Option Investor

Daily Newsletter, Tuesday, 9/23/2014

Table of Contents

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

Market Wrap

Small Caps Still Leading

by Jim Brown

Click here to email Jim Brown

The Russell 2000 hit a new six-week low to lead the big cap averages lower.

Market Statistics

The Russell led the big caps lower once again despite an attempt by the Dow, Nasdaq and S&P to break into positive territory mid-morning. The effort was quickly reversed and the steady selling resumed. This is not a market crash. Selling has been steady with no sharp declines or sudden spikes in volatility. This has been orderly profit taking after the big cap indexes set new highs at the same time Alibaba was surging to $99 on Friday. All have rolled over with BABA now trading at $87 and a -12% decline from its highs.

Multiple market analysts have commented on the extreme bullishness seen in the BABA IPO as the reason for the market drop. Once the IPO is over the bullishness disappeared. One could make the case for the Alibaba hype dragging the market higher and probably a case for a sell the news event following that event.

However, the weakness in the small caps began in July not last Friday. The Russell 2000 and the S&P both set new highs on July 1st but that is where they parted company. The Russell immediately began underperforming the big cap indexes. The S&P went on to set several new highs and the Russell continued to lag. Since Labor Day the Russell has been in a steep decline that has accelerated over the last several days. While BABA may have created a sell the news event in the big caps the Russell already had a head start with a -7.2% decline since the high close at 1,208 on July 3rd.

The small caps typically lead on the way up and on the way down and they are definitely the weakest index in the current market. More than 45% of Russell stocks are in a bear market with more than 20% declines from their recent highs. Until the Russell finds a bottom we can expect the big cap averages to be lethargic at best and at the worst they will be followers.

The Dow declined -0.68%, Nasdaq -0.41%, S&P -0.57% and the Russell was hit the worst at -0.94%.

On the economic front the Richmond Fed Manufacturing Survey headline number rose from 12 to 14 and the highest level since March 2011. New orders rose to 14 and a multi-month high. Backorders declined from 15 to 6 but that was still the second highest level in the last eight months. Employment rose from 11 to 17 and also a multi-month high.

This was a good report although the price for raw materials also rose at a 2.1% rate, which was higher than the 1.39% rate in August.

The Richmond Services Survey was flat with August at 21. The retail portion of the index was also unchanged at 37 but that represents strong expansion underway.

Manufacturing Components

The FHFA Purchase Only Home Price Index rose +4.4% for July compared to +5.1% in June and forecasts for a +5.6% gain. Of the nine divisions only 2 posted declines in prices. Those were the middle Atlantic with a -0.5% decline and -0.3% in the Mountain division. This report was ignored as lagging data.

The calendar for Wednesday has New Home Sales and the NAHB Housing Market Index. With home sales falling in recent months these numbers will be critical for sector direction. Builder stocks are in decline and a gain in new home sales could help to reverse this trend. KB Homes (KBH) has earnings before the open and they are not likely to post the same good news that Lennar (LEN) did last week.

Hopefully the Kansas Fed Manufacturing Survey on Thursday will show similar gains to the Richmond survey. However, the Kansas survey is heavily impacted by auto manufacturing and auto sales have also begun to slow. This puts the Kansas numbers at risk of a decline.

The big number for the week is still the Q2-GDP revision on Friday. The official consensus is still 4.3% but there are estimates close to 5.0% growth. This number could be market negative if it came in too hot because it would suggest the Fed could raise rates sooner. If it came in to low if would be Fed positive but economically negative. Something in the 3.8-4.0% range would be the best outcome.

Next week is payroll week with those numbers key for Janet Yellen and Fed direction.

The U.S. and 5 Arab nations attacked Syrian sites on Monday night with 14 ISIL targets hit and 8 Khorasan targets destroyed. The Khorasan organization was made up of al-Qaeda veterans that were focused on attacking Europe and the U.S. and making bombs to be carried on airplanes that could not be seen by metal detectors. Jordan, Saudi Arabia, the UAE, Qatar and Bahrain were the countries participating in the attack. Iraq, Turkey and European allies were noticeably absent.

The U.S. said the Khorasan group was effectively decapitated because they were not expecting to be attacked and had not dispersed their people and assets. The group was targeted because they were actively seeking passport holders from western nations and their plotting was the reason airline security was increased over the last several months. The U.S. said it had intelligence the group was in the final stages of preparing an attack on the USA.

Within hours of the attacks ISIL posted a video saying the U.S. and its allies were embarking on Gulf War III and not since Vietnam has we witnessed such a potential mess in the making. They specifically threatened Saudi Arabia with retaliation for joining in the attacks.

Russia condemned the attacks saying they violated Syrian sovereignty and would "aggravate the situation even further." The further warned that "those who initiated one-sided military scenarios bear full international legal responsibility for the consequences." The U.S. did inform Syria ahead of the strikes and warned the Assad regime not to engage American aircraft. Syria has a sophisticated air defense system and it would have lost that system if it had been used to attack U.S. aircraft.

The market ignored the attack because it had been heavily discussed over the last several weeks. The fact there were five Arab countries involved in the attack blunted any concerns about the Syrian bombing.

One reason for the market's decline could have been the note from Goldman Sachs. Goldman said ten-year yields could rise to 4% over the next 12 months after the end of QE in late October. Goldman believes the end of QE purchases will spike rates and the economy will force the Fed to begin reducing its $4.45 trillion balance sheet sooner rather than later. Yellen said that after QE ends they would continue reinvesting principle that matured in order to maintain the stimulus that is already in the market. Once the Fed was forced to raise rates they would first halt the reinvestment of that principle and let the portfolio begin to decline. The next step would be to hike rates in a "gradual and predictable manner" according to Yellen.

Goldman said that once QE ended and the reinvestment of principle was halted it would turn into "quantitative tightening" and they believe this will occur sooner rather than later. "The impact will begin as soon as QE ends and reinvesting coupons alone will not be enough to offset the roll down of stock" They expect the Fed to begin tightening between June and September of 2015, if not sooner, and the ten-year yield could rise to 4% within 12 months.

Apple shares rallied $1.58 in a bad market after headlines broke that China was about ready to approve the license on the iPhone 6. That had not been expected until December. Opening up China to iPhone 6 sales would be a big boost for Apple sales.

On the negative side the new IOS 8 operating system is not functioning correctly. The new OS is causing apps to crash about 3.3% of the time or 67% more than the prior version. Facebook, DropBox and other heavily used apps are crashing repeatedly as a result of the new OS. The problem has caused DropBox to release a software fix that works around the errors in IOS 8 that are causing the crashes. Older phones are having the most problems. The new IOS includes more than 4,000 new functions and changes and developers are racing to adapt to the changes. According to Apple 46% of Apple devices connected to the App Store are now running IOS 8. Another big complaint is the massive amount of storage required for the new OS. Many users are being forced to delete pictures, videos and other apps from their phones in order to have enough memory to run IOS 8. Apparently users are fighting through the problems because Apple said it sold more than 10 million new phones over the weekend.

I was really hoping for a decline in Apple shares to something in the mid $90s but it does not look like it is going to happen.

Facebook (FB) announced a new ad program for mobile users in order to better compete with Google. The new platform, called Atlas, will be revealed next week. This is a new re-engineered version of the Atlas Advertiser Suite they purchased from Microsoft in 2013. The platform will allow marketers to know what ads Facebook users have seen and interacted with on third party websites. Google reported ad revenue in Q2 of $14.36 billion compared to Facebook's $2.68 billion. Shares of Facebook rallied +$1.50 on the news.

Alibaba (BABA) may have had a successful IPO but the success ended at the close on Friday. Shares are now down 12% from its highs and -5.6% from Friday's close. There appears to be heavy institutional dislike for BABA after the company management hand picked the companies that would get BABA shares at the IPO price. The majority of companies that received shares got only 10% of what they asked for. The vast majority of companies asking for shares got none. Reportedly 25 companies received 50% or more of their requested allocations. This means the stock ownership is very narrow and in theory that should have led to a lot of demand from everyone that did not get an allocation. However, the process soured those that did not get any or very little and shares are being offered for sale but demand is weak. Volume today was 38 million shares and most of that volume was negative with the stock losing -$2.72 for the day to close at $87.

Jack Ma and his close associates may have tried to be too smart about the allocation process and it is coming back to haunt the share price.

The S&P is closing in on the 1980 support level and that is important short term support. This is the level that held the drop on August 15th. While this is being called crucial support it is not. It is only crucial for the very short term. Critical support is more in the 1950 range and the 100-day average or long term uptrend support in the 1930 range.

At this point we should see at least a temporary bounce from the 1980 level because the selling has been slow and steady and not fast and furious. The fast drops are the ones that blow through support and keep going. Steady selling tends to pause at interim support levels and dip buyers on the sidelines interpret those pauses as bottoms. Sometimes that is self fulfilling if enough buyers take the bait. Sometimes the bounces from those support levels just provide a higher entry point for sellers.

We don't know why the market is selling off this week. We only know that it is overdue and the week after option expiration in September is normally down. This is a portfolio restructuring week ahead of the Q3 earnings cycle.

There was a sharp downdraft right at the close and one commentator called it a potential flush. Sorry, a -5 point drop in the S&P is not a flush. We are not yet in flush mode. As long as the selling remains steady we are in distribution mode. When the drop accelerates into panic mode that is when we can start looking for a flush that signals capitulation. We are not there yet and we may not get there if 1980 pauses long enough for dip buyers to wake up from their nap and get back into the market.

Support in round numbers is 1980, 1950, 1930 with the 50-day average at 1976. I always laugh when someone says support is 1951.62 or something similar. Markets rarely stop on a penny, nickel, dime or quarter. They do stop on ranges and sometimes on round numbers like 1980. Don't be too concerned about the small increments and focus on the bigger picture.

The Dow dropped -50 points in the last 10 minutes of trading to close at the lows of the day at 17,058 and a loss of -117 points. This is the first back to back triple digit loss since June. It is also about -300 points off the high at 17,350 that was set on Friday. That is a pretty straight decline on moderate volume of 6.2 billion shares. This suggests the Dow is rapidly moving from overbought to oversold.

It has also reached the prior congestion range from 16,950 to 17,050. This should be decent support. The last decline in the 12th dipped to just below 16,950 and rebounded. Round number support at 17,000 was a price magnet for late August and early September and will likely be a magnet again.

Back to back triple digit declines sounds ominous but the Dow has only been declining for two days. Get a grip! Two days is not a trend. A two day dip is a blip in the long term trend. If the index moves below 16,950 and the 50-day average at 16,937 then we can start to worry.

The Nasdaq sell off has slowed. After two days of drops from 4,610 to a low of 4,513 the minor -19 point decline today was tame. You can see in the losers list below that there were very few big losses. The Nasdaq is closing in on the 4,500 level and it dipped to low of 4,499.87 on the 15th before rebounding to retest the September 3rd high of 4,610. What goes up fast sometimes comes down fast. Now that it is back at the starting point the number of sellers appears to be dwindling. There were numerous tech stocks that bucked the trend today and posted decent gains.

With the 50-day average at 4,489 and round number support at 4,500 it should take some concentrated selling to push the Nasdaq lower. It would have to be heavier than what we saw today. Anything is always possible but unless we are headed into correction territory the Nasdaq may be near a bottom.

The Russell is closing in on 1115 and support from early August. At the rate it is falling we could see an overshoot. There were two intraday dips to 1108 in August but both produce immediate rebounds. Let's hope that trend continues. The 1087 level is a 10% correction for the Russell. The 50-day is solidly under the 200-day for a death cross but of the last 11 times that has happened only 2 of them led to losses over the next 12 months. The average gain over the next 12 months was 11%.

I believe the selling may be drawing to a close. That does not mean there is an instant rebound in our future and we could trade lower for the rest of the week but I think the majority of the decline is over UNLESS we are headed for correction territory. Every three day decline in the last year has been bought even if it was just an oversold short squeeze. I would tighten your stops on any bearish plays because you know there is a short squeeze lurking in our future.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

Click the advertisement below for a free trial to the Ultimate Investor newsletter.


New Plays

This Stock Looks Lost

by James Brown

Click here to email James Brown


Garmin Ltd. - GRMN - close: 50.75 change: -0.78

Stop Loss: 52.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
Garmin was founded in 1990. They became a big name in the navigation technology business. I'm sure many of us remember buying GRMN automobile PNDs (portable navigation device) that sat on the dashboard or stuck to the windshield. Yet those have been replaced by the ubiquitous smartphone and in-dashboard GPS systems.

GRMN still sales a lot of auto GPS systems, many to OEM clients. They also sell fleet management solutions. GRMN has also see some growth in their systems for aviation (planes) and marine (boats). They seem most excited about getting into the wearables industry with a focus on fitness devices. Although that is going to be a crowded market soon.

Officially the company describes itself as, "Garmin International Inc. is a subsidiary of Garmin Ltd. (GRMN), the global leader in satellite navigation. Since 1989, this group of companies has designed, manufactured, marketed and sold navigation, communication and information devices and applications – most of which are enabled by GPS technology. Garmin’s products serve automotive, mobile, wireless, outdoor recreation, marine, aviation, and OEM applications. Garmin Ltd. is incorporated in Switzerland, and its principal subsidiaries are located in the United States, Taiwan and the United Kingdom."

It's a bit surprising to see GRMN's relative weakness considering their last earnings report back on July 30th. The company has no debt and their last results beat estimates. Management raised their 2014 guidance. Gross margins improved from 55% to 57% and operating margins improved from 24% to 28%. Unfortunately traders sold the news.

You can see the big spike on its earnings report and immediate reversal lower. Since then traders have been selling the rallies. Now GRMN is under its 200-dma and it looks poised to breakdown under support near the $50.00 mark.

We suspect this trend down continues. Tonight we're suggesting a trigger to launch bearish positions at $49.75. I'm not setting an exit target tonight but the point & figure chart is forecasting at $42 target.

NOTE: GRMN does have an elevated amount of short interest (more than 10% of the float). Traders may want to use the options to limit their risk.

Trigger @ $49.75

- Suggested Positions -

Short GRMN stock @ (trigger)

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

Buy the 2015 Jan $50 PUT (GRMN150117P50) current ask $3.10

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Slip For A Third Day

by James Brown

Click here to email James Brown

Editor's Note:
The market's widespread profit taking continued for a third day in a row.

ADM and HPQ hit our stop loss.

JCI hit our bearish entry point.

Current Portfolio:

BULLISH Play Updates

Best Buy Co. - BBY - close: 33.36 change: -0.31

Stop Loss: 32.75
Target(s): To Be Determined
Current Option Gain/Loss: +2.3%
Entry on September 08 at $32.60
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.3 million
New Positions: see below

09/23/14: The profit taking in BBY continues with its third decline in a row. Shares did close under their simple 10-dma, which is short-term bearish.

I am not suggesting new positions at this time.

Earlier Comments: September 6, 2014:
It's tough to be bearish when investors are buying bad news. The U.S. economy is slowly improving there have been nagging concerns over the U.S. consumer. If that wasn't bad enough Amazon.com has become the dominant player in consumer electronics. So why are investors buying shares of BBY?

First here's a brief description from the company website: "Best Buy Co., Inc. is the world's largest consumer electronics retailer, offering advice, service and convenience – all at competitive prices – to the consumers who visit its websites and stores more than 1.5 billion times each year. In the United States, more than 70 percent of Americans are within 15 minutes of a Best Buy store and BestBuy.com is among the largest ecommerce retailers in the United States. Additionally, the company operates businesses in Canada, China and Mexico. Altogether, Best Buy employs more than 140,000 people and earns annual revenues of more than $40 billion."

The last few years have seen BBY suffer from the online showroom phenomenon. Where customers come in, look at merchandise in BBY's showroom, and then go home and buy it online (usually at Amazon.com). The company has been desperately fighting this issue for a couple of years and they have made progress. However, sales continue to suffer.

BBY reported earnings on August 26th. Wall Street expected a profit of $0.31 on revenues of $8.98 billion. BBY beat the bottom line estimate with $0.44 but revenues only hit $8.9 billion. More importantly management guided lower. They expect same-store sales declines in both the third and fourth quarter. So why are investors buying the stock? It could be a case of all the bad news is already price in. Some consider BBY to be a value play at current levels.

If investors are willing to buy the bad news then it could be tough to be bearish. The shorts could be in trouble. The most recent data listed short interest at 9.5% of the 288.6 million share float. A breakout higher could spark some short covering. The point & figure chart is already bullish and suggesting at $49.00 target.

Traders bought the post-earnings sell-off in August and they bought the dip again this past week. Now BBY is on the verge of hitting new multi-month highs. We're suggesting at trigger to open bullish positions at $32.60.

- Suggested Positions -

Long BBY stock @ $32.60

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

Long 2015 JAN $35 call (BBY150117c35) entry $1.48*

09/20/14 new stop @ 32.75
09/16/14 new stop @ 31.75
09/08/14 triggered @ 32.60
*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

Broadcom Corp. - BRCM - close: 39.98 change: -0.30

Stop Loss: 39.45
Target(s): To Be Determined
Current Option Gain/Loss: - 3.9%
Entry on September 19 at $41.60
Listed on September 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.1 million
New Positions: see below

09/23/14: BRCM also delivered its third decline in a row. Shares are testing short-term support near $40.00. Wait for a bounce before considering new positions.

Earlier Comments: September 18, 2014:
We are quickly approaching a world where everything can and will be connected. Broadcom plans to make it happen by leading the world into the Internet of Things.

Who is Broadcom? The company describes itself as "a global leader and innovator in semiconductor solutions for wired and wireless communications. Broadcom products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. With the industry's broadest portfolio of state-of-the-art system-on-a-chip solutions, Broadcom is changing the world by Connecting everything."

By connecting everything they mean it. From broadband technology to cloud infrastructure to wireless and wearables to home networking, to automotive, appliances, bandwidth to backhaul, GPS to GPON, processors to powerline, set-top box to small cells, wearables to Wi-Fi, Broadcom is designing chips for to connect it.

What is the Internet of Things? It's a hot buzzword right now and one we will hear a lot more often over the next few years. Gartner, the world's leading information technology research company, described the Internet of Things (abbreviated as IoT) as the "network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment." One concept to help envision this idea is making dumb electronic devices smart. It could be anything from your coffeemaker to your refrigerator.

Gartner estimates that the IoT, "which excludes PCs, tablets and smartphones, will grow to 26 billion units installed in 2020." That is a 30-fold increase from 2009. Cisco Systems (CSCO) believes that the number of connected items could hit 50 billion by 2020. That's six devices for every person on the planet. Gartner is estimating that the products and services for the IoT will generate more than $300 billion in sales by 2020.

The IoT sounds like the next technology revolution. While it's only a few years away that might be too far in the future for some investors to consider. Right now everyone is focused on Apple's (AAPL) new smartphone the iPhone 6. BRCM just happens to be a major supplier for AAPL's new phone.

AAPL revealed their new phone last week. The reviews have been a little over-the-top. Descriptions of the Iphone 6 have been glowing. Some are calling it the "best smartphone on the planet" or the "best smartphone ever made!" One professional reviewer described the new iPhone 6 as the fastest iPhone yet. First-day pre-orders for AAPL's new phone hit a record-breaking four million phones. That is double the number of pre-orders for the iPhone 5 two years ago. There are estimates that AAPL could sell between 60 to 70 million iPhone 6s by the end of 2014. It certainly sounds like they have a hit on their hands and that's good news BRCM.

There was another story out recently that hinted BRCM may have won the contract to supply chips to AAPL's new smart watch as well. AAPL's new watch is expected in 2015.

Meanwhile BRCM continues to see earnings growth. They have beaten analysts' EPS estimates four quarters in a row. Shares of BRCM are currently trading at multi-year highs. The point & figure chart is forecasting a long-term target of $63.00.

Tonight BRCM closed at $41.44 with a high of $41.49. I am suggesting a trigger to open bullish positions at $41.60. The $40.00 level is short-term support so we'll put our stop loss at $39.45.

- Suggested Positions -

Long BRCM stock @ $41.60

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

Long 2015 Jan $43 call (BRCM150117C43) entry $1.55*

09/19/14 triggered @ $41.60
*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

E*TRADE Financial - ETFC - close: 23.35 change: -0.17

Stop Loss: 22.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

09/23/14: ETFC did not see a lot of follow through on yesterday's afternoon rebound. Shares hit an intraday high of $23.72 and then reversed. Currently we're suggesting a trigger for bullish positions at $23.85.

Earlier Comments: September 22, 2014:
ETFC was founded back in 1982. The company really gained steam during the boom of Internet trading in the 1990s. Today they compete with a suite of online brokerage, investing and related banking solutions.

Trading volumes are not what they used to be. As a matter of fact volumes have been pretty anemic but that hasn't slowed the market's rally. Lack of volume does impact the brokers. Daily trading volume for ETFC has consistently been below the prior year's level.

Wall Street might be overlooking the drop in volumes in favor of ETFC's account growth. They have been consistently adding about 30,000 new accounts a month the last several months.

Technically shares of ETFC appear to be breaking out from their April-August consolidation. Traders just bought the dip near its rising 10-dma today. If this bounce continues we want to hop on board.

Tonight we're suggesting a trigger to open bullish positions at $23.85. I'm not suggesting an exit target yet but the point & figure chart is bullish and forecasting a long-term $33 target.

Trigger @ $23.85

- Suggested Positions -

Buy ETFC stock @ (trigger)

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

Buy the 2015 Jan $25 call (ETFC150117C25)

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

Southwest Airlines - LUV - close: 33.26 change: -0.89

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Entry on September 09 at $33.25
Listed on September 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.9 million
New Positions: see below

09/23/14: The profit taking is getting uglier with LUV down -2.6% today. The last three days have erased almost two weeks worth of gains.

I am not suggesting new positions. Our stop is at $32.95.

Earlier Comments: September 6, 2014:
Airline stocks have been big winners this year. A big drop in the price of crude oil has been a blessing since fuel is the biggest expense for airliners. Year to date the S&P 500 index is up +8.5%. The XAL airline index is up +26.2%. Yet shares of LUV are up an astounding +74.25%.

According to the company's press release, "Dallas-based Southwest Airlines continues to differentiate itself from other carriers with exemplary Customer Service delivered by more than 45,000 Employees to more than 100 million Customers annually. Based on the most recent data available from the U.S. Department of Transportation, Southwest is the nation's largest carrier in terms of originating domestic passengers boarded. The airline also operates the largest fleet of Boeing aircraft in the world to serve 93 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and five near-international countries via wholly owned subsidiary, AirTran Airways. Southwest is one of the most honored airlines in the world, known for its triple bottom line approach that takes into account the carrier's performance and productivity, the importance of its People and the communities it serves, and its commitment to efficiency and the planet."

Earnings are coming in better than expected. When LUV reported on July 24th Wall Street was looking for a profit of $0.61 a share on revenues of $4.95 billion. LUV reported a profit of $0.70 with revenues up almost 8% to $5.01 billion. Demand for domestic air travel has been strong. Shares of LUV have been showing significant relative strength.

Traders bought the dip on Friday at short-term technical resistance on the simple 10-dma. That left LUV to end the week near all-time highs. Tonight we are suggesting a trigger to buy calls at $33.25.

- Suggested Positions -

Long LUV stock @ $33.25

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

Long 2015 Jan $35 call (LUV150117c35) entry $1.25

09/20/14 new stop @ 32.95
09/18/14 new stop @ 32.75
09/16/14 new stop @ 31.95
09/11/14 speculation that oil might have reversed higher today
09/09/14 triggered $ 33.25
Option Format: symbol-year-month-day-call-strike

Morgan Stanley - MS - close: 35.02 change: -0.16

Stop Loss: 34.65
Target(s): To Be Determined
Current Option Gain/Loss: + 0.8%
Entry on September 03 at $34.75
Listed on September 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.8 million
New Positions: see below

09/23/14: MS is still holding support near $35.00. Unfortunately shares closed near their lows for the session, which doesn't bode well for tomorrow.

Earlier Comments: September 2, 2014:
MS is in the financial sector. They're one of the biggest players in the financial services industry. The stock has been outperforming its peers by a significant margin. Citigroup (C) is still down -0.8% for 2014. Goldman Sachs (GS) is only up +1.0%. JP Morgan (JPM) is up +1.6% and BAC is up +3.3% in 2014. The XLF financial ETF is up +6.8% year to date. Yet MS is up +9.4%.

The company has managed to build its revenues on stronger wealth management business. The company has beaten Wall Street's earnings estimates four quarters in a row.

Their most recent earnings report was July 17th. Analysts were expecting a profit of 55 cents a share on revenues of $8.18 billion. MS delivered $0.60 a share with revenues coming in at $8.61 billion. The company's profit has more than doubled from a year ago.

The stock has spent months consolidating sideways under resistance near $33.50. This past month has seen a bullish breakout higher. Now broken resistance near $33.50 should be new support. MS is currently testing short-term resistance near $34.50.

Tonight we're suggesting a trigger to open bullish positions at $34.75.

- Suggested Positions -

Long MS stock @ $34.75

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

Long 2015 Jan $35 call (MS150117C25) entry $1.70*

09/22/14 new stop @ 34.65
09/20/14 new stop @ 33.90
09/03/14 triggered @ 34.75
*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: 46.56 change: -0.50

Stop Loss: 45.85
Target(s): To Be Determined
Current Option Gain/Loss: +5.6%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

09/23/14: MSFT announced that its X-box One is set to launch in China on September 29th. Meanwhile the stock is following the market lower with shares down about $1.00 in the last two days.

I am not suggesting new positions.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

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

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

09/22/14 new stop @ 45.85
09/20/14 new stop @ 44.75
09/11/14 new stop @ 44.45
08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike

Pilgrim's Pride - PPC - close: 30.69 change: -0.68

Stop Loss: 30.45
Target(s): To Be Determined
Current Option Gain/Loss: -2.7%
Entry on September 16 at $31.55
Listed on September 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

09/23/14: PPC was not immune to the market's three-day sell-off. Shares actually underperformed today with a -2.1% decline. We have a stop loss at $30.45. More aggressive traders may want to put their stop below $30.00, which could be round-number support.

I am not suggesting new positions at this time.

Earlier Comments: September 15, 2014:
Last year the U.S. stock market was up about +30%. Shares of PPC rallied almost +100%. This year the S&P 500 is up about +7%. Yet shares of PPC are up +90%. One reason is rising demand for protein and another is falling feed costs.

According to the company website, "Pilgrim's Pride Corporation employs approximately 35,700 people and operates chicken processing plants and prepared-foods facilities in 12 states, Puerto Rico and Mexico. The Company's primary distribution is through retailers and foodservice distributors. Pilgrim's is the second-largest chicken producer in the world, with operations in the United States, Mexico and Puerto Rico. Our corporate headquarters is in Greeley, Colorado. We have the capacity to process more than 36 million birds per week for a total of more than 9.5 billion pounds of live chicken annually. The company exports chicken products to customers in approximately 105 countries, including Mexico." (FYI: The company is majority owned, about 75%, by Brazilian meat producer JBS SA, symbol: JBSAY).

The cost to feed millions and millions of chickens is the number one expense for a chicken farmer. The price of corn and soybeans has been falling. Currently both grains are at multi-year lows. That means PPC's margins should improve. The good news is that U.S. farmers are looking at a record-breaking harvest of corn and soybeans again this year. That should continue to push grain prices lower.

Technically shares of PPC are riding their long-term trend of higher lows. Shares got ahead of themselves in July and sold off following its earnings report at the end of the month. Yet investors bought the dip at technical support on the rising 50-dma. Now after consolidating sideways for the last few weeks PPC is starting to rally again.

Today's intraday high was $31.39. We're suggesting a trigger to open bullish positions at $31.55.

- Suggested Positions -

Long PPC stock @ $31.55

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

Long 2015 Jan $35 call (PPC150117C35) entry $1.40*

09/22/14 new stop @ 30.45
09/20/14 new stop @ 29.85
09/16/14 triggered @ $31.55
*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

BEARISH Play Updates

AGCO Corp. - AGCO - close: 45.76 change: +0.24

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: +1.1%
Entry on September 18 at $46.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 976 thousand
New Positions: see below

09/23/14: Hmm... AGCO displayed relative strength (+0.5%) on a widespread down day for the market. Today's move almost looks like a one-day bullish reversal pattern on the daily chart.

I am not suggesting new positions at this time.

Earlier Comments: September 16, 2014:
Farmers do not like to buy new equipment when the price of their crops is falling.

According to the company website, "AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. We support more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts. Our products are available in more than 140 countries worldwide."

AGO management has noted weakness in multiple parts of the world this year. Their most earnings report was July 29th. They managed to beat bottom line estimates by 8 cents with a profit of $1.77 a share. Yet revenues dropped by almost 10% and missed the revenue estimates. To make matters worse AGCO management lowered their 2014 guidance by a significant margin. A few analysts expect the company's earnings to fall over the next 18 months.

Part of the challenge is the business climate for farmers. Falling crop prices affect farmer sentiment and they tend to spend less. Unfortunately for AGCO the U.S. has seen falling commodity prices for a while and it's getting worse. The recent rise in the dollar is forcing grain prices lower. Plus the American farmer is expecting a record-breaking harvest this year. They are expecting so much grain (corn and soybeans) that it will exceed the nation's ability to store it all. That doesn't bode well for farmer sentiment either.

Technically shares of AGCO are bearish. Investors have been selling the rallies since the peak in 2013. Back in July the stock broke down under a long-term, multi-year trend line of support. Now after a four-week consolidation near $48.00 the stock has started to breakdown again.

Tonight we're suggesting a trigger to open bearish positions at $46.25. We are not setting an exit target yet but I will note the point & figure chart is projecting at $40.00 target.

- Suggested Positions -

Short AGCO @ $46.25

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

Long NOV $45 PUT (AGCO141122P45) entry $1.25*

09/22/14 new stop @ 46.35
09/18/14 triggered @ 46.25
*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

CBS Corp. - CBS - close: 55.03 change: +0.41

Stop Loss: 56.35
Target(s): To Be Determined
Current Option Gain/Loss: - 0.5%
Entry on September 22 at $54.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.1 million
New Positions: see below

09/23/14: CBS also produced an oversold bounce with shares gaining +0.75%.

Currently our stop is at $56.35 but that might be a little too tight. Investors may want to consider using a stop loss just above the simple 10-dma, currently at $56.56.

Earlier Comments: September 20, 2014:
Television is a cutthroat business. Companies fight with affiliates, content providers, distribution rights, and more. They need to because traditional TV has been dying for years as more and more consumers forgo television for their computer, tablet, or even smartphone to get their media. Companies like Netflix also steal viewership. Granted the major networks have invested a lot to build up their own "second screen" viewership but it's unclear if the investment is paying off.

Who is CBS? According to the company website, "CBS Corporation (NYSE: CBS.A and CBS) is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world. The Company has businesses with origins that date back to the dawn of the broadcasting age as well as new ventures that operate on the leading edge of media. CBS owns the most-watched television network in the U.S. and one of the world's largest libraries of entertainment content, making its brand – "the Eye" – one of the most recognized in business. The Company's operations span virtually every field of media and entertainment, including cable, publishing, radio, local TV, film, outdoor advertising, and interactive and socially responsible media. CBS's businesses include CBS Television Network, The CW (a joint venture between CBS Corporation and Warner Bros. Entertainment), Showtime Networks, CBS Sports Network, TVGN (a joint venture between CBS Corporation and Lionsgate), Smithsonian Networks, Simon & Schuster, CBS Television Stations, CBS Radio, CBS Television Studios, CBS Global Distribution Group (CBS Studios International and CBS Television Distribution), CBS Interactive, CBS Consumer Products, CBS Home Entertainment, CBS Films and CBS EcoMedia."

Shares of CBS peaked near $68.00 back in early March 2014, marking what looks like the end of a strong two-year rally from its 2011 lows. The challenge seems to be revenues. The last couple of earnings reports have seen CBS beat Wall Street's EPS estimates. How they are doing that could be cost cutting or financial engineering. CBS has announced significant stock buybacks and accelerated repurchases in 2014. Yet revenues keep falling.

Back in May, when CBS reported its Q1 earnings, revenues for the quarter were down -4.6% from a year ago. When CBS reported its Q2 results in early August this year, revenues were down -5.4%. Management tried to soften the blow with news they were doubling their stock buyback from $3 billion to $6 billion. Yet the stock continues to fall. Investors are probably worried about the falling revenue numbers.

Technically shares of CBS are testing major support at its trend line of higher lows (see the weekly chart) and support near $55.00. It also appears that CBS has created a bearish head-and-shoulders pattern, albeit one with two right shoulders (which is not uncommon). Thus a breakdown under $55.00 would be very negative for the stock price.

The May 2014 intraday low was $55.01. Tonight I am suggesting a trigger to launch bearish positions at $54.75.

- Suggested Positions -

Short CBS stock @ $54.75

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

Long 2015 Jan $55 put (CBS150117P55) entry $3.40*

09/22/14 new stop @ $56.35
09/22/14 triggered @ 54.75
*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

Johnson Controls Inc. - JCI - close: 45.30 change: -0.40

Stop Loss: 47.10
Target(s): To Be Determined
Current Option Gain/Loss: + 0.2%
Entry on September 23 at $45.40
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: see below

09/23/14: Our new trade on JCI is now open. The stock gapped down at $45.48 and eventually hit our entry point at $45.40 before closing with a -0.87% decline. I don't see any changes from my prior comments.

Earlier Comments: September 22, 2014:
The auto part makers were a bright spot in the market for quite a while. Yet JCI has been underperforming its peers for weeks. Now the whole group has reversed sharply lower.

Investors might be growing cautious as earnings growth slows down. Investor's Business Daily noted that the forecast for some of these auto parts makers is getting softer.

Technically the group appears to be rolling over and JCI could be leading the way lower with a bearish breakdown under a long-term trend of higher lows. It doesn't help that JCI now has a "death cross" with the 50-dma falling under its 200-dma, which itself is starting to roll over.

Today's low was $45.66. We are suggesting a trigger for bearish positions at $45.40.

- Suggested Positions -

Short JCI stock @$45.40

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

Long 2015 Jan $45 PUT (JCI150117P45) entry $2.25

09/23/14 triggered @ $45.40
Option Format: symbol-year-month-day-call-strike

Mobile Mini, Inc. - MINI - close: 36.50 change: -0.31

Stop Loss: 37.85
Target(s): To Be Determined
Current Option Gain/Loss: + 5.9%
Entry on August 28 at $38.80
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 265 thousand
New Positions: see below

09/23/14: Shares of MINI fell toward its early August lows around $36.00 and bounced. I would not be surprised to see this bounce back toward $38.00 but our stop loss is at $37.85.

No new positions at this time.

Earlier Comments: August 27, 2014:
The mobile storage space might be facing some headwinds. MINI provides commercial storage, construction storage, residential storage, and mobile offices. According to the company's website, "Mobile Mini, Inc. is the world's leading provider of portable storage solutions through its total lease fleet of over 213,000 portable storage and office units with 135 locations in the United States, United Kingdom and Canada. Mobile Mini, Inc. went public in 1994 and trades on NASDAQ under the symbol MINI. Mobile Mini offers customers a wide range of portable storage and office products in varying lengths and widths with an assortment of differentiated features such as: proprietary security systems, multiple door options and 100 different configuration options."

Sales are growing but MINI is developing a trend of missing earnings or delivering lackluster results. MINI missed Wall Street's EPS estimates back in February and April. The latest earnings report was July 30th. Revenues were almost +10% from a year ago but earnings were down. MINI reported a 23-cent profit, which was in-line with estimates but down from 25 cents a year ago. Investors crushed the stock following the late July earnings report. MINI was already weak through most of July and then got hammered from $43 to under $38 on its earnings news.

The stock's long-term up trend might be in jeopardy. The company is not growing fast enough to justify its P/E above 40. The stock's oversold bounce from the post-earnings sell-off has stalled at technical resistance at the exponential 200-dma. Now it appears that MINI is beginning to roll over.

Today's low was $38.93. I'm suggesting a trigger at $38.80 to open bearish positions.

- Suggested Positions -

Short MINI stock @ $38.80

09/22/14 new stop @ 37.85
09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80

Transocean Ltd. - RIG - close: 33.43 change: -0.20

Stop Loss: 34.75
Target(s): To Be Determined
Current Option Gain/Loss: +12.5%
Entry on September 03 at $38.20
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: see below

09/23/14: The path of least resistance for the oil drillers is down. Pricing for rigs has fallen to the lowest level in three years. The industry is suffering from a significant drop off in demand. This has helped drag RIG's stock price to new 10-year lows.

While the fundamental story is bearish that does not mean RIG's stock price can't see a bounce. I'm worried that RIG is short-term oversold. It's really oversold if you look at the three-month drop from its June highs near $46.00. RIG is also nearing what could be short-term support at a two-year trend line of lower lows (best seen on a weekly chart).

Just because the fundamental story is bearish for RIG doesn't mean the share will go straight down (which is just about what RIG has done for the last four weeks).

Make sure you're happy with your stop loss placement.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

- Suggested Positions -

Short RIG @ $38.20

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

Long OCT $35 PUT (RIG141018P35) entry $0.27*

09/22/14 new stop @ 34.75
09/20/14 new stop @ 37.55
09/17/14 new stop @ 38.05
09/06/14 new stop @ 39.05
09/03/14 trade begins. RIG gaps higher at $38.20
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/02/14 remove the trigger ($37.25) and short RIG now at current levels.
Option Format: symbol-year-month-day-call-strike


Archer-Daniels-Midland - ADM - close: 50.77 change: -0.69

Stop Loss: 50.75
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Entry on September 11 at $50.75
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.3 million
New Positions: see below

09/23/14: ADM has followed the market lower with its own three-day decline. Shares hit our new stop loss at $50.75 today.

- Suggested Positions -

Closed ADM stock @ $50.75 exit $50.75 (+0.0%)

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

2015 JAN $50 call (ADM150117c50) entry $2.36* exit $2.34 (-0.8%)

09/23/14 stopped @ 50.75
09/20/14 new stop @ 50.75
09/18/14 new stop @ 49.75
09/11/14 triggered @ 50.75
*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


Hewlett-Packard Company - HPQ - close: 35.79 change: -0.68

Stop Loss: 35.90
Target(s): To Be Determined
Current Option Gain/Loss: -3.4%
Entry on September 19 at $37.17
Listed on September 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11.1 million
New Positions: see below

09/23/14: Ouch! HPQ underperformed the tech sector and the major indices with a -1.86% decline. Shares broke down under support near $36.00 and support at its simple 50-dma. Our stop was hit at $35.90.

- Suggested Positions -

Closed HPQ stock @ $37.17 exit $35.90 (-3.4%)

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

2015 Jan $40 call (HPQ150117C40) entry $0.83* exit $0.55** (-33.7%)

09/23/14 stopped out
09/19/14 triggered on gap higher at $37.17, entry point was $37.15
*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