Option Investor

Daily Newsletter, Tuesday, 6/24/2014

Table of Contents

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

Market Wrap

Yes, There Is a Sell Button

by Jim Brown

Click here to email Jim Brown

Today's drop proves that stocks can be sold. Many of us were beginning to wonder.

Market Statistics

This was a busy day for economics and there was another burst of headlines from Syria but there was nothing specific that caused the decline. Early in the day the market reporters blamed it on a report that Syrian planes were bombing targets inside Iraq and that was the reason for the market decline. While that is an interesting development I seriously doubt it impacted our markets.

Reportedly Syrian planes bombed ISIS convoys on two separate occasions with help from Iranian intelligence. That report was confirmed by two senior U.S. defense officials. The report was both bullish and bearish. It was bullish because they were bombing ISIS convoys. Regardless of which direction they were headed it was positive for Iraq. It was bearish because Iran provided the intelligence on the targets in Iraq and it was a foreign country bombing in Iraq and they killed more than 50 people. No word on whether those were 50 ISIS troops or 50 civilians.

What we did hear that was bearish for the markets was a move to evacuate the U.S. Embassy locations in Iraq. The U.S. is positioning ships in the Persian Gulf to assist in the event of an evacuation. Reportedly more than 1,000 embassy workers in Baghdad are already being moved to other locations including Jordan. The Iraq embassy is the largest U.S. embassy in the world with 5,000 workers. Moving to evacuate workers suggests the U.S. expects the conditions to worsen rather than improve.

Also weighing on the markets were comments from Philly Fed President Charles Plosser that the Fed may need to move faster and hike rates sooner to offset rising inflation. Analysts believe it will be mid to late 2015 before the Fed begins to hike rates. If the Fed suddenly said they were considering a shorter waiting period after the end of QE the market would react negatively.

However, even if Plosser is right and the Fed did decide to move earlier it would still be well into 2015 before that action would be announced. Selling stocks because of Plosser's comments today would be stupid. Investors will file his comments away for future review but it really depends on what the Fed says along the way.

The busy economic calendar should have been bullish for the market with multiple positive reports. The reports may have been so bullish that traders began to worry Plosser was right and the economy was accelerating too quickly.

New Home Sales spiked from 425,000 to 504,000 and the fastest pace since mid-2008. This was a +18.6% rise since April and +16.9% over April 2013 and months of inventory declined from 5.3 to 4.5 months. Home prices have risen +6.9% year over year. The snapback in home sales definitely arrived. The consensus estimate for a drop to 400,000 was really wrong and that contributed to the early morning spike in the markets.

Consumer confidence for June soared from 82.2 to 85.2 to the highest level since the recession. The present conditions component rose from 80.3 to 85.1 and a six-year high. The expectations component rose from 83.5 to 85.2, which was also a decent move. Auto buying plans rose from 11.6% to 12.3% of consumers surveyed. Home buying plans rose from 5.0% to 5.4%. Appliance buying plans like kitchen appliances and big screen TVs rose from 45.2% to 50.2%. Apparently the snapback in the consumer sector is also alive and well. However, only 18.8% of respondents expect business conditions will improve over the next 6 months. More than 16.3% thought available jobs would increase but 18.7% believe available positions will worsen.

The weekly chain store sales rose +2% and the biggest gain in four weeks. This follows a +0.4% gain last week and -2.8% drop the prior week. This report is normally ignored but today it was punctuation for the other bullish reports.

However, there was a bear in the house today. The Richmond Fed Manufacturing Survey declined from 7.0 to 3.0 and a three-month low. The internal components were generally negative. Backorders fell into contraction territory from +1 to -3. Employment declined from 10 to 3 and inventories fell from 14 to 4. New orders were a positive component with a minor rise from 3 to 4 and the average workweek rose from 3 to 7.

The Richmond Services Survey declined from 13 to 9 mostly as the result of a sharp decline in retail. If you exclude retail from both months it would have been a rise from 7 to 13. The six month outlook component declined only one point from 13 to 12.

The decline in the Richmond activity was minimal and nothing in the components suggests there is a slowdown in the long term trend. However, we have seen some weakness in several of these regional reports so the outlook is still cloudy.

The Case Shiller home price report showed prices rose in April 10.8% over year ago levels. That is down from +12.4% for the prior month. The FHFA Purchase Only House Price Index showed a gain of +5.9% in April compared to 6.4% in February. These are lagging reports for the April period and were ignored.

The big report for the week is the GDP due out on Wednesday. Analysts are currently expecting a downward revision to -1.9% for Q1. Most investors are going to be shocked when this number is released if it is anywhere close to the forecast. With estimates for the rest of the year now declining every week the negative start for the year could be bad for sentiment.

The Fed lowered their full year growth forecast last week from 2.9% to 2.3% because of the negativity in Q1. They blamed it on the weather and nobody blinked.

After Plosser's comments today the speech by Richmond Fed President Jeffery Lacker on Thursday is sure to draw attention.

I had several emails about the Russell index rebalance on Friday and asking about what to expect from the Russell in the following week. Basically the Russell should be negatively influenced by the rebalance through Friday. The majority of fund selling and buying will be done with market on close orders on Friday. However, traders will try to front run the funds by selling all week. Early next week fund managers will try to even out their new positions based on the final weightings released by Russell. This means there will be a minor amount of follow on buying to bring their positions into compliance with the new Russell weightings. In theory this should provide a slightly positive bias for the Russell indexes next week.

Since the indexes being reconstituted involve the top 3,000 stocks in the U.S. this positive bias is market wide. However, there are only about 165 stocks being added. Depending on the market cap of those 165 stocks the positions in the other 2,835 stocks will have to be adjusted. For instance if Facebook were being added with a $131 billion market cap it would cause ripples in the entire index structure. Even a little ripple can be felt because there is $7.5 trillion indexed to the Russell indexes.

I scanned the additions list, See the list of additions here, and I did not see any giants. However, there are a lot of midrange companies and some popular new IPOs. Companies of interest were GRUB, TYC, TRUE, PLUG, FRSH, LQ, FWLT, KODK, ARWR and ALLY. The two in that group that stood out the most were Tyco and Ally Financial. ALLY has a market cap of $12 billion and TYC is $21 billion. Strangely most of the small cap additions I looked at were moving lower. That may have just been the market pressures for this week.

Yahoo CEO Marissa Mayer really ticked off a lot of people when she showed up more than two hours late to a key meeting with some very important advertisers. The mistake came at the Cannes Advertising Festival where companies like Yahoo get some face time with the people who make decisions about spending tens of millions of advertising dollars.

In this case Interpublic Group (IPG) had arranged a private dinner at the very posh L'Oasis restaurant to meet executives from Mondelez International (MDLZ) home of Kraft Foods, Nabisco, Maxwell House, etc, MillerCoors and yogurt maker Chobani. When Mayer did not show up for more than two hours the CEO of IPG and several of the other executives had already left.

Mayer told attendees she had fallen asleep. Analysts said it would have been better if she had lied and blamed an unavoidable conflict. Since Yahoo's advertising revenue is declining every quarter Mayer should have been very interested in not only being on time but alert and engaged. After the story broke numerous employees and past employees came forward and claimed she is extremely late for meetings all the time. While I don't think Mayer will lose her job over this I suspect the board will make her understand that relationships matter and respect or disrespect from the C-suite goes a long way. Just because she earns $500,000 a week it does not mean she can show up at meetings whenever she wants.

Is anyone worth $500,000 a week?

Micron (MU) reported earnings of 79 cents that beat estimates of 70 cents. Revenue spiked +72% to $3.98 billion and beating estimates of $3.89 billion. They raised guidance for current quarter revenue to $4.1 billion and slightly ahead of estimates. Micron said estimates for falling chip prices were wrong and DRAM and NAND prices were stable and demand was strong. DRAM PC/Server memory accounted for 69% of revenue with NAND flash memory at 28%.

SanDisk is still outperforming Micron with a new generation of chips called TLC or three level cell. Micron is working on widening its product base but right now it is the low cost producer of the generic memory and business is good. Micron is expected to partner with a hard drive maker like STX or WDC to make a major push into SSD drives.

Vertex (VRTX) shareholders were handed a long awaited gift today when the company announced the results of some drug trials on cystic fibrosis. Lumacaftor, when used in conjunction with an existing Vertex drug was shown to improve lung function, patients quality of life improved and they gained weight. People with this disease normally die in their mid 20s. Goldman Sachs expects the drug to peak at $5 billion a year in revenue, up from the $370 million for the companion drug. This is a windfall for Vertex and they have a couple more drugs in the pipeline to further enhance the patient response. Analysts expect VRTX shares to rise as high as $150 once they get FDA approval in 2015.

This drug trial announcement had been expected for some time and Vertex said it would be out at the end of June. You could not buy options on VRTX for the last several weeks without paying an obscene premium. I tried on Monday to find a way to play it for maximum impact and I could not make the numbers work. Near the money calls at $15 and puts at $12 on a $66 stock did not work for me. The reason was the potential for either a pass or fail trial. If the trial had failed we could have seen the stock in the $20s, down from the close at $66 on Monday. This was an all in bet. Red or black, pass or fail, hero or zero. Those with faith in the outcome were richly rewarded. Shares rallied +40% to $94.

Web.com (WWWW) shares fell -20% after Google said it was testing a service for finding and registering domain names. If Google leaps into this sector the cannonball splash is going to empty the pool. There has been some serious consolidation over the last several years and every time I log into my registrar I expect to see some new name on the webpage.

Registering domain names is a lucrative business. I own about 700 and even using an inexpensive registrar is expensive because they have to be renewed every year. I loaded up on website and newsletter names over a decade ago and have been slowly selling them off one at a time. I sold Jon Najarian the OptionMonster.com name way too cheap! (If anyone wants to start their own website/newsletter just email me and I will partner with you. Need a newsletter name, I have it.)

Google could quickly dominate the market if it decides to jump in. Google has sold domains through resellers in the past so they have experience in the process. It is not a hard business and with Google's IT staff they should be able to develop a compelling offering. They announced yesterday they are working with website builder Wix.com (WIX) and shares of WIX spiked 13%.

The energy sector was the biggest loser today after being the biggest winner for the last month. Shares of the big momentum stocks were down hard on no news. CLR lost -$5, EOG -4, HP, -4, WLL -4, OXY -4, etc. However crude prices were positive most of the day around $106. The sector may rebound tomorrow because something happened after the bell to send crude prices to $107.50 and while I could not find the headline I would bet it had to do with Iraq.

The Dow lost -119, Nasdaq -18 after being up +30, the S&P -12 and the Russell 2000 -11. Those are decent declines but only a blip in the longer term trend. The S&P only declined -.6% and added one more day to extend its streak to 44 days without a 1% move in either direction. That is the longest since 1995. We should not be concerned about a -12 point drop especially when the trend since January has been rally for a couple weeks, decline for three days and repeat.

The S&P hit a new intraday high at 1,968 this morning before falling to close at 1,950. That round number close was convenient but support is still another 20 points away around 1,930. If the 1,925-1,930 level breaks we should become very concerned because it would be a change in the trend.

The historical trend for the week after June expiration is down for 21 of the last 24 years. We are well on our way but the week is not over.

The Dow chart worries me. The Dow high in early June was 16,970.17. The intraday high today was 16,969.70. The difference is only .47 or less than half a point. Can you say "double top?" Normally double tops are farther apart in time but it would be tough to argue with today's performance. The fly in this soup is the intraday high on Friday at 16,978. It only happened for a few seconds before falling back below 16,960 the rest of the day. However, the chart still looks the same.

The failure at the 16,970 level multiple times is a warning. If uptrend support just under 16,800 were to fail this decline could accelerate quickly. As long as the existing tend is not broken buyers will eventually return. However, this close to summer it would not take much to sour sentiment. Nobody wants to leave a bunch of positions open in a falling market as they head to the beach.

The Nasdaq Composite soared past resistance at 4,371 at the open but the hang time above that level was very short. The decline began almost immediately and the Nasdaq went from +30 at the open to -18 at the close. In reality all it did was give back three days of gains but it was ugly on an intraday chart.

The 4,350 level is a critical support point after falling below the short term uptrend support. However, we could dip to the 4,300 level without significant damage. I don't want to go there but it is not my choice.

The Nasdaq 100 spiked through the 3,800 resistance level that has held it back for two weeks but it was instantly sold to knock it back below that prior resistance. Note the very tight range under 3,800. That suggests the buying pressure is growing.

The Russell 2000 was up +9 points in the morning and declined to lose -12. The dead stop at 1,193 and resistance from April could have been a determining factor but I am betting on the Dow being the lead dog today. However, the MACD is rolling over along with the RSI. We need that 1,160 support level to hold or we are in big trouble.

Let's review the facts. We were overbought and struggling to make incremental new highs every day. The Dow may or may not have been the major factor for the decline when the early June highs proved to be too much resistance to overcome. This week has been down in 21 of the last 24 years. The situation in Iraq took a turn for the worst. A Fed head was trying to roil the market and succeeded.

One day does not make a trend. Our recent history of dips lasting only three days is a trend. Let's hope it holds.

There were 275 new highs on the NYSE and Nasdaq and only 53 new lows. That is hardly bearish.

The S&P only traded in a narrower range than it did on Friday and Monday ONE day in the last 20 years. We were due for some volatility.

Table from Business Insider - MKM Partners

Traders are so used to watching the market overcome all obstacles and move higher that a strong down day flushed out a lot of weak holders.

Thanks to QE making money cheap in the first quarter stock buybacks totaled $160 billion and the second highest quarter ever. If you add dividends the cash back to shareholders totaled $241.2 billion. Only Q4-2007 was higher. When QE ends this free money scenario could also end. With this statistic being repeated almost daily and Plosser predicting a quicker arrival of rate hikes investors may have decided to take some money off the table.

We never know why a market declined until it is over and we have the benefit of hindsight. Let's hope our rear view mirror next week shows another three day dip and rebound to new highs. If this dip turns into something else then we will deal with it as it happens. Remember, stocks do go down as well as up. We should remain in buy the dip mode until proven wrong.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Confidence Up, Spending Down

by James Brown

Click here to email James Brown


The TJX Companies, Inc. - TJX - close: 53.84 change: -0.97

Stop Loss: 55.10
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
According to their website, the TJX Companies, Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. With over 3,200 stores in the U.S., Canada and Europe, 3 e-commerce sites and approximately 191,000 Associates at the end of 2013, we see ourselves as a global, off-price, value retailer and our mission is to deliver great value to our customers through the combination of fashion, brand, quality and price.

The stock has been a strong performer on Wall Street for years. Shares of TJX are up 2008 lows near $10 a share to until they peaked near $64.00 late last year. It would appear the long-term momentum is fading.

TJX, along with most retailers, are facing a tough consumer market. Big ticket items like new homes and automobiles are selling well. Smaller purchases like fashion and apparel have been tough unless you're in the luxury market.

The U.S. Commerce Department reported that consumer spending fell -0.1% in April, marking the first decline in a year. It is worth noting that consumer spending was up the prior two months, but that didn't help TJX first quarter sales. TJX reported earnings on May 20th. Their Q1 results (ending April) were 64 cents a share on revenues of $6.49 billion. That was three cents less than Wall Street's estimate of 67 cents a share on revenues of $6.59 billion.

TJX management said their Q1 same-store sales growth was only +1%, which was below guidance. TJX then lowered their 2015 guidance. There has been some speculation that TJX could be losing some market share to the return of JC Penney (JCP).

The issue could be bigger than just one or two stores fighting for market share. The U.S. consumer is facing higher prices. Consumer price inflation is up, especially for everyday items. Over the past twelve months the CPI has risen +2.1%. The price of meat, chicken, eggs, and fish is up +7.7%. The price of fruits and vegetables are up +3.2%.

The consumer is also facing higher gasoline prices. AAA said the national average on gas had risen to $3.68 per gallon. That is the high for this time of year. AAA is currently forecasting a range of $3.55 to $3.70 per gallon. Fortunately, they are hoping that gasoline prices will not hit $4.00 a gallon. However, that could change quickly if the violence in Iraq escalates and terrorist start to impact Iraq's oil exports. Another issue here at home is talk of raising the U.S. federal tax on gasoline from 18.5 cents per gallon to 30.5 cents over the next two years. Call your senator if you do not want that tax to go up.

All of these price increases are weighing on most Americans who are stuck with flat or very low wage gains. Oddly enough consumer confidence just hit a six-year high today. Hope springs eternal but just because consumers are hopeful doesn't mean they're actually spending more money.

Technically shares of TJX are bearish. It has a trend of lower highs and lower lows and just broke down under support near $54.00. Tonight we're suggesting a trigger to launch bearish positions at $53.65. We are not setting a bearish target tonight but I will point out that the point and figure chart is bearish and forecasting at $45.00 target.

Trigger @ $53.65

Suggested Position: short TJX stock @ (trigger)

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

Buy the Oct $50 put (TJX141018P50) current ask $1.05

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

Annotated chart:

Weekly chart:

In Play Updates and Reviews

Widespread Profit Taking

by James Brown

Click here to email James Brown

Editor's Note:
The market's early morning highs vanished into a widespread market decline on Tuesday. Is this a reversal in progress? Or is this just a little profit taking?

The market ignored positive economic news like new home sales rising at their fastest pace in six years. Plus, the latest consumer confidence reading hit six-year highs.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $43.18 change: -1.18

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: + 7.3%

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

06/24/14: Airline stocks followed the rest of the transportation industry lower on Tuesday. AAL underperformed with a -2.6% pullback. More conservative investors may want to take some money off the table now.

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: 14.19 change: -0.86

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +17.8%

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

06/24/14: We should be used to the volatility in ARWR by now. Shares plunged -5.7% following yesterday's dip.

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: 52.32 change: -0.57

Stop Loss: 50.85
Target(s): To Be Determined
Current Gain/Loss: + 2.1%

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

06/24/14: The action in DOW today looks bearish. Shares rallied just high enough to hit new multi-year highs and then reversed.

Tonight I am raising our stop loss to $50.85. More conservative investors might want to use a stop closer to $51.50-51.60 instead.

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*

06/24/14 new stop @ 50.85
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: 10.99 change: -0.09

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 6.7%

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

06/24/14: The profit taking in FLEX continues with the stock now down five out of the last six sessions.

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: 62.21 change: -0.90

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: - 2.6%

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

06/24/14: IR slipped -1.4%. The stock is now testing support near $62.00, which is essentially where shares consolidated about two weeks ago. I would hesitate to launch new positions.

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: 41.75 change: -0.25

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

06/24/14: MSFT spent Tuesday's session quietly churning sideways in the $41.50-42.00 zone.

Investors might want to wait for a new rally past $42.00 before initiating positions.

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

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

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

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

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

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

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

current Position: long MSFT stock @ $41.85

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

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

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

SoftBank Corp. - SFTBY - close: 37.33 change: -0.06

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +1.8%

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

06/24/14: SFTBY's early gains faded. Shares essentially settled on its converging 20-dma and 100-dma moving averages.

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: 25.34 change: -0.34

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +13.9%

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

06/24/14: Thus far the profit taking in SMCI has been pretty mild.

More conservative investors may want to take some money off the table or raise their stop loss. 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: 47.30 change: -0.14

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

06/24/14: WCN managed to tag a new high intraday but it wasn't enough to hit our suggested entry point at $47.75.

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: 52.49 change: -0.49

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 3.0%

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

06/24/14: WFC faded from record highs with a -0.9% pullback 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: 39.23 change: -0.55

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

06/24/14: XYL retested round-number resistance at $40.00 and then retreated as the broader market sank. I don't 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.