Option Investor

Daily Newsletter, Tuesday, 10/21/2014

Table of Contents

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

Market Wrap

Rumor Rally

by Jim Brown

Click here to email Jim Brown

A report out of Europe claimed the ECB was planning on buying corporate bonds as part of their coming QE program and the markets rocketed higher.

Market Statistics

While the rumor was unconfirmed and flatly denied by other sources it did manage to lift the S&P futures out of a -15 point decline overnight and move them solidly positive before the open. China's GDP came in at 7.3% and the lowest level since the financial crisis and with the exception of the crisis the lowest level in decades. However, it was slightly above the 7.2% consensus so the Asian markets were mixed rather than in crash mode.

The Dow suffered from two more earnings misses from Dow components and IBM was down hard again but once the short covering began at the open those three components were unable to drag the index down.

On the economic front the Existing Home Sales for September came in stronger than expected at an annualized rate of 5.17 million compared to estimates for 5.10 million. Sales rose in 3 of the 4 regions. The Midwest declined -5.6% with the Northeast up +1.5%, South +5.0% and West +7.1%. Those are very strong numbers for this time of year. Normally people want to be moved in before Labor Day so the kids can start the year at their new school.

Inventories of single-family homes declined -1.3% to 2.3 million but still up +6% from the prior September. This equates to a 5.3 month supply. Home prices were up +5.6% over year ago levels with the average sales price of $209,700. The biggest negative in the data was the lack of first time homebuyers, which is at lows dating back to 2010. People can't pass the credit check and come up with enough down payment to overcome objections.

The Regional and State Employment for September was a non-event. Employment rates rose only marginally in 38 states and declined in 10 states. This report was ignored.

The calendar for tomorrow is equally uninspiring with only the Consumer Price Index as a headline. Consensus estimates are for a rise of +0.1% but I would not be surprised to see it flat or negative because of the drop in commodity prices.

The reports for the rest of the week are not normally market movers. All eyes are on the FOMC meeting next week and the potential end of QE.

Dow component McDonalds (MCD) reported earnings that declined -30% to $1.09 per share, down from $1.52 in the year ago quarter. Revenue declined -5% to $6.9 billion with U.S. same store sales falling -3.3%. The company blamed a lack of participation by millennials in the USA, store closures in Russia in retaliation for the sanctions and the meat supplier in China for the weak performance. Still, operating income in the U.S. fell -10% as new marketing initiatives failed. During the quarter it was found that Shanghai Husi Food Co, a supplier to McDonalds and others, was mixing fresh meat with expired meat and selling it as fresh. The discovery prompted yet another round of fast food avoidance in China. Shares declined -$1.85 at the open but recovered to end with a -0.58 loss.

Coca Cola (KO) shares declined -6% after reporting slower sales of soda. Overall global sales rose +1% thanks to noncarbonated beverages. In the U.S. sales of both soda and non-carbonated beverages declined. Recently Pepsi also reported a -1.5% decline in soda volume. Apparently taking the soda machines out of all the schools is actually having an impact. Adult Americans have been cutting back on soft drinks for the last decade.

Coke said it was focusing on smaller cans to boost profits. Unfortunately those profits fell -14% to 53 cents, which beat estimates by a penny but revenue of $11.98 billion missed forecasts of $12.15 billion.

Dow component IBM continued its decline with another -$6 drop to make it a loss of -$19 for the week. The -6 points is the equivalent of -48 Dow points but you could not tell it from the +215 gain on the Dow today. IBM was forced to cancel its forecast for $20 in profits in 2015 because of a rapidly changing technology environment from what they had been used to for the last decade. IBM is also being hampered by slowing hardware sales to Asia as a result of Snowden's NSA admissions. China is afraid IBM hardware has built in NSA entry points for future snooping.

Harley Davidson (HOG) shares rallied +7% after reporting earnings of 69 cents that beat estimates of 59 cents. Retail sales at dealers rose +3.4% in the USA. Globally they sold 73,217 motorcycles compared to 70,517 in the year ago quarter. Sales in Q3 rebounded somewhat after the cold weather in Q2 depressed spring sales.

Harley is introducing new models including an electric version that seems to be going over well enough for them to expand production. Management reaffirmed full year guidance and that helped boost the stock price.

Despite the increased orders for Hellfire missiles and other military equipment for use in Iraq and Syria, Lockheed Martin (LMT) guided for a decline in 2015 sales and reported lower than expected revenue for the second time this year. The company said 2015 revenues would decline by low single digits compared to 2014. In Q3 revenue declined -2% to $11.1 billion and below estimates for $11.31 billion. Earnings rose +5% to $2.76 compared to consensus estimates of $2.71. Despite the lowered 2015 guidance the company raised full year 2014 guidance to the higher end of the prior range. Revenue is expected to decline slightly from $45.4 billion to $45.0 billion but earnings are expected to rise from $9.58 to $11.15. Shares declined -$3 on the news but held above recent support.

After the bell VMware (VMW) reported adjusted earnings of 87 cents that beat estimates of 83 cents. Revenue rose +18% to $1.52 billion and also beating estimates of $1.50 billion. License revenue rose +13% with long term agreements including maintenance and support accounting for more than 40% of their revenue. EMC owns 80% of VMW and activist investor Elliott Management has been urging them to sell the unit. EMC is balking and claims it will continue to maintain its ownership. Shares were down $1 in afterhours. EMC reports earnings on Wednesday.

Yahoo (YHOO) reported earnings after the close of $6.70 per share or $6.77 billion. However, if you strip out the sale of their Alibaba shares the earnings declined to 52 cents or $543 million. Revenue from display ads declined -6% to $396 million. Overall ad sales rose +1% to $1.1 billion. The problem with these earnings is that they can no longer hide behind the Alibaba sale and future earnings will be based on their declining business model. CEO Marissa Mayer is going to have to do something dramatic with the $6 billion they got from the Alibaba sale or she is going to be looking for another job very soon.

The activist investors are starting to circle like hungry sharks and if Yahoo continues to flounder in its business model there will be plenty of investors lobbying to break up the company.

Yahoo shares rose $1 in afterhours.

On the earnings calendar for tomorrow two more Dow components will report. Those are Boeing and AT&T. The big events will be on Thursday with AMZN, CAT, GM, MSFT and MMM.

Earnings guidance is still slightly better than normal with negative guidance 3:2 over positive guidance. Normal is 2:1 negative over positive. However, inline guidance is growing rapidly. Apparently many companies are electing to stick with their prior estimates in hopes of closing out the year with a surge.

Amgen (AMGN) shares have risen +$16 since the lows at $128 last Thursday. The force behind the move is activist investor Dan Loeb and his fund Third Point. Loeb wants Amgen to break into two businesses. One would be the cash generating mature business and the other a fast-growing R&D focused business. Loeb sees Amgen shares worth $249 if the breakup were to occur. Shares of AMGN gained +5% today to close at $144.


There were multiple reasons the market rallied today. The Ebola fears are fading as expected now that the various U.S. groups in isolation are being released with no additional infections. This is calming consumer fears and removing another brick from the wall of worry.

Oil prices have stabilized at $83 and a level that should continue to hold. Energy stocks, a significant portion of the S&P, are all in rally mode. Last week they were in crash mode with the energy sector down -25% and firmly in a bear market. This week the dip buyers are viewing the sector as a buying opportunity.

The recent comments from various Fed heads has turned decidedly more dovish and there is even a chance for the FOMC to postpone ending QE at the October meeting. This would have been an unheard of topic just a month ago. There is even talk of a QE4 if Europe does fall into a deep recession. That is music to the market's ears.

China reported a Q3 GDP of 7.3% and slightly better than the 7.2% analysts expected. We don't know how much of that number was "managed" by Chinese bureaucrats but we have to take it on face value. Much has been made about the decline in China's economy. However, an astute reader pointed out that China's GDP output is actually rising, not falling. In constant 2005 dollars China's GDP output is actually expanding. To put this into perspective China's GDP is expected to rise to more than $10 trillion by 2020. I would hardly call this a material slowdown.

World Bank data. Annual amounts in trillions.

Year, Output, Growth, Rise in Output

2009 $3.476, +8.70%, +$258 billion
2010 $3.829, +10.4%, +$363 billion
2011 $4.196, +9.30%, +$357 billion
2012 $4.517, +7.65%, +$321 billion
2013 $4.864, +7.68%, +$347 billion
2014 $5.219, +7.30%, +$355 billion

Hat tip to JM for the info.

Lastly, the markets normally rebound from the October lows in the week after expiration. With only nine weeks left in 2014 fund managers are under the gun to do something quick to recover from lackluster performance year to date. More than 80% of funds are trailing their benchmarks and they have to chase performance or they are going to lose investors when the yearend statements are mailed.

I could go on with several other geopolitical events but you get the idea. We had a decent dip to correction territory and now the dip is being bought. Earnings are coming in slightly better than expected despite several high profile misses.

With the Fed turning dovish, earnings improving and geopolitical headlines fading it would appear to be a perfect recipe for a yearend rally. It is almost scary that I actually typed those words. I hope I did not jinx the markets.

The S&P soared +1.95% to 1,940 and blew right past the resistance of the 200-day average at 1,906. The move started with a monster burst of short covering that sent the S&P up +20 points at the open. From there it was a case of solid buying the rest of the day.

As usual the close left us with a bit of uncertainty with the S&P stalling right at downtrend resistance. With the S&P up +120 points from the low five days ago there are plenty of stocks that have gone from oversold to overbought in a very short period of time. A +120 point move normally takes several months in a normal market. However, the velocity of a sharp decline is quite often matched by the velocity in the rebound at least in the early days of the move.

If we continue higher the next challenge will be in the 1,960-1,966 range where the 50 and 100 day average converge along with some horizontal resistance. Support is so far in the rear view mirror that it is not worth mentioning.

The Dow rebounded +215 points but it is still below the downtrend resistance line around 16,800 from the September highs. It also has the convergence of the 50/100 day averages at 16,894. Once it gets to that roughly 16,900 level the resistance will increase substantially. From 16,900 to 17,150 there is a lot of congestion from the September and we will start running into the "I am finally back to where I should have sold" crowd that will be exiting with a sigh of relief.

I am not as bullish on the Dow as I am on the other indexes because of the earnings problems from the individual stocks. IBM is going to be a drag on the index for weeks to come and there are still 15 Dow stocks left to report.

The Nasdaq shifted into rocket mode when the expected post earnings depression did not hit Apple shares. Quite a few analysts thought Apple would report a good quarter but then experience a sell the news event. Fortunately the guidance was so good that eager buyers were waiting for any dip.

The Nasdaq rallied +2.39% or +103 points in just one day. This blew right by prior resistance levels of 4,344 and 4,371. It has gained +300 points in the last five days from the 4,116 low. The next material resistance is 4,485. Obviously a +300 point gain in five days is extreme and I would be cautious about trying to jump on this rocket ride. There is nothing to prevent it from continuing but remember how extreme the negative sentiment was just five days ago. That can come back in a heartbeat on a negative headline. While I am encouraged with the speed of the rebound I simply urge caution.

The Russell 2000 raced past prior resistance at 1,100 and gained +1.63%. That is a +72 point rebound from last Wednesday's low at 1,040. I am glad to see the small caps performing because that means fund managers are no longer afraid of another dip. They are chasing performance and small cap stocks are the way to get it.

The Russell has little in the way of resistance until the 1,150 level and then it repeats about every 10 points until 1,180.

The real index performer is the Dow Transports. After dropping to 7,700 last Wednesday they have sprinted to 8,485 today and a +3.14% gain today alone. This is absolutely amazing. They are right back at prior resistance of 8,500 and they could easily hit a new high before the week is out if the market remains positive. The lower fuel prices are going to be very positive for Q4 earnings.

It would appear that bullish sentiment has staged a remarkable comeback but too much of a good thing can always lead to trouble. The market is setting up for a very strong week and I just hope nothing appears to derail this rally train.

There are no economics of note that could upset the markets and the geopolitical events are all fading. The dip buyers are back and shorts are running for their lives. Let's hope this is all not just a huge bear trap but there are no signs of that today.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Home Improvement

by James Brown

Click here to email James Brown


Lowe's Companies - LOW - close: 54.59 change: +1.10

Stop Loss: 52.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 21, 2014
Time Frame: Exit PRIOR to earnings on November 19th
Average Daily Volume = 5.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
LOW is in the services sector. They run the second biggest chain of home improvement stores in the country. Their 1,837 stores offer more than 200 million square feet of retail space through the U.S., Canada, and Mexico.

The company's most recent earnings report was back in August. LOW beat Wall Street's top and bottom line estimates. Revenues were up +18.2% from a year ago. Gross margins saw some improvement. Same-store sales were up +4.4%, which was impressive. Management provided a small reduction in their full year revenue guidance but this failed to have much impact on the stock. Shares of LOW gapped down on its earnings news and investors bought the dip at support near $50.00.

Since this August earnings report we've seen homebuilder confidence hit nine-year highs while shares of LOW were hitting all-time highs in the $54-55 zone. Investors keep track of the housing market because LOW's business seems to rise and fall with real estate.

The stock market's recent volatility drug LOW back to support near $50.00 and once again traders bought the dip. There was a recent analyst note that was cautious on LOW and its rival Home Depot. The analyst noted that a slow down in sales for building materials would suggest the slowdown should hit retailers too. We may have to wait for LOW's earnings report to see if the analyst is right. In the mean time shares of LOW just ended at an all-time closing high.

If you believe the U.S. economy will continue to improve and the labor market will continue to see job growth then home improvement retailers like LOW and HD should see steady improvement as well.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish and forecasting a long-term $75.00 target for LOW.

Use a trigger at $55.05 to open bullish positions. We will most likely exit ahead of LOW's earnings report on November 19th.

Trigger @ $55.05

- Suggested Positions -

Buy LOW stock @ (trigger)

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

Buy the NOV $55 call (LOW141122c55) current ask $1.33

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

The Oversold Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's oversold bounce continued on Tuesday. The S&P 500 and the NASDAQ delivered their best one-day gains of the year.

INSY hit our entry trigger. XONE has been removed. SODA hit our stop loss.

Current Portfolio:

BULLISH Play Updates

INSYS Therapeutics, Inc. - INSY - close: 38.81 change: -0.22

Stop Loss: 36.95
Target(s): To Be Determined
Current Option Gain/Loss: -3.6%
Entry on October 21 at $40.25
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 540 thousand
New Positions: see below

10/21/14: Our new bullish trade on INSY is open but the play is not off to the best start. The early morning rally pushed INSY above $40.00 but shares ran out of steam midday and INSY underperformed the market to close down -0.5%. That's disappointing with the market delivering a very widespread gain today.

I am not suggesting new positions with INSY below $40.00.

Earlier Comments: October 20, 2014
INSY is a short squeeze candidate. The company is part of the healthcare sector, more specifically biotechnology. They currently market two drugs. One is their Subsys, which is a sublingual fentanyl spray to quickly treat pain for cancer patients. Thus far the product seems to be off to a strong start. INSY also markets a generic Dronabinol product to help treat chemotherapy induced nausea as well as anorexia related to patients with AIDS.

INSY is also developing treatments with cannabidiol, which has made headlines in the past. Cannabidiol is a component of marijuana that does not provide patients with a high. INSY has been working with cannabidiol to develop a treatment for Dravet Syndrome, a form of childhood epilepsy.

INSYS was recently granted orphan drug designation for its cannabidiol treatment for glioblastoma multiforme, which is the most aggressive version of malignant brain tumors in humans. Yet this good news has been offset by bad news that the FDA rejected the company's application for a new Dronabinol oral solution. The feds claim INSY submitted an incomplete study plan on the treatment's safety.

There is also the spectre of a federal investigation. Shares of INSY collapsed back in May after it was unveiled that one doctor in Michigan was fraudulently prescribing hundreds of INSY's Subsys painkiller treatment. This has sparked an investigation into INSY' marketing practices.

Technically shares of INSYS have been trending higher with a pattern of higher highs and higher lows. The most recent low happened to be on the day investors reacted to the FDA rejection on its dronabinol oral treatment. INSY was down about -10% intraday and then rebounded to a huge gain (Oct. 15th).

If this rally continues INSY could see a short squeeze. The most recent data listed short interest at 68.6% of the extremely small 10.19 million share float.

Tonight we are suggesting a trigger to open bullish positions at $40.25. More aggressive traders might want to consider a trigger just above $39.50 instead.

Please note that I am labeling this a higher-risk, more aggressive trade. Biotechs are already dangerous do to headline risk. INSY could be volatile with all the short interest.

*Small positions to limit risk* - Suggested Positions -

Long INSY stock @ $40.25

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

Long NOV $45 call (INSY141122c45) entry $1.60*

10/21/14 triggered @ 40.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Marathon Oil - MRO - close: 34.88 change: +0.62

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: +5.2%
Entry on October 16 at $33.15
Listed on October 15, 2014
Time Frame: Exit prior to earnings on Nov. 3rd
Average Daily Volume = 5.5 million
New Positions: see below

10/21/14: The bounce in MRO continues. The stock is up five days in a row and up +11% from its intraday low on the 15th. MRO is probably due for a pullback soon. Tonight we are raising the stop loss to $32.45.

Earlier Comments: October 15, 2014:
Oil and energy stocks have been crushed in the last several weeks thanks to plummeting crude oil prices. Oil recently hit new four-year lows. Investors are worried this collapse in oil prices will impact margins for the producers. We won't know until earnings results come out but right now the sell-off in shares of MRO look extremely overdone. The stock has collapsed from multi-year highs near $41.50 to new 2014 lows near $31 in less than two months. That's a 25% correction (and technically a bear market).

MRO is a global energy company. They explore for, produce, and market oil and natural gas. They are also involved in the oil sands mining in Canada and the big shale oil and gas basins in the United States. The company has operations in Angola, Equatorial Guinea, Ethiopia, Gabon, Kenya, Libya, Norway, the United Kingdom, and the Kurdistan region of Iraq.

Today shares of MRO briefly traded below their 2014 lows set in February this year around $31.60. The double bottom intraday in the $31.35-31.40 area looks like a potential bottom. We want to speculate on an oversold bounce. I do consider this a more aggressive, higher-risk trade so keep position size small.

We are suggesting an entry trigger at $33.15. Plan to exit prior to MRO's earnings report in early November.

- Suggested Positions -

Long MRO stock @ $33.15

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

Long NOV $33 call (MRO141122c33) entry $1.90*

10/21/14 new stop @ 32.45
10/16/14 triggered @ 33.15
*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

Noodles & Co. - NDLS - close: $22.87 change: +0.21

Stop Loss: 20.95
Target(s): To Be Determined
Current Option Gain/Loss: +7.8%
Entry on October 15 at $21.21
Listed on October 14, 2014
Time Frame: 3 to 5 weeks
Average Daily Volume = 444 thousand
New Positions: see below

10/21/14: NDLS continues to march higher. The stock has gone nearly straight up, albeit slowly, over the last two weeks.

We will move the stop loss up to $20.95. More conservative traders may want to use a higher stop but I would look for support at the 10-dma.

I am not suggesting new positions at this time.

Earlier Comments: October 14, 2014:
NDLS stock has had a rough start. The company held its IPO in mid 2013. The initial surge send shares of NDLS from the low $30s to over $50. Once the newness left the stock was left to churn water.

NDLS spent most of 2013 struggling and failing to breakout past $50.00 again. The last twelve months have been bearish with a trend of lower highs and lower lows. The company has disappointing results to blame for the sell-off in its stock price.

Currently NDLS has 410 locations in 31 states in the U.S. Management has suggested their long-term goal is 2,500 restaurants. That could be a challenge considering the recent sales slowdown. Their most recent earnings report was in August. You can see the big drop on the daily chart. NDLS missed estimates and lowered its 2014 guidance. Investors were not too keen on falling same-store sales growth either.

Bears have been right on this stock for months. The biggest critique is that shares of NDLS are expensive at over 50 times the trailing 12 month earnings. While the bears may be right, NDLS is expensive, the stock's bearish momentum has stalled.

It is possible that all the bad news is priced in after a -42.5% drop this year. NDLS has seen a higher low and more recently a bullish breakout above its simple 50-dma. You'll also notice that NDLS has completely ignored the market's recent weakness. The major indices have been crashing but NDLS has been slowly marching higher.

If this strength continues NDLS could see some short covering. The most recent data listed short interest at 12.6% of the very small 21.3 million share float. The point & figure chart is already bullish and suggesting a long-term target at $27.00.

Tonight we are suggesting small positions if NDLS can trade at $21.21 or higher. If triggered I'm suggesting a target in the $24.50-25.00 zone but we will plan on exiting prior to the company's earnings report in mid November.

- Suggested Positions -

Long NDLS stock @ $21.21

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

Long NOV $22.50 call (NDLS141122c22.5) entry $1.20*

10/21/14 new stop @ 20.95
10/20/14 new stop @ 20.75
10/15/14 triggered @ 21.21
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

The Pantry, Inc. - PTRY - close: 24.17 change: +0.17

Stop Loss: 22.90
Target(s): To Be Determined
Current Option Gain/Loss: -1.3%
Entry on October 17 at $24.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 190 thousand
New Positions: see below

10/21/14: PTRY saw some volatility this morning with a spike below its 10-dma but the weakness was over in seconds.

Investors may want to wait for PTRY to reaffirm the up trend and watch for a rise past $24.55 before initiating new positions.

Earlier Comments: October 16, 2014:
This is a simple relative strength trade. PTRY has been almost bullet proof against the market's recent weakness. Instead of following the major indices lower PTRY has soared to new four-year highs.

The company website says, "Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of September 25, 2014, the Company operated 1,518 stores in thirteen states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers."

PTRY is a small cap stock that has been dead money for years. That seemed to change with their last earnings report. When PTRY delivered earnings on July 30th they beat estimates on both the top and bottom line. The stock soared and broke out past key resistance. Several analysts have raised their earnings estimates on PTRY since that report.

Shares are currently hovering just under short-term resistance at $24.40. We are suggesting a trigger to launch small bullish positions at $24.50. I am suggesting small positions to limit our risk. Looking at a long-term weekly chart of PTRY you could argue that the $25.00 level might be resistance. We will try and limit our risk with a stop loss at $22.90, just under today's low.

*small positions to limit risk* Suggested Positions -

Long PTRY stock @ $24.50

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

Long DEC $25 call (PTRY141220c25) entry $1.60*

10/17/14 triggered @ $24.50
*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

Jacobs Engineering Group - JEC - close: 46.64 change: +1.24

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: - 1.7%
Entry on October 15 at $45.88
Listed on October 13, 2014
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: , see below

10/21/14: JEC decided to participate in the market rally today. The company did announced it had received a new $18 million contract from the government this morning but that is a drop in the bucket to JEC's $12.6 billion in annual sales.

The intraday bounce near $46.00 is what concerns me. Investors may want to lower their stop loss. I am not suggesting new positions.

Earlier Comments: October 13, 2014:
JEC is part of the services sector. Although you might consider it an industrial considering what they do. JEC provides technical services and construction services around the world. They were founded in 1947 and now have about 200 offices around the world.

Unfortunately for JEC most of the world is seeing an economic slowdown. That is pressuring sales. JEC is developing a trend of missing earnings and has missed Wall Street's EPS estimate four quarters in a row.

The stock started to see an oversold bounce in early October but that bounce has stalled under its 10-dma and the $48.00 area. Now JEC is down -25.8% this year and poised to continue its underperformance.

I do want to note that the timing of this trade might be a little aggressive. Momentum is clearly lower but the major market indices are starting to look a little oversold and could bounce. Traders may want to start this trade with small positions to limit their risk.

We are suggesting a trigger to open bearish positions on JEC at $46.15.

*consider small positions to limit risk*

- Suggested Positions -

Short JEC stock @ $45.88

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

Long NOV $47.50 PUT (JEC141122P47.50) entry $2.65*

10/21/14 Caution! Today could be a bullish reversal in JEC
10/15/14 triggered on gap down at $45.88, suggested entry was $46.15
*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

Knowles Corp. - KN - close: 18.32 change: -0.39

Stop Loss: 20.05
Target(s): To Be Determined
Current Option Gain/Loss: +28.9%
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

10/21/14: Another day, another decline for KN. Tonight we will lower our stop to $20.05. More conservative investors may want to take profits now or lower their stop even further.

I'm not suggesting new 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*

10/21/14 new stop @ 20.05
10/16/14 new stop @ 20.30
10/15/14 new stop @ 20.65
10/13/14 new stop @ 21.75
10/11/14 new stop @ 25.05
10/07/14 new stop @ 26.75
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

Mistras Group - MG - close: 16.10 change: -0.01

Stop Loss: 17.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 81.5 thousand
New Positions: Yes, see below

10/21/14: MG is still hovering near support in the $16.00 area. The fact that shares are not participating in the market rally is bearish.

Earlier Comments: October 18, 2014:
MG is in the services sector. The company evaluates the structural integrity of infrastructure. A company press release describes MG as "a leading 'one source' global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. Mission critical services and solutions are delivered globally and provide customers with asset life extension, improved productivity and profitability, compliance with government safety and environmental regulations, and enhanced risk management operational decisions."

Unfortunately, for MG investors the company is developing a habit of missing Wall Street's earnings estimates. They've missed three quarters in a row. Their most recent report was October 7th. Wall Street expected a profit of 12 cents a share. MG only delivered 4 cents.

This big earnings miss produced the spike down you see on the daily chart. There has been almost zero bounce and now MG has drifted lower to major support at the $16.00 level. A breakdown here would be very bearish. The Point & Figure chart is already forecasting a long-term bearish target of $6.00.

Tonight we are suggesting a trigger to launch bearish positions at $15.85. I am suggesting caution. This stock does not trade very much. Average volume is very low. That should make traders cautious. I'm suggesting very small positions or try and put options to limit risk.

Trigger @ $15.85 *Very small positions to limit risk*

- Suggested Positions -

Short MG stock @ (trigger)

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

Buy the NOV $17.50 PUT (MG141122P17.50)

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


The ExOne Company - XONE - close: 21.56 change: -0.41

Stop Loss: 20.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 626 thousand
New Positions: see below

10/21/14: Some of the 3D printing stocks are not participating in the stock market's widespread rally. XONE happens to be one of them. Our trade has not opened yet. Given XONE's relative weakness we are removing it as an active candidate.

Trade did not open.

10/21/14 removed from the newsletter, suggested entry was $25.35



SodaStream Intl. Ltd. - SODA - close: 21.51 change: +0.73

Stop Loss: 21.60
Target(s): To Be Determined
Current Option Gain/Loss: +3.1%
Entry on October 07 at $22.30
Listed on October 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 897 thousand
New Positions: see below

10/21/14: The stock market delivered one of its best days of the year and that sparked some short covering in SODA. The stock hit our stop loss at $21.60 before settling on resistance at $21.50.

*small positions, higher-risk trade*

- Suggested Positions -

Short SODA stock @ $22.30 exit $21.60 (+3.1%)

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

NOV $27.50 PUT (SODA141122P27.5) entry $5.30 exit $5.80* (+9.4%)

10/21/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
10/18/14 new stop @ 21.60
10/13/14 new stop @ 21.75
10/11/14 new stop @ 22.75
10/07/14 new stop @ 23.25
10/07/14 Trigger was $27.35, trade opens on gap down at $22.30
10/07/14 SODA issues an earnings warning before the opening bell
Option Format: symbol-year-month-day-call-strike