1,650-1,660 region.

Story Stocks

Starbucks received an upgrade today from neutral to buy at UBS. The upgrade was based on the average analyst target price versus current share price. The upgrade comes with a potential upside of more than 18% of current value. Shares of Starbucks climbed more than 2% on the news coming to a halt just below resistance at $77.50.

It is not earnings season yet but that does not mean that no earnings are coming out. Today several higher profile, bigger name mid-term earnings reports were released led by Blackberry, Oracle and Pier 1. Blackberry reported before the bell, producing less of a loss than expected. Ex-items the company produced a loss of -$0.11 per share versus consensus in the range of -$0.25. Gross margins in the quarter are up to 48% from 43% last quarter on reductions in operating expenses. Total sales of Blackberry devices to end users was ahead of expectations. The stock surged more than 10% following the announcement.

Pier 1 missed its earnings expectations by 4 cents. The company earned $0.16 per share versus a consensus $0.20 on a 6.3% sales growth. The results are better than expected on quarter over quarter basis but still behind last years results for the same period. At the same time the company also lowered full year guidance to the low end of the expected range. The results were not satisfying and sent the stock down by more than 13% in today's trading.

Oracle reported after the bell. The software services company reported only $0.92 versus the expected $0.95. Revenue was light along with new licenses and software renewals. The stock got hit hard after hours dropping more than 7.5%.


The VIX traded up today after a lower opening. The volatility index traded in a tight range around yesterday's closing prices after opening close to a low dating back to 2008. Historically whenever the VIX reaches extreme low levels it usually precedes a sharp snap back. Over the past year that level was near 12.50. Now the VIX is below that level and the current situation does not appear to be the same, at least not yet. The indicators are currently bearish and point to lower VIX values which is coincident with a confirmation of resistance over the last two days precipitated by data and extended by the Fed. This resistance level is the same level that provided support for the VIX and resistance for the SPX all last year as the recovery began to take hold and we were speculating about when tapering would begin. On a purely technical basis the support turned resistance is a potentially strong one and could keep the VIX beneath it for the near to short term.

Before the Housing Bubble and market meltdown the VIX traded around the current level for years. It was not an extreme, it was the norm while the markets were rallying. The market was euphoric then on a rapidly rising housing market and that led to the bubble. I don't think the market is euphoric now; even though the equity market is at all time highs trading volumes are down according to OCC and other data, the housing market is not as robust as we keep expecting and there is still lingering concern for US and global growth. It could be that the market has reached a level of calm signifying that the Housing Bubble and Credit Crisis are behind us; It could be there really is a new normal.

The Indices

Today's laggard was the Nasdaq Composite. It is not surprising the index had a little trouble today as it opened at a new high, a new high coincident with a full retracement of the correction seen earlier this year. Earnings, even though it is still below full season, may be having an impact on this index today. Yesterday open source provider RedHat reported earnings that beat estimates and sent the stock up sharply. Today Oracle's report after the bell may have been a reason for traders to wait. The indicators are bullish but momentum is very weak. Stochastic is making a bullish crossover high in the upper signal zone but again I classify it as a weak one. It looks for now as if the Comp could be contained by resistance but the next few days to a week could reveal more. A break above the current high would provide some more bullish evidence but until then caution is warranted.

The Dow Jones Industrials climbed a mere 0.08% today, coming just short of the all time high set last week. The light action and small bodied candle formed today is not unexpected following the rally yesterday. The index is making a bounce from the short term moving average in line with the long term trend. The indicators are turning bullish in what can be considered a weak trend following signal. MACD momentum has just turned positive with today's candle and stochastic is making a bullish trend following crossover but only %k is pointing up at this time. The index faces resistance just above the current level at the previous all time high, a level the index looks likely to at least test. A break above would be bullish and could lead to another round of new highs.

The Transports closed exactly at break even from yesterday's closing prices after making new intra-day highs during the session. This index is also in mid-moving average bounce but with momentum yet to turn positive. Stochastic is presenting the early and weaker trend following signal but without a break above the current all time high caution is due.

The SPX led the major indices today with a gain of +0.13. This index is also presenting an early trend following signal and perhaps the strongest early signal of the four indices described. Momentum has turned firmly bullish with a trend following moving average bounce and a stochastic that, while not quite pointing all the way up, has a %d line that is flat to uppish. The SPX closed at a new all time high and looks good to produce more into the near to short term.

The Fed seems to have given the market yet another signal to rally with a hint of a reason to be cautious. The taper was continued, a sign the economy is still doing well enough to remove it. They indicated inflation is progressing at a pace in line with their outlook. They reiterated and reinforced that interest rates would rise sooner rather than later and yet stay low a long time. The only thing standing in the way now is economic data and full on earnings season which is only a few weeks away. In the near term, there is no economic data being released tomorrow and only three earnings reports, one of which I've never heard of, the other two being Darden Restaurants and Carmax. Next week the economic calendar is full with a slew of housing related data, durable goods and the final estimate for 1st quarter GDP.

Until then, remember the trend!

Thomas Hughes

New Plays

NASDAQ Stalls At 2014 Highs

by James Brown

Click here to email James Brown

Editor's Note:

The tech-heavy NASDAQ composite managed to hit a new 14-year high on an intraday basis before reversing into a minor loss.

The March 2014 highs are near 4,371. The NASDAQ hit 4,372 this morning only to close negative. A reversal here would look like a bearish double top formation. Fortunately, most of the major U.S. indices look poised to move higher tomorrow, including the NASDAQ. The question is will they move higher.

Currently the market has been able to shrug off rising geopolitical tensions, especially in Iraq. However, the weekend could bring new headline risk.

We are not adding new trades tonight.

In Play Updates and Reviews

Stocks Deliver A Quiet Session

by James Brown

Click here to email James Brown

Editor's Note:
Thursday proved to be a relatively quiet session. Overall traders remain in a buy-the-dip mood.

Our plan was to exit our NNBR trade at the opening bell this morning.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $43.06 change: +0.40

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +7.0%

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

06/19/14: AAL continues to march higher with its fifth gain in a row. Shares are nearing what could be resistance at their June highs in the $44.00-44.40 zone.

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

Arrowhead Research - ARWR - close: 13.89 change: -1.10

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +15.3%

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

06/19/14: Uh-oh! ARWR had a rough day. After a huge bounce from $11.00 to $15.00 the stock fell as much as -11% before closing with a -7.3% decline today. The company did issue a press release on a new RNAi therapeutic treatment aimed at liver disease but I don't see why it's any reason to sell the stock. The move today just looks like profit taking after ARWR had reached resistance in the $15.00-15.50 zone.

Unfortunately, today's pullback in ARWR has created a technical sell signal with a bearish engulfing candlestick reversal pattern. Readers may want to take some money off the table immediately.

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: 52.07 change: -0.45

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 1.6%

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

06/19/14: DOW did not see any follow through on yesterday's rally. That's troubling and the stock remains under its 10-dma. I am not suggesting new positions at this time.

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: 49.83 change: -0.15

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

06/19/14: FL continues to struggle with resistance near the $50.00 area. If we do not see shares breakout soon we might drop it for lack of movement.

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: +0.07

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

06/19/14: FLEX slowly drifted higher and spent a good chunk of the day hovering just below the $11.25 level. 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: 63.63 change: +0.16

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

06/19/14: IR has extended its current rally to five days in a row. Yet the intraday high today was only $63.69. We are still on the sidelines. Our suggested entry point is $63.75, which will likely be hit tomorrow.

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

KraneShares CSI China Internet ETF - KWEB - close: 35.55 change: -0.46

Stop Loss: 33.80
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 20 thousand
New Positions: Yes, see below

06/19/14: KWEB briefly spiked above round-number resistance at $36.00 but the intraday high was only $36.17. Our suggested entry point is $36.25.

I do not see any changes from my earlier comments.

Earlier Comments: June 18, 2014:
KWEB is an ETF designed to mimic the performance of the CSI China Overseas Internet Index. This ETF's top ten holdings are: Tencent, Baidu.com, Ctrip.com, Qiho 360 Technology, Vipshop, Netease.com, JD.com, 21Vianet Group, Youku.com, and YY Inc.

As a group the Chinese internet stocks have been a pretty strong rebound following the extremely painful March-May sell-off. Without a doubt this is a volatile group. Individually the stocks are definitely popular with the momentum traders.

Odds are you have heard about Alibaba and its upcoming IPO. If you haven't, check out the SoftBank (SFTBY) description in the Premier Investor Newsletter's play update section tonight. We think KWEB might be another way to play the excitement around Alibaba. Technically KWEB does not have any direct exposure to Alibaba but when Alibaba finally announces its IPO, expected this summer, it will likely drive a lot of interest into the Chinese Internet names.

Shares of KWEB have rallied to short-term resistance near $36.00. We are suggesting a trigger to open bullish positions at $36.25. KWEB does not have options so we have to play the equity.

Please note that I consider this an aggressive, higher-risk trade. Not only are the Chinese Internet stocks a volatile bunch but volume on KWEB is extremely low. That can make a volatile stock even more volatile. We want to use small positions to limit our risk.

Trigger @ $36.25 *small positions*

Suggested Position: buy KWEB @ (trigger)

Microsoft Corp. - MSFT - close: 41.51 change: -0.14

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: -0.8%

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

06/19/14: MSFT is still consolidating sideways below the $42.00 level. Investors may want to wait for a breakout past $42.00 before initiating new positions.

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

SoftBank Corp. - SFTBY - close: 38.25 change: +0.73

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +4.3%

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

06/19/14: The rebound in SFTBY continues and shares managed to close just a little above potential technical resistance at its simple 200-dma.

It is worth noting that SFTBY has struggled with resistance in the $38.25-38.50 zone for the last several weeks. A breakout past $38.50 would definitely be bullish.

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: 25.90 change: -0.12

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +16.4%

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

06/19/14: SMCI hit another record high midday at $26.80 before reversing gains to close negative.

This stock is very short-term overbought. 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: 52.02 change: -0.02

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 2.1%

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

06/19/14: Thursday ended up being a quiet day for both WFC and the financial sector as a whole. WFC closed virtually unchanged.

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

None. We do not have any active bearish trades.


NN Inc. - NNBR - close: 25.29 change: +0.29

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

06/19/14: NNBR's performance the last few days has not been bullish. Shares appeared to be forming a bearish reversal. We decided in last night's newsletter to exit positions this morning. NNBR opened at $25.04.

closed Position: Long NNBR stock @ $25.25 exit $25.04 (-0.8%)

06/19/14 planned exit
06/18/14 prepare to exit tomorrow morning
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