11:15pm (EST)

1.  Market Summary 

2.  iRobot Corporation (IRBT) – The Final Frontier     

3.  Global Crossing (GLBC) – A Rollercoaster Ride       

4.  Earnings 

5.  Weekly Wrap Portfolio Update 

6.  Week Ahead

(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section)

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1.  Market Summary 

The bulls finally got the bears off their back after scoring their first weekly win in 7 weeks as the market gained just enough on Friday to end the losing streak.  However, it must be noted that Tech finished the week in negative territory so it wasn’t a clean sweep by the bulls.

We said on Friday the bulls face a crucial test as they needed to overtake a few key resistance areas and the Dow and the S&P 500 managed to do just that.  The Nasdaq, on the other hand, made a brief trip into positive territory which was enough to claim a “W” but remained in a downtrend all day after the initial pop in the morning.  Friday’s slight gains were fueled on hopes Greece gets a bailout but late in the day there were reports surfacing that Moody’s (MCO, $36.33, down $1.94) was putting Italy’s debt rating on review for a possible downgrade. 

We will save the Moody’s story for another day but it’s hard to believe shares have managed to climb 50% this year and are up nearly 100% off their 52-week low of $19-and change. 

The Dow gained 42 points on Friday and finished at 12,004 after trading to a high of 12,072 intraday.  The index managed to hold the 12,000 level which we outlined as resistance followed by 12,200.  If there is a break above 12,200 then the bulls will try to push 12,350 again.  The bears will target 11,800 and then 11,600 which represents the March lows.  For the week, the Blue-Chips added 50 points, or 0.4%, and is up 3.7% YTD.

The S&P 500 gained 4 points to settle at 1,271.50 after kissing a high of 1,279.  We were looking for 1,275 to hold for a possible push to 1,300 but this area has been trouble.  If there is a rally past 1,300 then 1,315-1,325 would come into play but the bears seem determined to test 1,250 over the near-term.  The index started the week at 1,270 and gained a point for the week.  For the year, the S&P is still up 1.1%.

The Nasdaq fell 7 points and closed at 2,616 after reaching a peak of 2,648 but failed the 2,650 level once again.  This is an important area of resistance as the bulls attempt a run back to 2,700, but more importantly, they will need to hold 2,600.  If this level of support is breached then it will be a quick trip down to 2,550-2,500.  For the week, the Nasdaq fell 27 points, or 1%, and recorded it 5th-straight weekly loss.  For 2011, Tech is down 1.4%.

Last week, we mentioned the 10% decline in the Russell 2000 from its 2011 perch of 868.  The index managed to close slightly higher on Friday at 781.75 (up 0.21) and for the week (up 3).  If a turnaround rally is to take place, this index will need to challenge the 800 level again.  If not, the small-caps could be headed to 750, if 775 is penetrated.

The other interesting development that took place is the VIX which jumped over 20 last Thursday.  The S&P 500 Volatility Index (^VIX, 21.85, down 0.88) traded to a high of 24.65 on Friday and we said a jump to 30 could be in the cards on more selling pressure.  A break above 30 could put the market in a freefall.

As we look ahead to this week, we said on Friday that the week after June Quadruple Witching expiration has not been kind to the bulls over the past 2 decades.  The market has dropped 1.2%, on average, during this time frame with the Dow falling 11 straight years and 18 out of the last 20.  Those aren’t good odds (90% chance) for going long but anything can happen and we wouldn’t be surprised to see a rally back to resistance with so many people betting on a correction.

We could see some extra volatility this week as debt concerns around the globe continue to take center stage.  Here at home, expect more water-cooler talk about QE3 with QE2 set to finish by the end of the month.  We aren’t sure what could be up Ben Bernanke’s sleeve because a kitchen sink won’t fit and the money machine is running out of ink but he will come up with something.

This could give the market a lift or it could work against it.  Also, we are entering a period where companies usually “pre-announce” if they are going to miss earnings which begins in July with the start of 2Q’s numbers.  In any event, we expect the recent volatility to continue but we are in good shape.  We have plenty of room in our portfolio for new trades and we expect to be busy this week. 

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2.  iRobot Corporation (IRBT) – The Final Frontier

Robots are the future and are already making breakthroughs in medicine, bomb squads, and unmanned vehicles.  And with the market making its first weekly gain since April and the S&P 500 nearing support levels, as shown in the chart below, it could be a good time to go value hunting.  iRobot Corporation (IRBT, $30.11, down $0.14) is a company we have been watching over the years and is growing up right in front of our eyes.


The company builds robots for consumer, military, government, and industrial use.  More than 4,000 of their unmanned ground vehicles have been delivered to military and civil defense forces worldwide, performing search, reconnaissance, bomb disposal, and other dangerous missions, saving lives.  Earlier this month, the company received an order for $14.1 million from the U.S. Navy for 86 Man Transportable Robotic System (MTRS) MK 1 Mod 1 robots, spare parts, and accessories.  Last week, the company received an order of $7.4 million from the U.S. military for Small Unmanned Ground Vehicles (SUGV).  And more orders are likely on the way.

On the consumer end, the company offers a diverse line of products ranging from robotic vacuum cleaners to pool scrubbers. 

The Roomba® line of vacuum cleaners ranges from $200-$600.  The top of the line Roomba® 780 works of carpets, hardwood, tile, and linoleum floors, and automatically adjusts to different floor surfaces as it moves.  As it picks up dirt, dust, animal hair, and other debris, the air filter captures small particles from reentering the air.  The 13.9 inch diameter, circular device employs sensors, spending more time to clean the dirtiest spots, adapting to the home’s environment, and moving around the toughest corners.  It also knows when it needs to recharge, returning to its Home Base® to dock and recharge.  Plus, it tells you when it is full and needs to be emptied.  Consumer reports on the Roomba® product line are very positive, earning an average of 4 out of 5 stars.  There is little to no competition that can match up the features for the price.

The Scooba® line of robotic mops ranges from $300-$500.  The top of the line Scooba® 380 washes up to 850 square feet per charge.  It works on hardwood, tile, and linoleum.  Sensors tell it to avoid carpets and stairs.  Customer satisfaction gives the Scooba® line an average of 4 out of 5 stars.

The Verro® line of robotic pool cleaners ranges from $400-$1100.  The top of the line Verro® 500 PowerScrub cleans pools in 3 hours and filters over 70 gallons of water per minute.  Customer satisfaction gives the Verro® line an average of 4.5 out of 5 stars.

The Looj® line of robotic gutter cleaners ranges from $130-$170.  The top of the line Looj® 155 blasts through debris, clogs, and sludge and brushes the gutters clean.  Customer satisfaction gives the Looj® line an average of 5 out of 5 stars.

With trailing 12-month revenue of $412.3 million, the stock is selling for about 2 times revenue.  The company has no debt and $124.3 million in cash.  Earnings grew 21 percent for the 1st quarter of 2011 compared to the 1st quarter of 2010, while revenue during the same period surged almost 12 percent.  Below are charts of revenue and earnings trends with estimates for the 2nd and 3rd quarters (7/11 and 10/11) added. 


One recent Wall Street firm estimates iRobot can grow earnings by 20% and revenue by 15% through 2014 and gave the stock a $38 target price.  From the charts, this estimate seems rather bullish, especially since earnings seemed to stay about the same over the last year but revenue has been increasing over the last year.  One thing for certain, demand for its robots should increase. 

Third-quarter earnings estimates seem a little low.  While earnings grew in the 1st quarter and is expected to grow in the 2nd quarter from that of a year ago, earnings growth is expected to fall in the 3rd quarter.  Thus, when the company does report earnings, the company may guide higher, causing the stock to rise.  Second-quarter earnings are projected to fall like it did last year before rebounding to head higher.

Going back to the revenue and earnings graphs, there is a high probability that the company will meet or beat earnings expectations when they report in late July. 

One catalyst that may drive the stock higher is that executive vice president and CFO will discuss the company’s achievements and financial outlook on Thursday of this week at the Jefferies 2011 Global Consumer Conference in Nantucket, Massachusetts.

The graph shows that the stock is at support and could test resistance if current levels hold.  The Bollinger Bands and the 50-day moving average coincide with the position of the support and resistance lines, strengthening the argument that these lines will be a boundary for future short-term price moves.  The stochastic %K and %D and the W%R are at oversold levels.  The money flow index (MFI) and relative strength index (RSI) are nearing oversold levels.  The two times the technicals were at similar levels, indicated by the two vertical purple lines, the stock rose.


The option pits for iRobot aren’t as active as other stocks so the bid/ask prices usually have a decent size spread.  Although we like this stock as a covered call, we are watching the September 35 (IRBT110917C00035000, $1.30, up $0.05) calls as a straight-up directional play.  We would like to get these for under $1 and we will be following the options in our Daily.  If they do come down in price, we may take the trade.     

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3.  Global Crossing (GLBC) – A Rollercoaster Ride

Telecoms stocks are considered safe havens during tough times and Global Crossing (GLBC, $33.50, down $0.33) was a stock we were watching at the beginning of the year that showed promise.  Shares were in the low teens to start 2011 but surged in April after Level 3 (LVLT, $2.12, down $0.04) agreed to acquire the company in an all-stock deal.

At the time Global Crossing shareholders were to receive 16 shares of Level 3 common stock for each share of common stock or preferred stock they owned.  Based on Level 3’s closing stock price on April 8, 2011, the transaction valued Global Crossing at $23 a share. 

The merger will create a company with combined 2010 revenues of $6.26 billion.  The companies would have fiber optic networks on three continents, creating a network presence in 50 countries and connections to more than 70 countries.  Cost savings were estimated to be $2.5 billion between the two companies.


However, the FCC and numerous law firm investigations have prevented the merger so far.  And since early April, both companies share prices have increased.  In Global Crossing’s case, revenue, as seen in the graph below, has been surging, while earnings per share has been fairly flat.


Without the merger, could Global Crossing become profitable?  One thing, Level 3 wants is the company’s presence in the booming Latin American telecommunication market but it seems Global Crossing may not need the merger as much as Level 3 does.  Notice that in the 2nd quarter of 2009 (8/09), the company did manage a profit.  In the 3rd and 4th quarters, it came very close to making a profit.

Interestingly, short interest in Global Crossing hasn’t increased much, while short interest in Level 3 surged 13% over the last few weeks of May.  Investors seem to be okay with Global Crossing even if the merger doesn’t go through.  We believe the merger will eventually get passed, because the combined company will only have 3.3% of the U.S market.  Is that really such a threat for the FCC?

The graph shows that shares have been increasing 26 cents per day since the April acquisition news.  The technicals give mixed signals, with the W%R saying oversold but the RSI saying overbought.  Using support and resistance lines, the stock is right on support, indicating that it could bounce higher.


Due to the all-stock merger, the two stocks should continue to mirror one another.  Thus, the large increase in short interest in Level 3 could mean it is time to sell Global Crossing.  On the other hand, if the merger doesn’t go through, then someone else might make a bid for Global Crossing. 

Since the stock could move big in either direction, we are watching the July 35 calls (GLBC110716C00035000, $1.00, down $0.15) and the July 30 (GLBC110716P00030000, $0.0.50, up $0.10) puts for possible clues on where shares are headed.  The option market usually gets active before a big more in a stock so watch these two carefully.  

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4.  Earnings 

The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are as of Friday’s close, 6/17/11). 

MONDAY

Ennis (EBF, $17.03, down $0.31), Park Electrochemical (PKE, $26.72, down $0.38), Renren (RENN, $7.03, up $0.25), Semileds (LEDS, $7.49, down $0.21)

TUESDAY

Adobe Systems (ADBE, $30.47, down $0.33), Aerovironment (AVAV, $27.05, down $0.26), Apogee Enterprises (APOG, $12.14, up $0.11), Barnes and Noble (BKS, $20.41, up $0.57), Carnival Corp (CCL, $35.27, up $0.51), China Automotive Systems (CAAS, $7.02, down $0.03), Gerber Scientific (GRB, $11.02, up $0.02), Jabil Circuit (JBL, $18.29, down $0.31), Jefferies Group (JEF, $21.37, up $0.27), La Z Boy (LZB, $10.19, up $0.06), Walgreen (WAG, $44.67, up $0.29) 

WEDNESDAY

Azz (AZZ, $41.27, down $0.06), Bed Bath & Beyond (BBBY, $51.99, down $0.87), Carmax (KMX, $29.25, up $0.49), Fedex (FDX, $86.99, up $0.51), HB Fuller (FUL, $21.52, down $0.13), Herman Miller (MLHP, $22.99, up $0.52), IHS (IHS, $84.19, up $0.69), Paychex (PAYX, $29.63, up $0.11), Red Hat (RHT, $41.20, up $0.26), Robbins & Myers (RBN, $42.78, up $0.91), Sonic (SONC, $10.56, down $0.24), Steelcase (SCS, $9.86, up $0.11)

THURSDAY

Conagra Foods (CAG, $24.65, down $0.02), Discover Financial Services (DFS, $23.09, down $0.18), Finish Line (FINL, $22.61, up $0.21), H&R Block (HRB, $15.40, up $0.02), Lennar (LEN, $17.46, up $0.22), Micron Technology (MU, $7.83, down $0.03), Oracle (ORCL, $31.18, up $0.39), Rite Aid (RAD, $1.07, up $0.04), SMART Modular Technologies (SMOD, $9.13, flat), TIBCO Software (TIBX, $23.80, up $0.06)

FRIDAY

Cyanotec (CYAN, $3.12, up $0.11)  

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5.  Weekly Wrap Covered Call Portfolio Update (Closing prices as of 6/17/11) 

 

WEEKLY WRAP CLOSED TRADES for 2011:  DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%. 

 

Symantec (SYMC, $18.55, down $0.07)


July 19 calls (SYMC110716C00019000, $0.40, down $0.01)


Original Entry Price:  $18.77 (6/8/11)

Lowered Price from Selling Options: $18.17

Exit Target: $20+

Return: 2%

Stop Target: None

 

Action:  Shares were slightly higher for the week but there is risk down to $18 (black line and red circles).  A break below $18 could lead to $17.50 (red line and green circles) which is where would expect a trading range to form before the next leg up.  We like this stock for the long-term and for new subscribers, we just covered this company a few weeks ago if you want to read our thoughts on why we expect a run past $20 is coming. 


We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents.  This lowered the cost basis to $18.17. 

If shares are called away by mid-July at $19 the trades makes 5% in 5 weeks.

 

Rare Element Resources (REE, $9.44, down $0.18)

July 12 calls (REE110716C00012000, $0.10, down $0.05)

Original Entry Price:  $12.38 (5/31/11)

Lowered Price from Selling Options: $11.23

Exit Target: $10+

Return: -16%

Stop Target: None

Action:  We said there was support just below the $10 and this area held following the 10% drop from the week before.  Prior resistance should act as support (black line, red circles) going forward but a break below these levels could lead to $6 (green line, black circle).  We covered Rare Element Resources on April 3 for those of you want to learn more about their business.    


We recommended buying the stock at $12.38 on 5/31/11 and for every 100 shares to sell the July 12 calls for $1.15.  This lowered the cost basis to $11.23. 

If shares are called away by mid-July at $12 the trades makes 7% in 6 weeks.

 

 Vivus (VVUS, $7.67, down $0.17)

June 8 calls (VVUS110618C00008000) EXPIRED

Original Entry Price:  $7.93 (5/11/11)

Lowered Price from Selling Options: $7.43

Exit Target: $10+

Return: 3%

Stop Target: None

Action:  Vivus traded to a high of $8.06 on Friday but fell 2% for the day.  Shares continue to hold support (black line, green circles) which was prior resistance.  However, if broken, shares could fall into a trading range of $6-$8. 

We are looking at the September 8 calls (110917C00008000, $0.75, down $0.10) as a possible call to sell but we may wait for a pop back over $8 before doing so.

Vivus may have a winner with Qnexa on two fronts which is what most analysts are forgetting.  The drug has completed Phase 3 trials for obesity and is still awaiting approval from the FDA.  Qnexa has also completed Phase 2 clinical trials and is hoping to get approval to treat diabetes and obstructive sleep apnea as well.    


We recommended buying the stock at $7.93 on 5/11/11 and for every 100 shares to sell the June 8 calls for 50 cents.  This lowered the cost basis to $7.43. 


AKS Steel Holding (AKS, $14.16, down $0.17)

Original Entry Price:  $15.93 (5/2/11)   

Lowered Price from Selling Options: $15.43

Exit Target: $20+

Return: -8%

Stop Target: None

Action:  AKS Steel has been in a trading range of $14-$15-and change since May (black line, red line) but a break below could lead to longer-term support (blue line, green circles) at $13.  We are still waiting for shares to trade back over $16 before writing another call.  We have a target of $17-$18 by year-end for shares of AKS Steel if current levels hold. 


We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents.  This lowered the cost basis to $15.43.


American Capital (ACAS, $8.94, up $0.03)

June 10 calls (ACAS110618C00010000) EXPIRED

Original Entry Price:  $9.73 (4/19/11)   

Lowered Price from Selling Options: $9.23

Exit Target: $15+

Return: -3%

Stop Target: None

Action:  The June 10 calls expired so we can write another call option.  We are looking at the August 9 calls (ACAS110820C00009000, $0.65, down $0.05) but we would like to get more premium.  There is also huge open interest at this strike and we are still expecting shares to trade $10+ down the road.

Short-term support is at $8.50 (black line, green circles) while resistance is at $9.50 (red line, black circles).  The current action suggests a trading range over the next few weeks.


We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents.  This lowered the cost basis to $9.23. 


Cisco Systems (CSCO, $14.97, down $0.08)


Original Entry Price:  $17.14 (3/17/11)   

Lowered Price from Selling Options: $16.58

Exit Target: $20+

Return: -10%

Stop Target: None

Action:  Cisco continues to test support at $15 (black line) but we are watching the March 9, 2009 low of $13.61 if current levels don’t hold.  If Cisco does break down to $13-and change, we would back the truck up.


We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents.  This lowered the cost basis to $16.58. 


Spreadtrum Communications (SPRD, $13.95, up $0.96)  


Entry Price:  $23.45 (2/7/11)

Lowered Price from Selling Options: $21.48

Exit Target: $30

Return: -35%

Stop Target: None

Action:  We said last week shares could challenge $14 (blue line) before a rebound and that is what happened.  This stock is down 40% from its high of $24 and we probably won’t see a test back to $20 until the back half of the year.  In the meantime, we will continue to hold.    


Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents.  This lowered the cost basis to $22.48.

On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48.


DryShips (DRYS, $3.94, up $0.11)

January 2012 7.50 call (DRYS120121C00007500, $0.11, flat)   

Entry Price:  $5.25 (1/03/11)  

Lowered Price from Selling Options: $4.60

Exit Target: $8

Return: -14%

Stop Target: None

Action:  DryShips is trying to push resistance at $4 (black line) but is still stuck in a trading range with support just below $3.50 (red line).  


DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The January call options could have been sold for 65 cents which lowered the cost basis to $4.60.  

If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%.

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6.  Week Ahead

There is no economic news scheduled for Monday.

Tuesday is light with Existing Home Sales for May the only headline.

On Wednesday, the MBA Mortgage Index is due out along with the FHFA Housing Price Index numbers.  We also get the weekly update on oil supplies, but a potential market mover will be the Federal Open Market Committee (FOMC) Rate Decision on monetary policy which is due our shortly after at 2PM (EST).

For Thursday, Initial and Continuing Claims are due out before the bell and need to show a print under 400,000 for the bulls.  New Home Sales for May will hit the street shortly after the open.

We end the week on Friday with the latest Gross Domestic Product (GDP) figures and Durable Orders for May.

Futures are down about 0.2% tonight after learning Europe won’t throw Greece a bone until July.  More on this story tomorrow but we could be facing a lower open when we wake up in the morning.