Option Investor

Daily Newsletter, Monday, 6/23/2014

Table of Contents

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

Market Wrap

June Swoon?

by Thomas Hughes

Click here to email Thomas Hughes
Spreading violence in Iraq, an impending GDP revision and mixed global PMI helped to usher in a potential June swoon.

Wall Street veteran Art Cashin has been expecting, or at least preparing, for a lower week this week and today he reiterated that point. He mentioned how this week is historically a down week and today's price action does nothing to make me believe that may not be the case. Global markets were mixed in the overnight session in the face of positive PMI readings in China and Germany. Asian and European markets ended the day flat to mixed on signs of growth, just slowing or slowing growth. In China flash PMI was reported at 50.8, expansionary and above the expected 49.7 and the previous 49.4. In the EU German PMI was reported at 54.2, firmly expansionary but below last months 55.6 and the second month of declines. Other countries in the EU, France notably, sank deeper into decline.

Iraq was another factor in the early part of the trading day. More news of Isis taking over more towns and spreading it's influence throughout the region. Militants have also gained control of parts of the border along Jordan and Syria as well raising the threat of the violence spreading. Alongside that was other discussion of oil supply and how Iraq supply has not yet been impacted by the turmoil. Futures trading was flat to negative prior to the start of trading and held those levels going into the open. The SPX opened weak around -0.75 and then dropped to -2.75 in the first ten minutes. Support kicked in fairly quickly though, around the 1960 level, and sent the index up to poke into positive territory for a few minutes before moving back down to set a new intraday low. The back and forth at the open is a sign that traders are still indecisive about what this week will bring.

There is a fair amount of new data coming out but the bit in focus may be the GDP 3rd and final revision. Expectations are high the number will be revised even lower than last time. Current estimate stands at -1% with an expected drop to -1.8%. This revision will be important and could alter 2nd quarter and full year estimates. Afternoon trading saw the major indices trade in a tight range between the mid morning high and low into the close.

The economy

Only one piece of US data was released today, Existing Home sales. Sales increased by more than expected but not enough to significantly move the market. Sales increased by 4.9% to a rate of 4.89 million homes per year. The previous months data was revised up but sales are still down about 5% from last year. The median price of homes sold went up 1.5% and according to the report the “slow down is over”.

Tomorrow more housing data in the form of the Case-Shiller 20 city index and new home sales as well as consumer confidence. Wednesday Durable Goods and the GDP final revision lead into jobless claims, personal income & spending on Thursday and then Michigan Sentiment on Friday.

Moody's survey of business confidence administered by Mark Zandi remains positive. In his report he says that businesses are “stalwartly upbeat”. Businesses report that sales are still strong and that investment and hiring remain robust. He says that there are no signs of significant inflation as only a third of respondents have dad to raise end prices.

The Dollar Index

The dollar weakened slightly today but held above support and the 80 level. The index fell about a tenth of a point on very weak momentum and is now trading just above the mid point of the 8 month range. There are no central bank meetings for about 2 weeks so until then economic data will be driving dollar value. Iraq may have some impact if traders seek safe have currencies like the yen or the Swiss Franc.

The Gold Index

Gold prices held steady near the high set last week. Prices traded in a tight range just under the $1320 level and ended today's session up by a few dollars. $1320 looks like a potential resistance point for gold prices at this time. Short covering is likely to be over at this point leaving flight to safety holding up prices by it self. Regardless of the reason higher gold prices usually mean higher prices for gold stocks and that is what we saw today. The Gold Index advanced another +1% today on rising bullish indicators to halt just shy of a longer term resistance level. Momentum in gold stocks is positive now and on the rise so a test of this resistance is likely. Although rising, momentum is not very strong right now and stochastic is overbought in the near term so I'm not getting too bullish just yet. There is always the possibility that gold will get slammed again and that would not be good for the gold miners. In the longer term the index is showing some signs of bottoming around the $85 level so I would expect any decline to be met by support around the $95, $82.5, $80 and $85 levels.

The Oil Index

Oil prices opened at new highs today but quickly fell as traders weigh the news. Prices for WTI opened the day around $107 per barrel with Brent touching $115.50 before both fell during the session.The threat to Iraq oil is real and causing the rise in prices but the fear premium is being tempered by the counter reports explaining how Iraqi oil infrastructure is secure and not being impacted currently. The drop in prices after the open brought WTI beneath Friday's closing price but the decline was halted at $106. The Oil Index continued its march higher but it appears to be losing steam. The candles over the past few trading days have been getting smaller and smaller, one sign of a tired market. Momentum is still bullish so the index could keep going but there will probably be better entry points.

In The News

There are about 18 IPO's scheduled for this week. It's hard to nail down the number because there are at least 2 holdover's from last week and at least 14 for this week depending on which list you look at.

GE's offer to buy Alstom has had the last barricade removed but will result in slightly less earnings per share attributable to the purchase. GE is also selling part of its Capital Consumer Finance business to Banco Santander. Shares of GE fell more than 1% on the news falling just below the 30 day moving average in a move confirming longer term resistance.

Earnings season is just around the corner. Alcoa leads of the traditional start of the season on Tuesday July 8th. Today Micron Technology reported earnings after the bell and could be foreshadowing an earnings season of surprises. Micron reported earnings far above, well far enough anyway, analyst estimates moving the stock more than 1.5% in the after hours session. EPS of $0.79 beat estimates by nearly a dime on revenue that also beat by a fair margin. On a year over year basis Micron revenue has increased by over 71% on strong sales of its microprocessors.

The Indices

The Nasdaq Composite was today leader in terms of least amount of loss. The tech heavy index fell today after opening at the current all time intraday high. After a mild but choppy day of trading the index was able to just move into positive territory before the close. The Nasdaq has reached resistance at the 4,370 level as expected and looks as if a break through is not going to be easy. The indicators are bullish but highly divergent and consistent with the top of a range. A correction from this level will put the Nasdaq in position for a possible double top but that is still just a speculation. On the longer term weekly charts the indicators are bullish so this week may just be a test of resistance and support. The index has multiple support levels between the current level and the long term trend line which is about 9.5% lower than today's close. The GDP report on Wednesday and then the ever important upcoming earnings season could be the deciding factors on how low the index goes.

The SPX was today's runner up today and nearly made it back into the green before the close. The broad market traded just beneath the current all time high in a very tight range and low volume. The indicators are neutral to bullish in the near term with the chance of a small correction in the mix. Nearer term stochastic is overbought but longer term is low in the range and only in the process of rolling into bullishness. At this time the market appears to be sitting at a new high and waiting to “see what happens”. Maybe GDP will impress and the market can rally. Maybe Iraq will go away and the market can rally. Or maybe earnings outlook will weigh the market down with the help lower full year GDP expectations. In the near term support exists at the round number of 1950 and then just below that at the short term 30 day EMA around 1926.10 or -3.1%.

The Dow Industrial Average lost about -0.6% today on weak indicators. Momentum in the blue chip stocks is bullish but the peak is so small the chart doesn't even pick it up. Stochastic is in the midst of the weak trend following signal but % D is still pointing down so I don't put a lot of faith in that signal on by itself. The trend is still up and the index is making new highs but the near term is not looking real strong to me now. Support exists around 16,750 and 16,500 with a correction to my long term trend line equal to roughly 8.8%.

The Transports were the big loser today and no surprise as it has been the market leader for some time. The Trannies lost about a half percent and looks set to make a move lower. The indicators are firmly bearish hear, MACD in the red and ticking lower with today's candlestick. Stochastic is trending lower with both lines but %K is above %D so I'm not too worried about it yet. This could be setting up for another trend following move and bounce from the long term trend line which is about 5% below the current level. First support is along the short term moving average about 150 points lower.

There was a lot for the markets to consider today but again I think that the GDP revision will be the market mover of the week. If it's lower than expectations will it be blamed on the weather? Will the market believe it if it is and will it even matter? I think at this point we know the first quarter was weak, weaker than expected and weak enough to recalculate estimates. Will it matter if the revision costs us a tenth of a point or two or even three? The first quarter ended nearly three months ago. What is more important is the current quarter and how the rebound will be perceived. Did the rebound rebound enough? It's not a matter of how high 2nd quarter GDP is although higher is better, it is a matter of how much rebound we get from the first quarter. More rebound now means more economic momentum going into the summer, less is less and that is never good for the market. We'll find out on Wednesday but I think that whatever happens it will be another buy on the dip, however deep the dip goes.

And don't forget that next week is the end of the month and the next round of monthly jobs data.

Until then, remember the trend!

Thomas Hughes

New Plays

Momentum Stalled On Monday

by James Brown

Click here to email James Brown

Editor's Note:

The stock market struggled to keep the upward momentum going on Monday. Historically the week after June option expiration does not have a very good trend. It's normally a down week.

The NASDAQ composite remains just below resistance at its 2014 highs near 4,371. Meanwhile the small cap Russell 2000 index produced a bearish reversal candlestick today but we'll have to wait until tomorrow to see if the Russell confirms this signal.

Overall it was a quiet session. Stocks might see another pullback tomorrow.

We are not adding new trades tonight.

In Play Updates and Reviews

Is The Rally Tired?

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 index snapped a six-day winning streak. Meanwhile the small cap Russell 2000 index produced a bearish engulfing candlestick reversal pattern on Monday. We'll have to wait and see if the Russell confirms this signal.

Overall it was a quiet day for the Premier Investor Newsletter.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $44.36 change: -0.19

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +10.2%

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

06/23/14: AAL delivered big gains last week. The stock was due for some profit taking. Shares lost a minor 19 cents (-0.4%) on Monday after hitting new highs on an intraday basis.

I am not suggesting new positions.

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: 15.05 change: -0.32

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +24.9%

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

06/23/14: ARWR has a similar story. After big gains last week the stock was due for some profit taking. Shares slipped -2.0% after tagging new relative highs first.

More conservative investors may want to take profits now 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: 52.89 change: +0.42

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 3.2%

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

06/23/14: DOW displayed some relative strength on Monday with a +0.8% gain. More importantly the stock broke through short-term resistance at 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

Flextronics Intl. - FLEX - close: 11.08 change: -0.03

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 7.6%

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

06/23/14: FLEX continues to drift lower toward the $11.00 level.

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: 63.11 change: -0.88

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: - 1.2%

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

06/23/14: After a six-day rally share of IR saw some profit taking today. The stock fell -1.3% toward short-term support near $63.00 and its 10-dma. A bounce from current levels could be used as a new bullish entry point.

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: 41.99 change: +0.31

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: +0.3%

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

06/23/14: The price of cloud storage continues to fall. Microsoft just announced today that they are offering 15 gigabytes of storage for free on their OneDrive platform. If you are a Microsoft Office365 subscriber then you get 1 terabyte of online storage for free. MSFT also slashed its prices on its other storage plans.

It looks like Wall Street approves of the move. Shares of MSFT outperformed the broader market with a +0.74% gain. The stock is poised to breakout past short-term resistance near $42.00.

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

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

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

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

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

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

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

current Position: long MSFT stock @ $41.85

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

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

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

SoftBank Corp. - SFTBY - close: 37.39 change: -0.97

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +1.9%

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

06/23/14: After last week's bounce shares of SFTBY saw some profit taking today. The stock gapped open lower (gapping open is common for SFTBY) and traders bought the dip near its 20-dma and 100-dma.

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.

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: 25.68 change: -0.35

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +15.4%

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

06/23/14: I warned readers that SMCI was overbought and likely due for some profit taking. Shares slipped -1.3% today. Nearest support might be the 10-dma.

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

Waste Connections, Inc. - WCN - close: 47.44 change: -0.05

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

06/23/14: WCN hit new all-time highs this morning but failed to hit our suggested entry point at $47.75. Shares look like they might hit our entry point tomorrow.

Earlier Comments: June 21, 2014:
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

Wells Fargo & Co - WFC - close: 52.98 change: +0.09

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 4.0%

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

06/23/14: WFC inched higher and tested the $53.00 level today.

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

Xylem Inc. - XYL - close: 39.78 change: +0.11

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

06/23/14: XYL posted another gain and is now up five days in a row. Yet shares remain below round-number resistance at $40.00. I do not see any changes from my earlier comments. Our suggested entry point is $40.25.

Earlier Comments: June 21, 2014:
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)

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

BEARISH Play Updates

None. We do not have any active bearish trades.