Option Investor

Daily Newsletter, Tuesday, 9/30/2014

Table of Contents

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

Market Wrap

Russell Closes on the Lows

by Jim Brown

Click here to email Jim Brown

The Russell 2000 hit a four-month low at the close dragging the other indexes lower.

Market Statistics

The cartoon below from Hedgeye says it all. The Russell 2000 is crashing and dragging the rest of the markets with it. The Russell is now down -8% since its 1,208 high close on July 3rd. The index declined -1.45% today alone or -16 points.

More than 50% of the small caps and Nasdaq stocks are already in a bear market with individual declines of -20% or more. Small cap declines are actually worsening. This will be resolved one of two ways. Either the big caps will eventually catch the same decline virus and race to catch up OR the Russell will hit the 10% correction level at 1,087 and dip buyers will show up in volume and reverse the trend.

The S&P-100 big cap index ($OEX) is down only -1.9% from its September 18th closing high at 2,011. The Nasdaq 100 big cap index ($NDX) is down only -1.3% from its high close at 4,103. We definitely have a wide divergence between large and small stocks and the small and midcap stocks (-5.1%) make up the majority of the market. Traders and market reporters may focus on the Dow and S&P but even at 500 stocks in the S&P that is only 11% of the broader market where the Russell 2000 is 45% of the market.

The advance-decline line on the small caps is plunging and shows no signs of improving. The MACD is in full retreat and fully bearish.

On the economic front there was some dramatic news. The Consumer Confidence headline number declined from 93.4 in August to 86.0 in September. This decline erased all the gains from Q3 and confidence is at the lowest level since May. The major cause for the decline was a sudden turnabout in the outlook for jobs. Fewer respondents said jobs were plentiful and more respondents said jobs were hard to get.

Both condition components declined sharply but the expectations component declined the worst. The present conditions component declined from 93.9 to 89.4. The expectations component declined from 93.1 to 83.7. That is a huge drop of nearly -10 points.

Those planning on buying a home declined from 5.3% to 4.9%. Auto buyers declined from 13.5% to 12.0%. Appliance buyers rose from 45.7% to 51.3%. The drop in the home buyers is probably related to the seasonal swings. Kids are back in school and nobody wants to move.

Those who thought jobs were plentiful declined from 17.6% to 15.1%. Those who thought jobs were hard to get rose only slightly from 30.0 to 30.1 but look at the total percentage compared to those who thought jobs were plentiful. Twice as many think they are hard to get.

Conflicts in Ukraine and the Middle East are probably weighing on confidence but there are no specific questions in the survey related to geopolitical concerns.

The job concerns could be a signal the payroll numbers this week may not be very strong. However, with more than one million people being hired for the holiday shopping season the next two months should show gains.

The Intuit Small Business Employment Index was basically unchanged in August. The index rose only +0.01% but compensation rose +0.59%. The index showed that employers were not hiring additional workers but to compensate the existing workers were working longer hours and that boosted the compensation metric.

Average monthly compensation rose to $2,791 or $33,500 per year. Average worker hours rose +0.6% to 25.3 hours per week.

Case Shiller home prices rose +6.7% in July and the lowest rate of gain since late 2012. This compares to the +8.1% gain in June. The mortgage financing problem along with declining wages in the U.S. are impacting consumers ability to buy homes. This reduces competition for existing inventory and prices decline.

The Texas Service Sector Outlook Survey rose from 22.8 in August to 27.5 in September. The revenue component was the biggest driver with a rise from 21.0 to 26.9. However, the employment component declined from 13.2 to 11.9. Are we seeing a trend here with the employment components in all the reports weakening?

On the positive side the retail sales sub-index rose from 14.9 to 35.5 and the highest level in seven years. The retail labor market index declined -4.9 points to 10.8. The Texas recovery is still progressing nicely compared to the rest of the country. Cheap labor, cheap real estate and a business friendly climate is attracting businesses from all over the country where taxes and wages are obscene. If only Texas could do something about the weather. I lived in Dallas for more than 40 years and the summers are brutal.

The Eurozone inflation number this morning was +0.3% and in line with market forecasts and well below the ECB target of 2.0%. As Europe moves closer to deflation the potential for the ECB to move to full-blown QE is increasing. Having the ECB buy government bonds would still be difficult with Germany dead set against it but fear of deflation is a powerful motivating factor. The ECB meets on Thursday to consider action and there is likely to be something new in the post meeting announcement and press conference.

The ADP Employment report is due out on Wednesday and expectations are for a decline from 204,000 to 198,000 jobs. There are whisper numbers in the 175,000 range. The Nonfarm Payrolls on Friday are expected to rise from 142,000 to 203,000. We could have a downside surprise here with the declines in the employment components from other reports. This is the 800 pound gorilla that investors may be trying to avoid by moving to the sidelines ahead of the report.

The dollar index continues to rise to new four-year highs. This is crushing commodity prices and will lower inflation in the USA. However, it is going to be a big worry to the companies that do business overseas. More than 50% of the S&P earnings come from overseas and all of our products just became more expensive. Exports will slow but imports should pickup because our dollar will buy more.

Crude prices imploded on the rising dollar, slowing European economy, falling consumer confidence, weak economics from China and rising OPEC production. Libya, Saudi Arabia, Angola, Nigeria and Iraq all increased production in September. WTI declined -$3.40 for the day. However, it is common for hedge funds to pull money out of commodities at the end of each quarter. This sharp decline in WTI could have been just some liquidation by a couple major funds. With the dollar and production rising it was a good day to exit on the headlines if you had bought the prior dip in mid-September. The $90 level is very strong support and although there are some analysts projecting a decline to $85 any dip to that level would be brief. OPEC has already said they will probably cut production quotas for 2015 because of the additional supply and decline in prices.

Brent crude declined another $2.45 to $94.80 and that is below the comfort level for OPEC members. Saudi Arabia and others need oil above $95 in order to continue their budgets and pay for their social programs to keep the Arab Spring at bay. Brent hit $113 in June and it has declined nearly $20 in almost a straight line. This means gasoline will be cheaper in the coming weeks and could easily move under $3 nationwide.

In stock news Ebay reversed the position it has held all year and agreed to spin out PayPal as a separate company in 2015. EBAY shares rallied $4 on the news for the biggest gain in two years.

The Ebay CEO has said in multiple interviews over the last year that PayPal and Ebay were better together than they would be separately. This was in response to an attack by Carl Icahn to try and split the company. Icahn never gave up and apparently he has convinced management to take the plunge.

The spinoff opens several doors for M&A. The new Apple Pay process is going to impact Google Wallet and Amazon's payment system. It is entirely possible that PayPal becomes an immediate acquisition target by either of those entities in an effort to offset the impact from Apple Pay. PayPal is entrenched in the online retail world and especially for Amazon it would be easy for them to integrate Paypal into the Amazon system.

Ebay could also become an acquisition target. With their $70 billion market cap today cut in half or even by two-thirds after the PayPal exit they could also become M&A bait. Alibaba could snap them up like a mid afternoon snack and immediately Alibaba has a huge foothold in America and numerous other countries.

PayPal will be free to establish relationships with other companies that were reluctant to embrace the Paypal system since they were part of Ebay. Splitting off removes the Ebay stigma from PayPal.

Several analysts were talking down Ebay after today's spike saying there was nothing else they could do to increase their value. Meanwhile others like Dan Loeb were racing to acquire a large stake because they think the PayPal spinoff will be huge and unlock significant value both in the spinoff and in the potential acquisition binge that could follow it.

I am with Loeb. I think spinning PayPal off will unlock a huge amount of value. Once it hits the public market the stock could move significantly higher. It is a sure bet that at least one post spin entity and probably both will be acquired within 12 months for a hefty premium.

FedEx (FDX) said it was going to buy back 15 million shares. The company must be feeling prosperous even after buying new trucks, planes and facilities to increase capacity. FDX and UPS also got a boost from China when Premier Li pledged to "open up" and move towards internationalizing the country's package delivery business. The government is embracing online shopping as a way to increase internal consumption and let the country rely less on exports.

The State Council chaired by Premier Li posted a statement late Wednesday saying the parcel delivery business will be "fully opened-up" to "create a fair and competitive business environment in which domestic and foreign-financed enterprises receive equal treatment."

Currently e-commerce sites use so-called "kuaidi" couriers to move products inside China. UPS and FDX are licensed to serve only a few limited areas. That will be expanded to nationwide. Li said the licensing requirements would be "simplified" to promote "the orderly and healthy development of the industry." Since January 1st more than 8.1 billion packages have been delivered in China according to government data. Most packages were delivered by Shentong, YTO, SF Express and ZTO. Li said that mergers with existing domestic shippers would be encouraged to improve industry efficiency. An underlying goal of the liberalization is "to create conditions that stimulate consumption by supporting businesses," FDX has been operating on a limited basis in China since 2003 and UPS since 2005.

Apple (AAPL) shares recovered from last Thursday's drop after China approved the iPhone 6 for sale in China. Sales will begin on October 17th. Reportedly Apple had to make plenty of promises and disclose numerous technical details in order to get the phone approved. China's approval cited "national security concerns" as the reason for the delay in approval. Analysts expect between 12-16 million will be sold in Q4 in China.

Despite positive gains today Apple shares are still experiencing post announcement weakness.

We are rapidly moving towards the Q3 earnings cycle and we are in the period where earnings warnings are plentiful. Today those were limited and mostly positive.

Schnitzer Steel (SCHN) said it expected earnings of 28-32 cents per share and analysts were looking for 20 cents. Shares of SCHN rallied +5.6% after a month long decline.

1-800-Flowers (FLWS) said it now expects earnings of 45-50 cents with $1.1 billion in revenue compared to prior estimates of 29 cents on $803 million in revenue. Shares were unchanged on the day.

Synacor (SYNC) reaffirmed estimates for Q3 revenue of $25-$26 million and full year of $100-$103 million. This was in line with consensus estimates. Shares were flat.

Intuit (INTU) said it was expecting a loss of 20-21 cents on revenue of $620 million. This was in line with consensus estimates. Shares were flat.

Moody's (MCO) now expects $3.95 to $4.05 per share for 2014 compared to consensus estimates of $3.98. Shares were up +39 cents.

Westport Innovations (WPRT) warned that 2014 revenue would now be $130-$140 million compared to prior forecasts of $175-$185 million. Consensus estimates were for $178.7 million. Shares declined -2.5% on the news to punctuate a two-month decline.

American Science and Engineering (ASEI) warned it now expects a loss for the quarter compared to analyst estimates for a 19 cent gain. Shares lost -2.5%.

Walgreen (WAG) reported earnings that were in line at 74 cents on sales that rose +6.2% to $19.1 billion. The company said margin pressures from increased Medicare and Medicaid prescriptions was being addressed they were still able to increase their market share by 30 basis points to 19%. Shares were down fractionally on the news.


This market analysis is going to be short tonight because nothing has changed. The Russell is in free fall and the other indexes could not capitalize on a morning rally that lifted the Dow +130 points off its lows to top at 17,145 at 11:30. That went from a -55 point decline to +73 point gain but the gains did not stick with the Dow closing down -28 points. That was a triple digit move up and a triple digit move down in the space of 2.5 hours. There is nothing bullish about that.

The S&P traded in a 16 point range between 1969 (-9) and 1985 (+7) and then closed near the bottom of the range at 1972 after a -16 point slide intraday. For the last four days the S&P has hovered around the 1970 price magnet but the lack of a sustainable rebound is troubling. Bulls will point to the 1969 level and claim support is holding but without a move over 1985 soon the bears will eventually become cocky and start piling on in expectations of a support break.

Only 39.8% of the S&P stocks are trading over their 50-day averages.

The Dow has tested support at 16,950 several times and each time it has held. Unfortunately it also tested resistance at 17,150 and that has been rock solid as well. The Dow closed near the bottom of its 128 point range at 17,042. For today the 17,000 interim support level did hold but the lack of a sustainable bounce suggests it will be tested again.

The Nasdaq Composite closed at 4,493 and near the low for the day. This is very close to the six-week low at 4,464 that was set at the open on Monday. The Nasdaq chart is bearish and it appears to be setting up for a lower low in the coming days.

However, the Nasdaq 100 ($NDX) continues to cheat the bears. The index has come within a few points of testing support at 4,000 several times but always rebounds immediately. I called the NDX the canary in the market coal mine in the weekend commentary with the 4,000 level critical support. As long as that level holds the rest of the Nasdaq is not likely to slip much lower. If 4,000 breaks that would signal a change in sentiment and selling could accelerate across all the indexes.

The advance-decline line on the Nasdaq is also in full retreat. This is extremely bearish.

The Russell 2000 is in free fall. Support at 1110 broke and the index appears to be targeting 1096 and 1082 with 1087 as the 10% correction level. As long as the Russell is leading the markets lower the outlook is the same. I do expect at least a trading bounce at 1096. The R2K has now broken below the common averages including the 300-day at 1126.

Futures were down -6 earlier tonight on news of the first Ebola case in the USA. A man that traveled through Africa a couple weeks ago came down with symptoms and was admitted to Presbyterian Hospital in Dallas. He tested positive and now they are rounding up everyone he came into contact with over the last couple of weeks. The disease can remain dormant in an incubation period for up to 21 days. This means dozens of people can be infected before the carrier realizes he has the disease. Fortunately it requires physical contact with the carrier and the exchange of bodily fluids. While that sounds easy to avoid a sneeze can infect a room full of people. Improper sanitary methods can allow common items to be touched with infected hands. I am not a doctor but I don't think the disease has much of a chance of spreading in the USA. We can be proactive whenever it is discovered and we have the best medical science in the world.

There have been reports of suspected terrorists trying to extract blood and liquids from corpses and accumulating bloody clothes and linens. Let your imagination run wild with those possibilities.

I remain bearish until proven wrong or the Russell hits 1087. Any bounce from that level will have to be watched carefully for traction. I remain confused as to why the big caps are clinging so stubbornly to the high ground. That would seem to suggest that a bounce by the Russell would immediately power the big caps back to the highs. Just remember that QE ends in 30 days and every QE end we have had to date has produced a market decline even when we knew it was coming.

After today's decline from the highs I am less confident a short squeeze is forthcoming.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Medical Research

by James Brown

Click here to email James Brown


Fluidigm Corp. - FLDM - close: 24.50 change: -0.97

Stop Loss: 26.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 290 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
FLDM is in the healthcare sector. The company makes microfluidic systems. It's part of the medical laboratories and research industry. The company was founded in 1999.

The website describes the company as "Fluidigm develops, manufactures, and markets life science analytical and preparatory systems for growth markets such as single-cell biology and production genomics. We sell to leading academic institutions, clinical laboratories, and pharmaceutical, biotechnology, and agricultural biotechnology companies worldwide. Our systems are based on proprietary microfluidics and multi-parameter mass cytometry technology, and are designed to significantly simplify experimental workflow, increase throughput, and reduce costs, while providing excellent data quality. Fluidigm products are provided for Research Use Only. Not for use in diagnostic procedures."

The stock looks like a momentum name that has lost its mojo. 2013 was an incredible year for the stock with a rally from the $15 area to almost $40. FLDM continued to push higher in the first quarter of 2014 and almost hit $50. Then someone yanked the rug out from beneath the stock in late March.

If you recall March was rough for high-growth and high-beta names in general. Once FLDM broke down in March the path of least resistance has been down with investors selling every major rally at resistance.

The company had a pretty good earnings report in May. Yet an earnings beat and raised guidance back in May failed to inspire any new buying. Instead shares sold off sharply. Their most recent earnings report in July showed a +57% surge in revenues but that failed to meet Wall Street's estimates. The company is still losing money on a net income basis.

Now FLDM is breaking down under significant support near $25.00. The next major support level is $20.00. The Point & Figure chart is very bearish and forecasting a long-term target near $10.00.

Traders could launch positions now. We are suggesting a trigger to open bearish positions at $24.35. You may want to consider using options. The most recent data listed short interest at 9.5% of the small 26.2 million share float.

Trigger @ $24.35

- Suggested Positions -

Short FLDM stock @ (trigger)

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

Buy the NOV $25 PUT (FLDM141122P25) current ask $2.60

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

Annotated Chart:

Point and Figure chart:

In Play Updates and Reviews

Stocks Fade Lower Again

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered another widespread decline although losses were relatively mild for the big cap indices. It was a different story for the small caps, which accelerated lower.

We have updated a handful of stop losses tonight.

AGCO hit our stop loss. GRMN has been removed. KN hit our entry trigger.

Current Portfolio:

BULLISH Play Updates

Broadcom Corp. - BRCM - close: 40.42 change: -0.23

Stop Loss: 39.45
Target(s): To Be Determined
Current Option Gain/Loss: - 2.8%
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

09/30/14: Shares of BRCM held up reasonably well considering the market's widespread decline on Tuesday. If the market continues to sink tomorrow I would expect BRCM to dip toward $40.00 and its simple 30-dma. 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: 24.95 change: -0.07

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

09/30/14: IBKR also did a decent job weathering the market's weakness today. Shares continue to consolidate sideways 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: 33.77 change: +0.10

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: +1.6%
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

09/30/14: A reversal lower in crude oil today could have provided a boost for the airline stocks. However, the intraday gains in LUV did reverse near its 10-dma. We could still see it test short-term support near $33.00 soon. News that the U.S. has its first official case of the Ebola virus is a potential warning sign for the airlines. Should we see a spread of the virus it could impact travel as fearful consumers choose to travel less.

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: 29.42 change: +0.02

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

09/30/14: SMCI's rally continued this morning but shares ran out of steam near round-number resistance at $30.00. SMCI pared its gains back to virtually unchanged on the day. I would look for a dip toward the 10-dma near $28.50 if the market accelerates lower tomorrow.

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

CBS Corp. - CBS - close: 53.50 change: -0.82

Stop Loss: 55.65
Target(s): To Be Determined
Current Option Gain/Loss: + 2.3%
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

09/30/14: After consolidating sideways the last couple of days the sell-off in CBS resumed. Shares lost -1.5% and closed at new 2014 lows.

Please note our new stop at $55.65.

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*

09/30/14 new stop @ 55.65
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: 44.00 change: -0.63

Stop Loss: 46.05
Target(s): To Be Determined
Current Option Gain/Loss: + 3.1%
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

09/30/14: This morning JCI announced it would sell its global work place solutions business (i.e. building management) as the company tries to focus on its "core" businesses. The announcement didn't do much for the share price, which fell -0.8% today.

We are moving the stop loss down to $46.05.

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

09/30/14 new stop @ 46.05
09/23/14 triggered @ $45.40
Option Format: symbol-year-month-day-call-strike

Knowles Corp. - KN - close: 26.50 change: +0.52

Stop Loss: 28.05
Target(s): To Be Determined
Current Option Gain/Loss: -2.9%
Entry on September 30 at $25.75
Listed on September 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

09/30/14: KN spiked to a new low this morning and then bounced. Shares outperformed the market with a +2.0% gain. There was no news behind the rally. Unfortunately the morning drop was low enough to hit our suggested entry point at $25.75. I would wait for a new low before launching new bearish positions.

Earlier Comments: September 29, 2014:
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.

- Suggested Positions -

Short KN stock @ $25.75

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

Long NOV $25 PUT (KN141122P25) entry $1.20*

09/30/14 triggered @ 25.75
*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

Mobile Mini, Inc. - MINI - close: 34.97 change: -0.94

Stop Loss: 37.30
Target(s): To Be Determined
Current Option Gain/Loss: + 9.9%
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

09/30/14: MINI has reaffirmed yesterday's breakdown under potential support near $36.00 with a -2.6% drop today. Tonight we're adjusting the stop loss down to $37.30, just above yesterday's highs.

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

09/30/14 new stop @ 37.30
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: 31.97 change: -0.62

Stop Loss: 33.75
Target(s): To Be Determined
Current Option Gain/Loss: +16.3%
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

09/30/14: Another day another new low for RIG. Eventually this stock is going to bounce. We might want to consider exiting positions in the $31.00-30.00 zone since $30.00 could be round-number support.

Tonight we will adjust the stop loss down to $33.75.

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*

09/30/14 new stop @ 33.75
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: 20.89 change: -1.11

Stop Loss: 25.05
Target(s): To Be Determined
Current Option Gain/Loss: + 6.1%
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

09/30/14: XONE continues to underperform the market and lost another -5% today. I want to caution readers that the $20.00 level is potential round-number support so XONE might try and bounce near that area.

Tonight I'm moving our stop loss to $25.05. More conservative traders may want to use a lower stop.

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*

09/30/14 new stop @ 25.05
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


AGCO Corp. - AGCO - close: 45.46 change: -0.52

Stop Loss: 46.35
Target(s): To Be Determined
Current Option Gain/Loss: -0.2%
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

09/30/14: It was another bearish day for AGCO with an intraday reversal lower and a -1.1% decline. Unfortunately the early morning rally was enough to hit our stop loss at $46.35.

Our play is closed but readers may want to consider new bearish positions with a drop under $45.00.

- Suggested Positions -

Short AGCO @ $46.25 closed $46.35 (-0.2%)

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

NOV $45 PUT (AGCO141122P45) entry $1.25* exit $1.10** (-12.0%)

09/30/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
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


Garmin Ltd. - GRMN - close: 51.99 change: +0.12

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: see below

09/30/14: GRMN is not cooperating. The stock didn't move much today but it did not participate in the market's weakness either.

The overall trend for GRMN looks bearish but our trigger to open positions has not been hit yet. We're electing to remove GRMN as a candidate for now but I would keep this stock on your watch list for a breakdown under $50.00.

Trade did not open.

09/30/14 removed from the newsletter, suggested entry was $49.75