Option Investor

Daily Newsletter, Saturday, 6/21/2014

Table of Contents

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

Market Wrap

All Aboard!

by Jim Brown

Click here to email Jim Brown

The market train is climbing the mountain of worry. Is there still time to climb on board?

Market Statistics

The Dow, Nasdaq Composite, S&P-500, S&P-100 and Midcap 400 all closed at new highs on a Friday ahead of a weekend that could have some seriously negative headlines. The quadruple witching expiration Friday is normally a bullish day and that helped add to the gains. It would appear the market train is gaining momentum as we head for Dow 17,000 and S&P 2,000 but should we buy the breakouts?

I have said many times that new market highs attract new money faster than a picnic attracts flies. That does not mean it is always a buying opportunity. This time the market is slowly overcoming serious geopolitical events including the war in Iraq and the Russian buildup on the Ukraine border.

The markets ignored a cut in the economic forecast by the Fed and charged higher because Janet Yellen convinced investors that Fed stimulus would continue well into 2015. The Fed cut its 2014 GDP forecast from 2.9% to 2.3% but they used the "weather ate our economics" excuse so investors breathed a sigh of relief and charged ahead.

While it remains to be seen if the market will continue in rally mode for the rest of the summer it has proven one thing. Never short a dull market. With hedge funds currently net short S&P and Russell 2000 futures the most hated rally ever just keeps building on its gains in a very unspectacular fashion.

The slow melt up is confusing the bears. A market struggling to post gains day after day is normally one that is about to roll over. The bears are betting on that failure but so far those bets have been in vain. Now we are seeing the results of a rotation out of those short bets. Funds may not yet be convinced to go long but they are reducing their shorts.

Summer rallies are strange creatures. They are normally on low volume and without any material momentum. They just creep higher until one day they don't. When the direction changes in a low volume market it can be dramatic. This fear of the future is keeping a lot of traders on the sidelines.

Another factor adding to the confusion is the approaching Q2 earnings. S&P is predicting +7.1% earnings growth compared to only 3.5% in Q1. The forecast is based on the snapback concept from the horrible weather in Q1. Since hardly a day goes by without a couple high profile earnings warnings it makes you wonder where S&P is getting their bullish estimates.

The final GDP revision for Q1 will be on Wednesday. The initial estimate was for 0.11% growth. The second revision showed a contraction of -0.98%. The final revision is now expected to be a serious contraction of -1.9% according to Moody's estimates. Granted that was Q1 and Q2 did see an increase in activity but was it enough to send the markets to new highs? We still don't have any proof that earnings improved significantly in Q2 and that makes the coming earnings cycle a potential minefield for investors.

Bullish sentiment may be contagious as the market makes new highs but eventually there will have to be fundamentals to back up those record gains.

I am not saying earnings are going to be bad. I am only suggesting that without some positive earnings news we could see the current rally begin to fade. If the initial earnings begin to confirm the optimistic estimates we could see further short covering and potentially the conversion of those bears into bulls. Stranger things have happened.

We have not yet entered into the full blown mudslinging ahead of the midterm elections. When that begins history has proven that investors tend to pull back from the markets. The campaigns should shift into high gear in August so be prepared because the political climate is more adversarial than I can remember in years past. This is going to be a very heated election cycle.

Friday's economics were lackluster. The regional and state employment for May was little changed from April. The unemployment in the western region remained the highest at 6.9%. The state with the highest unemployment was Rhode Island at 8.2% with North Dakota the lowest at 2.6%. The unemployment rate rose in 16 states and declined in 20 with the remaining states unchanged. Nonfarm employment rose in 36 states and declined in 14 states. The report was ignored.

The calendar for next week has three regional Fed manufacturing reports from Chicago, Richmond and Kansas. The outlook is mixed and the numbers could decline as a result of the fading snapback.

We will see the latest new home sales and existing home sales and minor improvements are expected as a result of the spring selling season. Overall the activity is expected to be weaker than the Fed would like.

The GDP on Wednesday could be a pothole for the market since a lot of investors will not be expecting a major decline. It always amazes me that some of the largest traders don't really pay attention to economic forecasts. When a bad number appears it always seems to be a shock. I would rather expect the worst and then be pleasantly surprised. Economists seem to have a bullish bias and major estimate misses are common.

The stock news was sparse on an early summer Friday. We have one more week before we go to basically four trading days a week for the rest of the summer. Friday volume will die before noon as institutional traders head out early for the beach and leave the backup team to doze at their PCs while pretending to watch the markets.

Friday's quadruple witching produced the highest volume since March 21st, which was also a quadruple witching Friday. Volume then was 9.75 billion shares compared to only 7.7 million on Friday. That -2 billion share decline should be a clue to the diminishing interest in the market.

One of the few stocks making headlines last week was Coach (COH). Coach shares continued the decline from Thursday after the company said it was closing 70 locations or about 13% of its stores. This will cost Coach up to $300 million over the next several quarters. Coach said the retail environment had shifted and it had failed to keep pace. The company reported a -21% decline in same store sales for last quarter. Coach shares are down -$5 in two days.

Surprisingly Michael Kors, which saw same store sales increase over 20% last quarter is also down -$5 over the last several days. KORS is quickly gaining market share both in the U.S. and globally and I will be looking for a bottom in this decline to go long the stock. I believe they are being punished by the warnings in the sector because there was no news on KORS. The 200-day at about $86 would be my target for support.

Carmax (KMX) shares rallied +16% after the company reported earnings of 76 cents compared to estimates of 67 cents. Revenue was $3.75 billion and also beat estimates of $3.59 billion. Used vehicle sales rose +9.8% and same store sales rose +3.4%. Income from auto loans rose +8.7% to $94.6 million.

The key here is the spike in sales of used cars rather than new cars. This is a symptom of the shrinking consumer budgets that are also biting Coach, Walmart, Costco, etc. Consumers are looking for cheaper options.

Owens Corning (OC) warned for the full year for 2014 saying roofing volumes were -20% below year ago levels. That is a major decline, which points not only to the slowing sales of new homes but also to the shrinking budgets of consumers. The company said 2014 earnings would be less than the $500 million previously forecast but did not give a new number. They earned $416 million in 2013. If you reduce volume by 20% you would expect earnings to reduce by more than 20% since margins decline on lower volume. That may be why they did not give a new number because it would have been below the 2013 levels.

Turn out the lights, the party is over. Shares of Radio Shack (RSH) traded as low as 91 cents on Friday to put the stock in danger of being delisted by the NYSE. The chain is in the middle of yet another restructuring to try and save itself from going out of business. In March they announced the closing of 1,100 stores, leaving it with 4,000 locations. However, the lenders protested the massive closures and forced them to rethink their plans. In early June the company said its losses were larger than expected and revenue was shrinking because of competition in its mobile business. Shares declined -35% since the earnings miss on June 9th.

There have been miraculous recoveries in the past from companies that imploded because of changing times and or business models but very few come back from this level of decline. Rising debt, shrinking revenue and a shrinking customer base may be the death knell for Radio Shack. Far fewer consumers are running to Radio Shack to pick up some electronic parts, cables, connectors, etc. For non-hobby items like smartphones and CD players there is always Walmart and Amazon. I am a prime example. Decades ago I bought electronic parts for my computer hobby at RS at least a couple times a month. Now I have not even been in a RS store in a decade. Will the last customer please turn off the lights?

Software giant Oracle (ORCL) reported earnings of 92 cents that missed analyst estimates of 95 cents. Revenue of $10.94 billion was also below estimates of $11.48 billion. Making the move to cloud computing is proving harder than they expected. Oracle has posted sales growth of less than 5% for the past 11 quarters.

Oracle is fighting a flood of cloud providers like SalesForce.com and the profit margins are shrinking. New license sales were weak as customers are finding competitors that are offering cheaper solutions. Oracle projected revenue to climb 4-6% in the current quarter with earnings in the 62-66 cent range. Analysts were expecting a 5% rise in revenue and earnings of 64 cents. It definitely looks like Oracle scanned the analyst estimates and chose the median average on purpose to prevent a disaster. Time will tell if they will meet that forecast or miss again.

Oracle shares have been on the rise with a $10 gain since last summer but some analysts are now calling it dead money for the next couple quarters given the slow growth. Larry Ellison said the company just bought LiveLOOK, a real-time technology for co-browsing and screen-sharing. No price was given. He is also said to be in talks to buy Micro Systems (MCRS) for $5 billion. Oracle has been a serial buyer of other companies for years as a way to gain technology without inventing it and as an excuse for not growing earnings. Ellison is a compulsive spender and the every acquisition clouds the future earnings potential. The acquisition of SunMicrosystems was a failure for several years and the potential acquisition of MCRS suggests the SunMicro deal is still a failure.

Amazon (AMZN) shares rallied on the phone announcement but gave back a couple dollars on Friday. The phone has the technology to scan an item and immediately give you multiple buying options online. This is not entirely new but the Fire Phone has taken it to a new level. The phone's Firefly button/camera recognizes 70 million products and 100 million items. Not just bar codes but ANYTHING you can point the camera at. Hear a song playing in a restaurant, click, listen, identify, download. Point it at a TV show and Firefly will tell you what it is and even what episode it is. Point, identify, download. Point your phone at any product, push the button, buy. Walk into a store, look at the range of product offerings, point to the one you want and Amazon sells it to you cheaper and puts it on your doorstep within two days with free shipping. This is better than Google Goggles, Bing Vision and Shazam combined. You don't have to wait in a sales line, remove cash or a credit card from your pocket and have your brain register the pain of payment. Instead, point, click, buy in a very painless process and because there is no visible cash leaving your pocket and no credit card swiping, which makes the psychological barrier to spending money disappear.

Casino's use chips instead of money for a reason. They know your brain does not process the decline in a pile of chips in the same way it does a pile of $20 bills. Chips are not money therefore gamblers spend more of them at the tables. Amazon's Firefly button is not money. It is unfettered convenience without the pain of paying at the register. One analyst said the phone was unique. "Amazon launched a shopping machine and called it a smartphone." Shares were already up ahead of the announcement so a sell the news event was likely. However, regardless of what everyone says about Amazon's lack of profitability you have to admire them as a marketing machine.

I am the perfect example of a Prime customer. In the last three weeks I have purchased 11 items and 5 e-books from Amazon worth about $600 in total. All were cheaper than I could have bought them locally, I did not have to leave the house and they were delivered within two days for free. I won't be buying a Fire Phone because I like my existing Android phone but for those who do buy a phone they are putting an Amazon cash register in their pocket. As an added inducement to buy the $199 phone Amazon is giving a free 12 month Prime membership with every phone, a $99 value. In a few years we won't need the NSA because Amazon will know everything about everybody. We have truly arrived in the 21st century.

The Volatility Index ($VIX) hit a new seven-year low at 10.34 on Friday morning. In theory this should mean there is a disaster ahead. However, as Art Cashin has been proclaiming for the last couple weeks the VIX is broken. The VIX is based on call and put option premiums on the S&P-500 ($SPX). The volume in these options is now huge. When I used to trade SPX options 15 years ago there was one-tenth the volume we have today, maybe even less. The close to the money June SPX options had open interest of 20,000, 50,000 and even 100,000 or more on some strikes at expiration. With higher volume came cheaper premiums and narrower spreads. Those lower premiums translate into a lower VIX.

The S&P is also affected by the trade in the underlying shares of the S&P-500 components. Volume in those individual shares have declined as more and more institutions and individual use ETFs as their investment of choice rather than buying shares of individual stock. The ETFs are not as volatile, many times are cheaper and they have high volume and low bid ask spreads. While an institution buying 100,000 shares of an ETF can affect the prices of the underlying S&P shares the change is miniscule. The SPY ETF traded 101 million shares on Friday. Buying 100,000 shares of some S&P stocks could move the price significantly and impact the S&P.

The VIX is broken in terms of how it reacted in the past but I think we have moved into the new normal and we just need to understand how the VIX relates to this new paradigm. The VIX at 10.34 is still extremely low and it is cautionary for investors long the market. However, three times in the last year the VIX was over 21 and all three times were great buying opportunities. While the spikes over 21 lasted only a couple days the declines to record lows can continue for days, weeks or even months. In late 2007 the VIX traded between 9.00-12.50 for a record five months before suddenly rising to a record high of 89 in October 2008.

In the late 1990s a routine high was 40-45 and the lows were in the 17-20 range. The last time we hit 45 was in October 2011 when the debt ceiling debate was in progress. Since early 2012 the high has been 27, then 23. In 2013 it hit a high of 21+ three times. Art is right about the VIX appearing broken but it is broken for one main reason.

The main reason the VIX is broken is the Fed. The late 2012 spike was due to the end of Operation Twist 2. The current QE3 program was announced shortly after that and the Fed has been buying a boatload of treasuries every month for the last two years. They will still be buying $35 billion in July with an end to the taper in November. The constant inflow of that mountain of cash has broken not only the VIX but the markets themselves. There is no volatility because the Fed is preventing it with their fire hose of monthly cash. When the S&P can only go in one direction the VIX is going to be abnormally low. Yes, we have had some potholes in the road to 1,960 but they were minor and every dip was bought thanks to the constant flow of cash. I believe once that cash flow stops we will see the return of the VIX we used to know.

The S&P closed at 1,962.87 and a new historic high. That was the culmination of a +24 point move since the Janet Yellen press conference. It was aided by the quadruple witching but mostly by Yellen's "stimulus forever" stance in response to the questions. While she did not say stimulus forever that is the outlook. With the Fed cutting its economic forecast and projecting low inflation into 2016 a continued stimulus posture is implied. Of course they claim they are not on automatic pilot and they will react to the conditions but they admitted the conditions were weaker than they expected.

The Fed is going to keep putting money into the market through November at their current rate of tapering. When QE ends and the elections are over the market will get a chance to stand on its own two feet. Will it teeter slowly forward or face plant right into the asphalt? That depends on how well the economy is doing at the time but without that constant IV drip of Fed cash into the system there are going to be some stumbles.

Fortunately we don't have to worry about 2015 today. We only need to worry about next week and that could be a stress test for investors. The week after June expiration has been down 21 of the last 24 years. While past performance is no guarantee of future results that is a pretty strong record.

However, we just had a -30 point decline from 1,955 to 1,925 and the dip was bought despite geopolitical headlines from Iraq and Ukraine and the worry about some FOMC disappointment. Next week should be a cake walk compared to the prior week. We have found out in the past we can't run down to Staples and pickup an "easy" button for the markets. When the yellow brick road to profits seems the easiest something always pops up. The market needs a wall of worry to climb and we are going to have to depend on weak economics for our wall next week.

Overhead resistance is now 1,970-1,975 with round number resistance at 2,000. Support is 1,925-1,940 and well below Friday's close.

The Dow is edging slowly higher and closing in on that short term uptrend resistance at 17,000. This is also round number psychological resistance. This is now the official target and once targets are reached there is sometimes a sell the news event. "Ok, we made it, now what." This could be especially true heading into the summer doldrums. Unless something has changed in the market any dip will probably be bought. Last week's consolidation created some decent support in the 16,725 range.

The Nasdaq almost did the impossible last week of breaking through the 4,344-4,371 resistance top. Even though the Nasdaq closed at a new 14 year high at 4,367 it is not yet through the resistance band created by the two intraday touches of 4,371 back in March. We are really close but we need to complete the breakout over that level.

The Nasdaq rebound has been remarkable. The index has rebounded +333 points since the May 15th low at 4,035. That includes two separate weeks of consolidation where it traded flat to down for the week.

The last week it had to do it without Apple. Shares of Apple closed at a post split low of $90.91 on Friday as the post split depression period slowly takes its toll. Apple hit $95 the day after the split but it has faded ever since.

When the Nasdaq moves over 4,371 it will immediately face new resistance at 4,400 but that should be easier to overcome than the current resistance level.

The Nasdaq 100 ($NDX) is really struggling at the 3,800 level without the help from Apple. I thought we were going to see a breakout there last week but resistance was too strong.

The Russell 2000 turned in a good performance with a +2.2% gain for the week. It closed at the high of the day on Friday and the trend is our friend. However, with the Russell rebalance next week there is the potential for the index to decline. There are about 165 stocks coming out of the Russell 3000 and funds will be selling those stocks to make room for the 165 additions taking their place.

The amount of index movement may be minimal because the stocks leaving are normally the smallest stocks that no longer meet the requirements to be in the Russell 3000. Also reducing the impact is a coordinated effort to do a market on close order at Friday's close for all the stocks entering and leaving the index. However, we know how traders are. There will be a group of traders trying to game the rebalance by selling/shorting the deletions all week in hopes of profiting from the downward pressure the rebalance creates. Since the deletions are still in the index until Friday's close any downward pressure will push the index lower.

On the positive side the Russell 3000 ($RUA) is the 3,000 largest stocks in the USA and the 165 being deleted are the smallest of those 3,000 or they are being acquired by someone else. It is a very small subset of the index and pressure on the index should be minimal. The top 1,000 stocks in the Russell 3,000 are further defined as the Russell 1000 index ($RUI). The bottom 2,000 stocks make up the Russell 2000 ($RUT).

The Russell 2000 pushed through decent resistance at 1,180 and is now targeting 1,194 as the next stepping stone to a new high. The Russell is only 2% below its historic 1,208 close back in March. Support is strong at 1,160.

In theory the markets should continue to rise next week. As Yogi Berra once said "In theory there is no difference between theory and practice. In practice there is." We don't know what underlying events have worked together to push the market lower 21 of the last 24 June expirations. It could be something as simple as the Russell rebalance pushing the Russell 2000 lower and that negative sentiment drags the broader market lower. It could be a simply as individuals exiting the market for the summer after the June expirations. We don't know the answer but we need to hope for the best but expect the worst. A very large number of stocks are hitting new 52-week highs. If individuals wanted to take profits before the summer doldrums this would be the week to do it. With the summer vacation season starting the following week with a long July 4th weekend there may be some extra incentive for individuals to cash out.

Random Thoughts

ISIS fighters captured a Saddam Hussein chemical weapons depot on Thursday. The depot contains hundreds of tons of deadly poisons like mustard gas and sarin. The al-Muthanna facility is 60 miles north of Baghdad. A former British commander in the 2003 Iraq war said the facility had large stores of weaponized and bulk sarin and mustard gas. Most of these bunkers had been temporarily sealed under concrete to make them hard to access until the Iraqi government got around to destroying the weapons and materials. Under a 2012 agreement with Baghdad the MOD's Defence Science and Technology Laboratory was to provide training to Iraqi personnel in order to help them dispose of the chemical weapons and agents. Apparently they never got around to actually destroying the weapons. A US officer said they agents could not be readily loaded into the empty weapons without experienced personnel and a calm environment to study and prepare. "The only people who would likely be harmed by these chemical weapons would be the people who tried to use or move them." However, never underestimate the power of determined radicals.

Interesting read. 16 things you need to know about ISIS

Everything you need to know about Iraq in 4 minutes HERE

Putin is at it again. In President Obama's speech on Thursday he all but called for the removal of Iraq's Prime Minister Nouri al-Maliki to be replaced with someone able to create a new government that included Shia, Sunni and Kurdish representation. Within 24 hours Putin offered Maliki his "complete support." Putin is benefitting from the spike in oil prices and they are investing huge sums to renovate the vast West Qurna-2 oil field and increase production. Clearly Putin would not want it to fall into ISIS hands but more than anything he jumped at the chance to take another position opposite President Obama.

Putin is also building up Russia's military presence again in the Ukraine. Putin put 65,000 troops on alert and ordered them to take part in a drill a day after the Ukraine Prime Minister declared a one-week cease fire along the border. Putin said the drill would involve movement of 5,500 pieces of military equipment. Putin has been sending arms and equipment to pro-Russian fighters in the Ukraine. However, the Ukraine PM said the military had sealed the border crossings and future transfers of equipment would be impossible.

The U.S., Canada and EU states including France and Germany warned Putin there would be new and tougher sanctions imposed next week if he did not pull troops back from the Ukraine border and take concrete steps to de-escalate tensions in the region. On Friday Canada and the U.S. levied additional sanctions against 7 more Russians with "broader measures being readied against the finance, defense and technology industries."

Morgan Stanley warned that the rising oil prices were going to be a serious drag on the economy. The average price of gasoline has risen to $3.68 although several areas of the country are already over $4. One reporter paid $4.30 in California last week. Diesel is $3.90 on average. U.S. consumers burn 370 million gallons of gasoline a day. A 10 cent increase in gasoline prices will reduce consumer purchasing power by $37 million a day or $1.11 billion a month.

Gasoline prices are the highest for this time of year since 2008 and we know how that turned out. As gasoline prices soared consumers were no longer able to spend money on goods and services or make their mortgage payments and the downward spiral began.

Morgan Stanley said a $10 jump in oil prices would reduce GDP by -0.4% while a sustained spike in crude prices could stall the economic recovery and lower GDP by -1.7 points 12 months from now.

What is wrong with this picture? With the market at new highs investor sentiment must be soaring. Sorry, that is not the case. For the week ending on 6/18 the AAII Sentiment Survey showed that bullish sentiment collapsed from 44.69% to 35.17%. That is a -9.5% drop in just one week when the market was making new highs. That is the largest weekly drop since the first week of January. Bearish sentiment rose only +2.9% to 24.1%. Those in the neutral camp rose +6.6% to 40.7%. Yes, there are more people neutral on the market than bullish despite the new highs. That does not bode well for next week.

The pace of M&A activity suggests we could be at a market top. As stock prices soar those companies with a fat stock price tend to go shopping before their stock declines. This normally happens at market tops. According to Matthew Rhodes-Kropf, a professor at Harvard business School and an expert in the field, "Each of the last five great merger waves on record, going back more than 125 years, ended with a precipitous decline in equity prices." At the current pace of acquisitions we could see $3.51 trillion in deals in 2014. According to Dealogic that is the most since 2007. Matthew said this does not mean a market crash is imminent. "Everyone tends to call the bubble too soon," the M&A trend could last a while longer.

The S&P has not moved more than 1% in a single day in 42 days. That is the longest streak since 1995 when it went 96 days. Since 1950 there have only been 31 streaks of volatility this low. In 1963 there were 167 days from Feb-28th to Oct-24th without a 1% move. Boring!

With global interest rates at such absurdly low levels it should be no surprise to find out that global central banks are investing in the equity markets. Those banks are also charged with investing excess reserves, which they normally do by investing in treasuries issued by various countries including U.S. treasuries. With inflation higher than short term yields these banks have to do what every other investor does. They search for yield.

A research publication compiled by the Official Monetary and Financials Forum (OMFIF) titled "Global Public Investor 2014" (GPI) surveyed more than 400 public-sector institutions in 162 countries. There were 157 central banks, 156 public pension funds and 87 sovereign funds holding $29.1 trillion in investments. According to OMFIF the GPIs have lost up to $250 billion in interest income over the last several years. Over that period the GPIs have increased their investments in equities by more than $1 trillion. Obviously this has helped push global equities higher but it could also lead to a monster decline in the event of another crisis. When those GPIs exit the market to return to the "safety" of interest rate securities the decline in equities could be extreme. As long as rates remain absurdly low the equity markets should be safe. Once rates begin to rise toward normal levels we could have a rocky ride in equities. Read more here

I keep updating my graphic of year-end forecasts for the S&P as new predictions are discovered or prior predictions are updated. The average year-end target from the 24 firms listed below is now 1,974. It has been slowly rising as the market moves higher. The four companies in yellow recently upgraded their forecasts.


Citigroup up from 1,975 to 2,000
Credit Suisse up from 1,960 to 2,020
RBC up from 1,950 to 2,075
S&P Capital IQ up from 1,985 to 2,100

Deutsche Bank, Bianco reiterated his call for a drop to 1,850.

Jonathan Golub, chief U.S. market strategist at RBC Capital Markets raised his forecast to 2,075 and warned that bull markets don't end until recessions appear. In a note to clients he pointed out that seven of the last eight bull markets ended only when a recession appeared. His chart below.

He said only one of his warning signals for a recession exists now and that is weak housing starts. He said, "The current economic rebound is the slowest of the post-war period. Growth is being held back by a modest housing recovery and weak business confidence. As a result, abundant spare capacity exists, which prolongs the length of the cycle." However, Jeff Kleintop at LPL Financial said one more thing needs to happen to keep the bull market going. The economic recovery must accelerate. Continuing to plod along at 2% GDP growth invites trouble. Any unexpected event could send us back to recession very quickly. The Fed lowered their GDP estimate for all of 2014 to 2.3% growth and that is barely over stall speed.

In theory the market should continue higher long term but each week has to stand on its own and there are quite a few economic reports this week that could upset investors.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Before this century is over, the Dow Jones Industrial Average will probably be over one million versus around 10,000 now. So for the long-term, the outlook is tremendously bullish if you buy stocks blindly to keep for a century."

Sir John Templeton, 2008


New Plays

Waste & Water

by James Brown

Click here to email James Brown


Waste Connections, Inc. - WCN - close: 47.49 change: +0.21

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 464 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
According to the company website, Waste Connections is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets.

Through its R360 Environmental Solutions subsidiary, the Company also is a leading provider of non-hazardous oilfield waste treatment, recovery, and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins. Waste Connections serves more than two million residential, commercial, industrial and exploration and production customers from a network of operations across the United States. We also provide intermodal services for the movement of solid waste and cargo containers in the Pacific Northwest.

We seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. We also target niche markets, like exploration and production, or E&P, waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

Apparently the company's strategy is working. WCN is developing a pattern of beating Wall Street's earnings estimates on both the top and bottom line. WCN's model is generating more profit than its rival with EBITDA margins of 34% compared to its larger rival Waste Management's 24% margins.

WCN is seeing strong growth in its oil field waste business. The company said that its E&P (oil) waste business surged +20% in the first quarter of 2014. It's traditional solid waste business grew +5.5%. Management is optimistic with 2014 off to a strong start. Revenues are up. Free cash flow is up. Margins are improving. They expect to see 12% to 15% growth this year.

Technically shares of WCN just broke out from a two-week consolidation and closed at all-time highs. One could argue that WCN produced a big, inverse head-and-shoulders pattern over the last several months. The point & figure chart is bullish and suggesting a $62 price target.

Tonight we are suggesting an entry point to launch positions at $47.75. We're not setting a target yet. WCN does have options but the option spreads are too wide to trade.

Trigger @ $47.75

Suggested Position: buy WCN stock @ $47.75

Annotated chart:

Weekly chart:

Xylem Inc. - XYL - close: 39.67 change: +0.33

Stop Loss: 37.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
Xylem is a spinoff from ITT Corp. and became an independent company in October 2011. Now they're a leading global water technology company doing business in more than 150 countries. The company name, Xylem, is from the classical Greek that refers to the supporting tissues that help transport water and nutrients from a plant's roots to its leaves.

Business has been good. The last two quarters in a row XYL has managed to beat Wall Street's earnings estimates on both the top and bottom line. The company has garnered positive analyst comments suggesting XYL could see strong revenue and margin growth over the next two or three years.

After their latest quarterly report XYL's CEO noted they were seeing strong growth in emerging markets. The Q1 2014 results saw earnings growth of more than 25%. Results have been boosted by strong sales of its pumps and technology that disinfects wastewater and kills viruses and parasites. Their backlog has risen $793 million, up six percent.

Long-term the company could see significant growth. Water consumption across the globe is rising at twice the rate of the world's population. This is creating huge demand on water resources. A Citigroup analyst recently pointed at XYL as the best publically traded "pure play" on water and water processing.

XYL expects to see a lot more growth overseas for both its water purification systems, desalination, power generation, and hydraulic fracking.

Technically shares have been showing relative strength with three weeks of gains in a row. Friday is an all-time closing high for the stock. Shares are hovering just below potential round-number resistance at the $40.00 level. Tonight we are suggesting a trigger to open bullish positions at $40.25.

Trigger @ $40.25

Suggested Position: buy XYL stock @ (trigger)

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

Buy the Oct $40 call (XYL141018C40) current ask $2.15

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

Annotated chart:

Weekly chart:

In Play Updates and Reviews

Stocks End The Week With Gains

by James Brown

Click here to email James Brown

Editor's Note:
Our airline, financial, and tech trades continue to perform well.

IR hit our entry trigger.

FL and KWEB have been removed.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $44.55 change: +1.49

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +10.7%

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

06/21/14: AAL hit the afterburners this week and pushed its winning streak to six days in a row. The stock has now completely erased its mid-June swoon. Our August call option is up more than +90%.

I would not chase it here.

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: 15.37 change: +1.48

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +27.6%

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

06/21/14: A late day rally on a surge of volume Friday afternoon helped push ARWR to a +10.6% gain. This looks like a breakout past its recent resistance but I would not chase it here.

More conservative investors may want to take profits and/or raise their stop loss.

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: 52.47 change: +0.40

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 2.4%

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

06/21/14: DOW spent most of the week churning sideways between short-term support near $51.80 and short-term resistance at its simple 10-dma. Shares remain inside this range. 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


Flextronics Intl. - FLEX - close: 11.11 change: -0.13

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 7.9%

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

06/21/14: After a seven-week surge higher shares of FLEX are starting to see a little profit taking. Aside from the spike lower on Wednesday morning the pullback really has been pretty mild. That doesn't mean the pullback is over.

More conservative traders may want to 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: 63.99 change: +0.36

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: + 0.2%

Entry on June 20 at $63.85
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: see below

06/21/14: It took a little bit longer than expected but our IR trade is now open. IR has been bouncing off short-term support at its rising 10-dma. This slow march higher has produced a six-day winning streak.

Our plan was to open positions at $63.75 but IR gapped open higher at $63.85 on Friday morning.

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.

We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

current Position: Long IR stock @ $63.85

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

Long Sept $65 call (IR140920C65) entry $2.36*

06/20/14 triggered on gap higher at $63.85
suggested entry point was $63.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Microsoft Corp. - MSFT - close: 41.68 change: +0.17

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

06/21/14: Shares of MSFT have been quietly consolidating sideways below short-term resistance near $42.00 these last few days. We suspect that MSFT is generating steam for its next bullish breakout higher.

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: 38.36 change: +0.11

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +4.6%

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

06/21/14: SFTBY is still flirting with a bullish breakout past technical resistance at its simple 200-dma and price resistance near $38.50.

Investors might want to wait for a rally past Friday's high ($38.65) 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: 26.03 change: +0.13

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +17.0%

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

06/21/14: These last couple of weeks have been outstanding for SMCI bulls. Shares have accelerated higher and Friday marked its sixth weekly gain in a row.

The stock is short-term overbought and likely due for a pullback. Our option has doubled in value. 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: 52.89 change: +0.87

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 3.8%

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

06/21/14: WFC's bounce has produced new all-time highs. Shares outperformed the major indices and its peers in the financial sector with a +1.6% gain on Friday.

I am not suggesting new positions at this time.

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.


Foot Locker, Inc. - FL - close: 49.63 change: -0.20

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: see below

06/21/14: FL has had every opportunity to breakout past resistance near $50.00 these past two weeks and just can't seem to do it. Shares hit $50.14 on Friday before reversing lower. Our suggested entry point has been $50.25.

Given FL's lack of movement we are removing it as a candidate.

Trade did not open.

06/21/14 removed from the newsletter, suggested entry point was $50.25


KraneShares CSI China Internet ETF - KWEB - close: 35.18 change: -0.37

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: see below

06/21/14: KWEB is not cooperating. Shares are retreating from short-term resistance near $36.00 while the rest of the market is pushing higher. Our suggested entry point is $36.25 but tonight we are removing KWEB as an active candidate. The relative weakness is worrisome and the extremely low-volume makes this a more aggressive, higher-risk trade.

Trade did not open.

06/21/14 removed from the newsletter, suggested entry point was $36.25