Option Investor

Daily Newsletter, Monday, 9/29/2014

Table of Contents

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

Market Wrap

Global Fears Mount

by Thomas Hughes

Click here to email Thomas Hughes
Rising geopolitical fears are upstaging positive expectations for the future.


Despite steady economic data here at home and improving expectations for the future rising geopolitical fears were the focus of market attention today. To start the ISIL crisis and Ukraine/Russia standoff both have no end in sight. ISIL is still operational and able to gain ground along some fronts at least. Now their influence seems to be spreading as Taliban forces in Afghanistan begin to adopt similar tactics. The Russia/Ukraine situation may come to another head as the standoff has shifted to natural gas. This was always a concern and with the oncoming winter will be a problem for Ukrainians this winter. The deal brokered by the EU on behalf of the Ukraine last week may be rejected by the Ukrainian government due to disputes over price and the amount of debt owed by the Ukraine to Gazprom.

There were at least two new things to worry about today. The first and more important I think is the protesting going on in Hong Kong. It is estimated that more than 80,000 people turned out over the weekend to protest for democracy. Current leadership is willing to allow a democratic vote but wants to choose the candidates but the people aren't going for it. Today estimates say the number of people have grown and have shut down the city. The protests are being compared to the Tienamen Square during the 80's and the quest for independence from Britain in the 90's. Less of a concern but still noteworthy is the impending election in Brazil. The race has narrowed between a Socialist Party candidate and the incumbent leadership.

Market Statistics

Asian markets are best described as being mixed today. Japanese, mainland China and other indices were flat to positive while the Hong Kong based Hang Seng shed nearly 2%. European markets were down by roughly -0.75% by the end of their day after a mixed start.

Both regions also received some negative economic data as well. In China industrial profits fell by -0.6% while in Europe economic sentiment fell to a low not seen since last year, hurting inflation expectations for the region. All of this negativity took its toll on the US markets this morning, pushing early futures trading down by nearly -1%. Trading before the bell was not helped by the data released this morning and remained weak going into the open. New data shows that earnings and spending are up among consumers and in line with expectations. At the bell the indices moved sharply lower, as indicated, but found support within minutes of the open.

The indices moved steadily higher throughout the morning until hitting resistance just after 11:15AM. This coincided with 1980 on the SPX and 17,075 on the Dow Jones Industrials. The next hour saw the markets trade sideways, test resistance, and set up to move back toward the days lows. Afternoon trading was mixed. The indices retreated from the highs and then traded in a tight range about -0.25 and -0.50% below yesterday's close. Late in the day the NASDAQ and Dow Transports turned positive but only the transports were able to hold above break even into the close.

Economic Calendar

The Economy

Today's data was not bad, not good enough to support prices, but not bad. The only real negative I see was the downgrade of 3rd quarter GDP expectations by the NABE. The National Association of Business Economists lowered their target for GDP from 3.1% to 3.0% in their latest survey. This is only slightly below the consensus estimates around 3.2-3.5% going into September and not a very large revision. While modestly lower, this is still expansionary and the NABE survey also shows that economists expect growth to continue into the future. Fourth quarter estimates currently stand around 3.1%.

Personal Income and Spending were both released at 8:30AM and both rose. Personal income rose by 0.3%, as expected, while the spending component rose by 0.5%, slightly ahead of expectations. Private wages and salaries increased by over $30 billion in the month of August, nearly twice the previous month.

Pending Home Sales was reported at 10AM. The number of pending homes fell by -1% on an annualized basis, weaker than expected. Analysts had been expecting the number to remain unchanged or dip slightly at worst. I don't think this miss is too unexpected though since new, existing and starts all fell in August as well. On a year over year basis sales remain down by -2.2%. This is the fourth month of activity above 100 and a sign of above average pending sales. While a decline from the previous month, pending sales are still at the second highest level of 2014. An analyst for the National Association of Realtors says the decline is largely due to less sales of distressed properties and lower investment activity.

The Dallas Federal Reserve survey of manufacturing was released at 10:15. The survey came in strong at 17.6, more than double the previous reading of 6.8. All segments within the report showed gains with notable increases in capacity utilization, shipments and hours worked. The employment component remained steady at 10.6. Expectations for future growth slowed somewhat but remain “firmly positive” according to the report.

According to Moody's Survey of Business Confidence business outlook remains firmly up beat. According to Mark Zandi, Chief Economist, sentiment is positive across all sectors with a recent uptick in responses from manufacturers. More than half of respondents are hiring and lay off's remain low with expectations going into next year also strong.

The Oil Index

Oil began the trading day to the downside but geopolitical concerns lifted prices after the open. Rising supply levels and a lack of supply disruption were also overpowered by strong US consumer data. WTI gained about 1% by the close of the session with Brent gaining as well, but only marginally.

The Oil Index fell during the early part of today's trading but found support around 9:45, shortly after the broader market began to lift. The index traded in a smaller range today than it has in the past week or so and is now sitting just above another potential support line at 1,550. The index is extended beyond the long term trend line by about 2.5%, a move that resulted in a snap back earlier this year. The indicators are consistent with support along these levels; MACD is divergent and stochastic is trending near the bottom of the range but has not crossed the lower signal line. The long term trend may be broken but the index looks to have some longer term support near the current levels. Current support is at 1,550 while a rally will find potential resistance at 1,600 and then the bottom of the trend line around 1,625.

The Gold Index

Gold prices hovered just above break even today. Rising global fears underpinned prices while the market awaits more significant economic data later in the week. Spot prices for gold traded in a small range between $1216 and $1220 for most of the day, falling back from an earlier high just shy of $1225. This level has provided resistance multiple times over the past week of trading days and will likely be important moving forward. The fundamental picture is still bearish for gold but much of the interest rate fear may have been priced in already but that is only a conjecture.

The data later this week will be telling as up until now bullish economics have been bearish for gold. There is also the ECB meeting on Thursday to consider. If the bank increases QE or anything else to weaken the euro versus the dollar gold could move lower as well. The long term low in gold is $1192 on a close and $1185 on an intraday basis with $1200 looking like a likely place to find support, at least on a near term basis. A sustained/confirmed break below that could lead to a significant drop in gold prices while holding support may lead only to sideways market action and consolidation.

Based on some recent reading I did the long term outlook for gold can only be bullish, unless the globe just keeps printing money. Industry executives see peak gold as a nearby or currently happening event, something that will cause gold prices to rise. Industry analysts see “easily recoverable gold” as already found and a major technological advancement necessary in order to increase production levels long term.

The Gold Index fell today as low low gold prices are hurting earnings expectations for gold miners. The bulk of the senior miners are scheduled to report near the end of October. The average price for gold this quarter will be much lower than the previous but may not impact the bottom line as much as feared. The drop in oil prices will help to improve margins that have already been improving over the past few quarters and rising production levels may also help, at least in terms of revenue and EPS. The index is now within the $90-$92.50 range and at a new 9 month low. The indicators remain bullish, with a target of $90, but also indicate the move lower is running low on steam. Momentum is on the decline and stochastic remains oversold in the near and short terms. By no means does this indicate a bottom in the industry but it is consistent with anticipated support along the $90 level where a bounce could be expected. The index has bounced from this level twice this year with a resulting move of 20-25%. This is also a level in which long term investors may begin to come back into the sector.

In The News, Story Stocks and Earnings

Apple hit the news again today, no surprise, but not connected to the recent iPhone 6 launch or bend-gate. The EU is expected to announce the result of probes into tax dealings between the company and Ireland. The question is whether or not unfair advantage was given by Ireland and taken by Apple in terms of tax benefits. If found guilty the charges could result in billions in fines. As for the bend-gate scandal a study by Consumer Reports released Friday shows that the iPhone 6 and 6+ are no more “bendy” than other comparable phones. Shares of Apple opened lower today but climbed throughout the session to close above $100. This level is emerging as support and could remain active in the near term. The company is next scheduled to report in earnings at the end of October.

FactSet dramatically cut its estimates for 3rd quarter earnings growth this week. The current estimate is for growth among S&P 500 companies to average 4.7%, a little more than half the 8.9% projected at the end of the 2nd quarter and below the 6% estimated just a week or so ago. The telecom sector is still expected to lead and consumer discretionary is still expected to be the only sector to show negative growth, largely centered on the home builders. Of the 17 S&P 500 companies to have reported so far 13 have beaten the average expectation for earnings and 12 have beaten on sales.

Cal-Maine, though not on my calendar for some reason, reported earnings this morning. The company is the largest producer/provider of shell eggs and reported robust earnings growth from last year based on increased sales and higher prices for eggs. Higher consumer demand fueled much of the growth with over 18% of that in the specialty egg category. Lower feed costs also helped to improve margins, adding a boost to earnings. The company reported $1.14 per share for the recent quarter, compared to only $0.36 in the previous comparable quarter. Shares of the stock traded lower in line with the markets but found support along the short term moving average. The stock is trading just off an all time high with indicators convergent with higher prices. Support appears to be indicated around $85 with possible resistance at the current all time just high above $92.

The move lower at the open was broad. All ten S&P sectors were in the red until mid-morning when the utilities moved into the green and then later in the afternoon when technology followed suit. The biggest loser for the day was the materials sector with the financials not far behind. The XLB Materials Sector Spyder dropped about -0.40% today but found support at the short term moving average. The ETF created a doji with today's action but volume was not significant. This sector has been in an uptrend all year and this does not look to be stopping. The indicators are a little weak but still consistent with support around the $50 line. A drop below this could take the ETF down to $49 where stronger support exists. Short to long term the trend is up and appears to be holding.

The utilities sector was today's only real gainer. The techs moved into the green as well but only by a very small amount, barely above break even. The utilities Spyder XLU moved more than 0.60% higher today, matched by a 0.50% move in the Dow Jones Utility Average. The allure of yield in the face of today's sell off is likely the reason. The ETF moved up from support along $41.50 accompanied by a weak trend following signal on the stochastic. Momentum is bearish but has peaked, consistent with the early signal. The sector has been trading in a range between $40.50 and $42.50 for about 6 months and looks like it is heading up to the top of the range. Near term resistance is around $42.30 and the short term moving average.

Ford made a surprise announcement at its investor meeting today. The company announced that it expects to experience a loss next year in Europe, counter to previous expectations of at least breaking even and positive performance improvement earlier this year. Full year guidance was lowered by about $1 billion dollars along with guiding margins down to the low end of the range. The news was not taken well by investors who drove share prices down by over -7%. The stock is now down near the $15 level and a nine month low. The move is the biggest one I have ever seen in Ford and puts the stock at a level I was thinking would be attractive when looking at the chart last week.

The Indices

The market fell today and fell hard. Not quite as hard as last Thursday but hard enough to hit support and then bounce higher. Early lows were met by buyers who stepped in and drove prices higher, not quite back to break even but pretty close. Even with the bounce though, the indices are still below near resistance which could keep the markets contained until the data is released. The S&P 500 was the loss leader today, closing with a loss of -0.25%. The broad market index fell from the short term moving average and created a small doji in the process. This candle is caught between near term resistance and stronger, longer term support below around the 1960 level. The indicators are bearish but weakly so at this time; MACD and stochastic are both moving lower but without much strength. There could be further testing of support over the next few days with a possible break below that would meet up with the long term trend line.

The Dow Jones Industrial Average also lost about a quarter percent, -0.24%, in today's session. While not closing with a 100+ point move the index did move that much on an intraday basis. The blue chip index also fell from near term resistance and the short term moving average but was able to regain the moving average on the bounce. The indicators here are also a little bearish but even more weakly so, consistent with support along the 17,000 level. There may be further testing of support here as well but it looks like it will hold at this time. Near term risks are the various geopolitical concerns that are in the market as well as data outside the “Goldilocks” range.

The NASDAQ Composite was able to regain most of its losses today, closing down only -0.14%. The tech heavy index climbed upward from longer term support but fell shy of the short term moving average. The indicators are bearish and gaining some strength but still consistent with support over the short to long term. There may be some more testing of the 4,500 level but at this time it looks like it will hold. If broken there is additional, stronger, support about 100 points lower along the 4,400 level.

The Dow Jones Transportation Average was the only major index to move into the green and hold it today. The transports gained 0.16% today, after dipping below the short term moving average, coming short of near term resistance. The index is still above longer term, more critical, support and the long term trend line so I remain bullish long term. In the nearer terms the indicators are weak but bearish with a potential retest of today's support on the table. Current resistance is 8,500 and the previous all time high.

The indices moved lower today but they also found support. This is the third trading day in a row in which the indices moved down to a comparable longer term support and held there. Today they not only held, they bounced, but not enough to break above resistance. Today's move was driven by the basket full of international concerns yet tempered by a still positive forward looking view of the US economy and expectations for data later in the week. This week is another important one for the market in terms of data and could lead us into further correction or break us out of the current holding pattern the market is in.

Today's data was more of the same. Weaker, but not real weak, in one area while stronger, but too strong, in another. Yes, pending home sales fell but from the previous months year-to-date high and still at high levels. On the other hand the consumer is making more and spending more, in line with other data supportive of an improving labor market. This is much as the data has been all year. Steady improvement along all fronts but no one front taking all the credit, or making all the gains. A real nice scenario in my opinion as it allows the economy to stabilize and steadily grow.

Again, this week could be another one with volatility. The indices are at or near short term support, below near term resistance and trending up in the long term. The economics are steady and improving while geopolitical tensions on multiple fronts has the market on edge. There is a lot of data this week culminating with the NFP on Friday. Last month's reading was lighter than expected but was likely a one off event. All the other data, including any expectations for revision to last month's NFP, point to a much higher number. This month estimates are back over 200K and I am in agreement. Initial claims are trending at low levels, continuing claims are trending lower, total claims are trending lower, the employment component of today's Dallas Fed survey was positive as are the employment components of every other report I have read leading me to think that the jobs numbers this week will hold steady or show improvement across the board.

Until then, remember the trend!

Thomas Hughes

New Plays

Breaking Its Trading Range

by James Brown

Click here to email James Brown


Knowles Corp. - KN - close: 25.98 change: -1.35

Stop Loss: 28.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
Knowles Corp. has been around since 1946 but until recently was part of Dover Corp. (DOV). Knowles (KN) was spun off early this year.

What exactly does KN do? According to a company press release "Knowles Corporation is a market leader and global supplier of advanced micro-acoustic solutions and specialty components serving the mobile communications, consumer electronics, medical technology, military, aerospace and industrial markets. Knowles has a leading position in micro-electro-mechanical systems microphones, speakers and receivers which are used in smartphones, tablets and mobile handsets. Knowles is also a leading manufacturer of transducers used in hearing aids and other medical devices and has a strong position in oscillators (timing devices) and capacitor components which enable various types of communication."

KN has sales of more than $1 billion a year. Yet revenues have been falling. It seems to be getting worse. Back in April they reported a -1% drop in revenues. Their last quarterly report showed a -5.3% decline in revenues.

Technically the stock has been stuck in a $28.00-34.00 trading range for months. That changed in the last few days. KN has broken down below the bottom of the range. Its recent attempt at an oversold bounce already appears to be failing.

Tonight we're suggesting a trigger to open bearish positions at $25.75, which would be a new low. We are not setting an exit target tonight but I will note the point & figure chart is bearish and forecasting an $18 target.

Bear in mind that KN does have slightly elevated short interest at more than 10% of the 85 million share float. You may want to consider put options instead of shorting the stock.

Trigger @ $25.75

- Suggested Positions -

Short KN stock @ (trigger)

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

Buy the NOV $25 PUT (KN141122P25) current ask $1.20

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

Annotated Chart:

In Play Updates and Reviews

A Choppy Monday

by James Brown

Click here to email James Brown

Editor's Note:
Stocks started the week soft with a gap or spike down at the open. Yet most of the market managed to pare its losses.

BBY was closed this morning. SMCI hit our entry point.

Current Portfolio:

BULLISH Play Updates

Broadcom Corp. - BRCM - close: 40.65 change: +0.04

Stop Loss: 39.45
Target(s): To Be Determined
Current Option Gain/Loss: - 2.3%
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

09/29/14: BRCM managed to end the day in positive territory but the gain was so small it might as well have been unchanged.

Shares are holding support near $40.00 but it's struggling to see any real upward movement. I would hesitate to launch new positions here.

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

Interactive Brokers Group - IBKR - close: 25.02 change: -0.22

Stop Loss: 23.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 533 thousand
New Positions: Yes, see below

09/29/14: Monday turned out to be a pretty quiet session for shares of IBKR. The stock is hovering near the $25.00 level. I don't see any changes from the weekend newsletter's new play description.

Earlier Comments: September 27, 2014:
IBKR was founded 37 years ago and has grown its business to where it executes almost one million trades a day. Barron's has rated IBKR the third best online broker three years in a row.

According to a company press release, "Interactive Brokers Group, Inc., together with its subsidiaries, is an automated global electronic broker that specializes in catering to financial professionals by offering state-of-the-art trading technology, superior execution capabilities, worldwide electronic access, and sophisticated risk management tools at exceptionally low costs. The brokerage trading platform utilizes the same innovative technology as the Company's market making business, which specializes in routing orders and executing and processes trades in securities, futures, foreign exchange instruments, bonds and funds on more than 100 electronic exchanges and trading venues around the world."

"As a market maker, we provide liquidity at these marketplaces and, as a broker, we provide professional traders and investors with electronic access to stocks, options, futures, forex, bonds and mutual funds from a single IB Universal AccountSM. Employing proprietary software on a global communications network, Interactive Brokers Group continuously integrates its software with a growing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention."

This year has not seen any significant increase in trading volumes at the exchanges. If anything volume has been mediocre at best. Yet IBKR has consistently reported stronger year over year DARTs the last several months. DARTs stand for daily average revenue trades. IBKR is also reporting improvement in customer accounts created. I will point out that IBKR is seeing tougher year over year comparisons for its monthly DARTs as the rate of improvement seems to be slowing yet this trend hasn't stopped the stock price.

Shares of IBKR have been consolidating sideways for months. The consolidation started last December when IBKR's 2013 stalled. Since then IBKR has been slowly churning sideways but that changed earlier this month with a bullish breakout to new multi-year highs. The point & figure chart has turned very bullish with a long-term target near $48.50.

The market's recent weakness has pulled IBKR low enough to retest prior resistance as new support. Friday's bounce could be an entry point. We are suggesting a trigger to open bullish positions at $25.60.

Trigger @ $25.60

- Suggested Positions -

Buy IBKR stock @ (trigger)

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

Buy the 2015 Jan $26 call (IBKR150117c26)

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

Southwest Airlines - LUV - close: 33.67 change: -0.24

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: +1.3%
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

09/29/14: I'm a little worried about our LUV trade. Shares underperformed the market today with a -0.7% pullback. Another bounce in oil may have been the culprit. LUV looks like it will retest the $33.00 level soon.

I am not suggesting new positions.

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

Super Micro Computer, Inc. - SMCI - close: 29.40 change: +0.99

Stop Loss: 26.90
Target(s): To Be Determined
Current Option Gain/Loss: +0.9%
Entry on September 29 at $29.15
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 389 thousand
New Positions: see below

09/29/14: Bullish analyst coverage on SMCI this morning helped shares outperform the market. The stock gapped open instead of following the market with a gap down. By the closing bell SMCI was up +3.48%. Our trigger to launch bullish positions was hit at $29.15.

Earlier Comments: September 24, 2014:
A lot of investors are looking for growth and this company has got it!

With a market cap near $1 billion SMCI is still consider a small cap. According to a company press release they describe themselves as "Super Micro Computer, Inc. or Supermicro, a global leader in high-performance, high-efficiency server technology and innovation is a premier provider of end-to-end green computing solutions for HPC, Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data and Embedded Systems worldwide. Supermicro's advanced server Building Block Solutions offers a vast array of modular, interoperable components for building energy-efficient, application-optimized, computing solutions."

SMCI's last three earnings reports in a row have been better than expected. As a matter of fact the last three quarterly reports have seen SMCI beat analysts' estimates on both the top and bottom line. All three times SMCI has raised guidance.

SMCI's most recent earnings report was August 5th. Wall Street was looking for $0.39 a share on revenues of $396 million. SMCI delivered $0.40 a share. Revenues came in at $428.1 million. That's a +14.5% increase in sales from the prior quarter and a +32.8% increase from the same quarter a year ago. The company's GAAP net income was up +23.5% quarter over quarter and up +114.3% from a year ago. Gross margins improved both quarter over quarter and from a year ago.

SMCI's Chairman and CEO Charles Liang commented on their Q4 results (Aug 5th) saying "In the fourth quarter, we achieved $428.1 million revenue or 32.8% growth over last year which marked the third straight quarter of record revenues and keeps us on a path to reach our goal of achieving $2 billion annual run rate in the coming fiscal year 2015... with this strong revenue growth combined with operating expense leverage, we achieved record profits. We are looking forward to the new fiscal year and we have been preparing to be a strong market leader in the upcoming technology refresh cycle related to the Intel Grantley (Haswell new processor) launch."

Technically SMCI broke out from a three-month consolidation in mid September. The three-day pullback was mild and traders just bought the dip at its rising 10-dma. If this bounce continues we want to hop on board. I'm suggesting a trigger to open bullish positions at $29.15.

- Suggested Positions -

Long SMCI stock @ $29.15

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

Long 2015 Jan $30 call (SMCI150117c30) entry $2.40*

09/29/14 triggered @ 29.15
*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

BEARISH Play Updates

AGCO Corp. - AGCO - close: 45.98 change: -0.08

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: +0.6%
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

09/29/14: AGCO has spent the last few days churning sideways in the $45-46 zone. I'm starting to worry this might be a short-term bottom. No 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: 54.32 change: -0.24

Stop Loss: 56.35
Target(s): To Be Determined
Current Option Gain/Loss: + 0.8%
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

09/29/14: CBS spent much of Monday drifting sideways but eventually closed down -0.4%. It still looks like $55 and $56 should be overhead resistance.

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

Garmin Ltd. - GRMN - close: 51.87 change: +0.01

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

09/29/14: GRMN bounced back from its morning lows to close virtually unchanged. We are still on the sidelines with a suggested entry point at $49.75.

Earlier Comments: September 23, 2014:
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)

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

Johnson Controls Inc. - JCI - close: 44.39 change: -0.63

Stop Loss: 47.10
Target(s): To Be Determined
Current Option Gain/Loss: + 2.2%
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

09/29/14: JCI continues to underperform with a -1.39% decline. Closing on its lows for the session doesn't bode well for bulls tomorrow.

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: 35.91 change: -1.19

Stop Loss: 37.85
Target(s): To Be Determined
Current Option Gain/Loss: + 7.4%
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

09/29/14: It was a rough day for shares of MINI, which failed near Friday's highs and its 10-dma this morning. The stock plunged to a -3.2% decline and closed at new 2014 lows.

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

09/25/14 MINI's failure to drop today might be a warning sign.
09/22/14 new stop @ 37.85
09/06/14 new stop @ 40.10
08/28/14 triggered @ 38.80

Transocean Ltd. - RIG - close: 32.59 change: -0.68

Stop Loss: 34.50
Target(s): To Be Determined
Current Option Gain/Loss: +14.7%
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

09/29/14: RIG dropped at the open and spent the rest of Monday drifting sideways in a narrow range.

More conservative investors will want to consider locking in potential gains now.

I am not suggesting new positions at this time.

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*

09/27/14 investors may want to take some profits now
09/25/14 new stop @ 34.50
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

The ExOne Company - XONE - close: 22.00 change: -0.71

Stop Loss: 25.85
Target(s): To Be Determined
Current Option Gain/Loss: + 1.1%
Entry on September 29 at $22.25
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 523 thousand
New Positions: see below

09/29/14: Our new bearish play on XONE is off to a good start. Shares gapped down at $22.25 and underperformed the broader market with a -3.1% decline. I don't see any changes from the weekend newsletter's new play description below.

Earlier Comments: September 27, 2014:
Stock prices are supposed to be driven by corporate earnings. It's tough to be bullish when a company continues to miss analyst expectations.

XONE is considered part of the industrial goods sector. They make 3D printers and associated materials. According to a company press release, "ExOne is a global provider of 3D printing machines and printed products, materials and other services to industrial customers. ExOne's business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for its customers using its in-house 3D printing machines"..."ExOne also supplies the associated materials, including consumables and replacement parts, and other services, including training and technical support, necessary for purchasers of its machines to print products."

Unfortunately for the bulls XONE has developed a pattern of missing earnings estimates. They missed estimates back in March, in May, and again in August this year. The most recent report was August 13th. Wall Street expected a loss of 18 cents a share. XONE delivered a loss of 32 cents. Revenues rose +21% to $11.2 million but that failed to meet expectations. XONE's gross profit plunged from $4.2 million a year ago to $2.5 million thanks to crashing gross margins.

Shares of XONE are now at record lows. The company held its IPO back February 2013. The IPO price was $18.00 a share and the first day of trading saw XONE gap open at $23.66 and close up at $26.52. Today XONE is below its opening trade and might be headed for $18.00.

I do consider this an aggressive, higher-risk trade because there is already a lot of short interest. The most recent data listed short interest at 52.8% of the very small 8.7 million share float. That significantly raises the risk of a short squeeze. Therefore traders may want to limit their positions or just choose the put options to limit risk.

Tonight we are suggesting bearish positions on Monday morning (no trigger).

*Higher Risk Trade: consider smaller positions* Suggested Positions -

Short XONE stock @ $22.25

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

Long NOV $20 PUT (XONE141122P20) entry $1.40*

09/29/14 trade begins. XONE gaps down at $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


Best Buy Co. - BBY - close: 33.65 change: +0.71

Stop Loss: 32.75
Target(s): To Be Determined
Current Option Gain/Loss: +0.4%
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

09/29/14: The stock market's widespread weakness this morning pushed BBY to gap down at $32.72. Shares dipped to their 30-dma and bounced near $32.50. By the closing bell BBY was showing relative strength with a +2.1% gain and a bullish engulfing candlestick reversal pattern.

Unfortunately we had already decided to exit our BBY trade this morning at the open. I'm starting to wonder if we were too quick to bail out.

- Suggested Positions -

Closed BBY stock @ $32.60 exit $32.72 (+0.4%)

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

2015 JAN $35 call (BBY150117c35) entry $1.48* exit $1.45** (-2.0%)

09/29/14 planned exit this morning
09/27/14 prepare to exit on Monday
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