Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/3/2014

Table of Contents

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

Market Wrap

Just Passing Time

by Jim Brown

Click here to email Jim Brown

Traders were just passing time today as they await the ECB and payroll reports later in the week.

Market Statistics

Despite some good economics at the open the markets dipped slightly on some minor profit taking and then traded sideways on very low volume the rest of the day. With the ADP Employment on Wednesday and the expected bazooka out of the ECB on Thursday followed by the Nonfarm Payrolls on Friday the rest of the week is a minefield of economic reports. With the low volume and minor profit taking it appears traders are going to hold what they have and wait for the reports. Even with all the major indexes finishing in the red the VIX remains below 12 with only a .29 point rise. There is rampant complacency and no fear in the market.


The weekly chain store sales snapped back from a -1.2% reading the prior week to a huge +2.9% gain last week. These numbers have a lot of noise and are not normally followed but the big gain did attract attention. Obviously the Memorial Day weekend disrupted spending patterns and provided a holiday bounce. ICSC Research expects same store sales for May to rise +3.0-3.5%.

The Intuit Small Business Employment Index rose +0.16% compared to +0.12% in April. That equates to a gain of +30,000 workers for the month. The internal components showed that hours worked and worker compensation rose sharply. The gains were the strongest since March 2013.

The ISM New York report for May showed business conditions rose at the fastest pace in four months to 630.1, up from 627.4 in April. The internal components showed some nice gains. The six-month outlook rose from 58.8 to 69.7. The current conditions component rose from 50.6 to 55.3 and employment rose from 43.1 to 50.3. The quantity of purchase component soared from 41.7 to 58.9. Expected demand rose from 62.5 to 68.0. This strong rebound came after the worst performance in 10 months in April.

Factory Orders for April came in at +0.7% compared to +1.5% in March and +1.7% in February. While that represented some slowing from the prior months it was well above the +0.2% consensus estimates. However, ex-aircraft orders declined -1.2%. Backorders rose only +0.1% to 0.9% suggesting not much order flow other than aircraft.

New orders for durable goods rose only +0.6% after rising +3.7% and +2.6% in the prior two months. Computer and electronics orders fell by -1.3%.

U.S. Auto Sales for May came in at 16.8 million on an annualized basis and well above the estimate for 16.0 million. This was the fastest pace since February 2007. However, there is a qualification. May had five weekends and auto companies always have major sales and promotions over the Memorial Day weekend.

Kansas City Fed President Ester George made investors happy with a call for the Fed to shrink its balance sheet by allowing holdings to mature before the Fed considers raising interest rates. This "passive runoff" as holdings mature and are redeemed is going to be a major point in the eventual normalization of rates. The Fed owns too many securities to sell them back into the market or rates would rocket higher. They can just let them mature but that is going to take 5-7 years to make a major dent in the Fed's balance sheet. The potential for another recession during that period are about 100%. We average a recession about every 5 years and our five years are already up.

The big reports for Wednesday are the ADP Employment, ISM Services and the Fed Beige Book. The ADP is probably the most critical since it will give everyone an idea what to expect in Friday's Nonfarm Payrolls. A big ADP number should mean a big Nonfarm number and this would suggest the economy is in growth spurt mode. A low number would suggest a low Nonfarm and bring the economic doubt back into the picture.

I can't imagine that the Beige Book will be negative. The trend has been to tout rising activity and without a black hole in some region pulling down the metrics they will continue to tout any gains in activity regardless of how small.

Thursday has the highly anticipated ECB decision and while it won't have any direct impact on the U.S. the implications for growth in Europe will impact our markets. If the ECB lowers rates already at zero it will start a new round of financial engineering experimentation. The problem is that even with rates at zero the banks are not putting the money to work in the economy. Forcing them to pay interest on their reserves rather than earn interest is an unproven tactic although it has been tried in limited tests around the world with mixed results.

If the ECB follows through on a rate cut it will only make U.S. treasuries more attractive for banks looking for yield. This could have been the reason for the treasury rally last week. European banks expecting the rate cut may have moved into treasuries ahead of the event.

Friday's Nonfarm Payrolls are expected to show a gain of +215,000 jobs. Anything over 180,000 should be market neutral and over 225,000 bullish for the market.


Art Cashin alerted me to some work done by Dan Clifton at Strategas concerning the recent drop in treasury yields. Clifton pointed out that the Fed is purchasing a larger share of treasuries today than at any other time during QE. The reason for this is the government is issuing debt at a slower pace than the Fed is tapering QE. Over the last two months the amount of outstanding treasuries has been reduced by $100 billion while the Fed was in the market buying $58 billion. The government was reducing debt at the same time the Fed was buying treasuries from that shrinking base. On a six-month rolling basis the Fed has purchased 73% of new treasury issuance. That leaves very little for normal investors to buy and a good reason the yields have been falling.

There was very little stock news today. We are right in the middle of the earnings cycle where Q1 earnings are over and Q2 warnings won't begin for several more weeks. This is the quiet period where companies have nothing to say.

Clovis Oncology (CLVS) fell another -20% after Citigroup offered a competing opinion on their CO-1686 drug for certain non-small cell lung cancer patients. I believe the Citi analyst was preaching his own book because the data from the trials and the comments from the Clovis CEO on Monday contradict the Citi statement.

Clovis shares declined -$3.50 on Monday after news broke at the ASCO cancer conference that "some" of the patients taking their new cancer drug CO-1686 saw a rise in blood sugar. The press immediately jumped on the news claiming the drug caused diabetes but according to the CEO that is not true. "We do not cause diabetes" he said in an interview.

He was interviewed at the conference and said only a few patients had exhibited hypoglycemia problems and those were easily handled with the oral drug Metformin. He reminded everyone that ALL cancer drugs have side effects and any effect that can be handled with an oral pill is the best kind.

These patients have lung cancer. They are terminal without treatment. He said 95% of patients show improvements in quality of life and "progression free survival." That means the cancer does not worsen and longer life spans are expected. In 65% of patients the improvement in quality of life was "startling" and progression free survival was greatly extended according to the CEO.

In only 22% of patients did they see the appearance of minor hypoglycemia. He said if the problem was bad patients would be dropping out of the trial. To date there have been ZERO patients withdraw from the trial due to the hypoglycemia.

What would you do? Take an oral pill to suppress it or stop the drug and die?

Mizuho said the data from CO-1686 looks superior on progression free survival compared to AstraZeneca's AZD9291. The firm reiterated a buy rating on CLVS with a $100 price target. Citi said today the AstraZeneca drug AZD9291 appeared superior because early stage cardiovascular side effects were unfounded. However, in the current trial any patients with any cardiovascular problems were rejected. In prior trials there were increases in QTc that are associated with heart problems that cause sudden death.

So, the options are to take a drug that may cause sudden cardiac death if you have any cardiac risk or take a drug that provides "startling" improvements in progression free survival and 20% of patients may have to take an oral supplement to eliminate the hypoglycemia? I think the answer is clear.

The stock was pummeled for a -20% decline because the Street's Adam Feuerstein reported the drug is "turning patients into diabetics", which is completely untrue but the unsubstantiated claim was being repeated by Citigroup. I believe this sell off is a huge buying opportunity.


Tesla (TSLA) CEO Elon Musk dangled the potential for doing "something drastic" to accelerate the acceptance of electric cars. While he did not say what the majority of analysts believe it has something to do with his patents. If he volunteered his patents to other manufacturers line Ford and GM they could quickly ramp up a successful electric car program. Tesla has already announced a partnership with Toyota but until they can increase battery availability those plans are on hold.

Musk made these comments at the Tesla shareholder meeting today. He said there are roughly 2 billion cars on the road and 100 million new ones sold every year. Tesla only sold 22,000 in 2013 and they expect to sell 35,000 in 2014. He also said he would stay on as CEO of Tesla for at least 4-5 years "through volume production of a third-generation car" for the mass market in the $35,000 range. He said "Nobody is a CEO forever. Eventually they carry you out."

He said they have not yet picked a site for the "Gigafactory" to mass produce batteries. They have narrowed it down to a "few sites" but they planned on doing a "down-select" for a primary site around year-end. Musk said they were shooting for a 30% decrease in battery costs but thought they could probably do better than that.

Tesla is constrained by the supply of batteries it can get from partner Panasonic. They expect enough to build 35,000cars this year but the goal with the gigafactory is to ramp up production to supply 500,000 cars per year. Panasonic said they expect to be the "sole manufacturer" in the battery factory. The company noted Tesla is looking for a $3 billion investment in addition to the $2 billion Tesla will put up. Tesla hopes to begin battery production in 2017. The company announced in February that Arizona, Nevada, New Mexico and Texas were in the running for the site. However, California is pushing to be considered as well. Musk said he is planning on pitting 3 states against each other in the final selection process. Musk is requiring states in the competition to have all plans and permits finalized and approved before they can be considered in the finals. This probably leaves out California since they can't get anything done in a reasonable period of time especially environmental plans approved. Some analysts believe Nevada has an edge with the site near the Reno-Stead general aviation airport that would make visitations and deliveries easier.

An R.W. Baird senior analyst, Ben Kallo, said Tesla was his top stock pick for the second half of 2014. "We have a quarter that is lined up nicely for a solid beat. Production is very good. We were out at the factory 3 weeks ago and I think they are ahead of their targets for the quarter."


Hillshire Brands (HSH) authorized takeover talks with Tyson Foods (TSN) and Brazil's JBS Sa. The bidding war in the $6.7 billion food fight over Hillshire is entering a new stage. Hillshire was previously called Sara Lee before it spun off some of its tea and coffee products in 2012.

Pilgrim's Pride (PPC) raised its offer to $55 or $6.7 billion after Tyson offered $50. Pilgrim's Pride is 75% owned by JBS. Both offers from PPC and TSN require Hillshire to terminate its $6.6 billion bid to buy Pinnacle Foods. JBS slaughters and packages beef and poultry and buying Hillshire would give it an entry into the prepared meat market where profits are higher. JBS said that would open up the international market using the Hillshire brands. HSH shares gained another 9% today.


Krispy Kreme (KKD) shareholders are probably reliving nightmares from the past when earnings misses were a regular event. The company reported earnings that were in line with estimates but missed on revenue. Then they lowered full year estimates from 73-79 cents to 69-74 cents. Analysts were expecting 78 cents. They blamed the winter weather for the weak guidance. The company said their store count rose 3.3% to 855 and same store sales rose +2.3% in the USA but declined -2.2% overseas. Shares declined -15% on the news.


Volume today across all exchanges was 5.2 billion shares, up only slightly from the 4.88 billion on Monday. The low volume is reducing volatility and the trading ranges. The S&P traded in a very narrow 7 point range today and the Dow range was only 46 points. Trades are simply waiting for the economic events later in the week and they are not trading.

Traders are covering shorts and reducing their longs. The lack of a real direction is causing a serious bout of uncertainty. With the markets only a couple points under their historic highs there is no rush to be long. Traders are slowly taking profits but at the same time there are funds nibbling at stocks on every dip.

The stealth rally of the last two weeks is still concerned about the weakness in the Russell 2000 and the Nasdaq but not too concerned or they would be buying puts. The New York Fed President Bill Dudley warned last week that the extremely low volatility may be giving investors the wrong impression of the markets and this was something that concerned the Fed.

One thing I am sure of is what the Fed will do about it. If they believe the low volatility is making the market too complacent they will do something to shake it up. It is only a matter if time.

A couple of weeks ago I warned about the resistance at 1,925 and that is exactly where the S&P has stopped its gains. That may only be a temporary stall but for the last two days it has been rock solid with the afternoon rise into the close coming to a stop right at that level.

We can have a stealth correction just like we can have stealth rallies. The S&P can continue to wander around in the 1,920-1,925 range for several more days as positions are rotated but I doubt that will happen. Economic events are going to power the market one way or another.

Initial support is now 1,910 and resistance 1,925. The 50-day average is rising about a point a day and is now 1,877.


The Dow closed at a new high at 16,743 on Monday and only gave back -21 points today. The trend is still higher and the next resistance level is 16,800 once we get over Monday's intraday high at 16,756.

The majority of the Dow stocks were pretty tame on Tuesday with Goldman the leader and Visa the laggard.



The Nasdaq 100 ($NDX, QQQ) continues to languish just below critical upper edge resistance at 3,740. Apple shares declined sharply on Monday after the WWDC kickoff but recovered today on positive analyst comments about the new iOS and the pending 7:1 stock split. If Apple continues to remain positive it could be our best chance to the NDX to break over that resistance. Beware next week when Apple trades post split. The post split depression period for Apple could be severe.


The Nasdaq Composite has stalled in a 40 point range for the last six days just below the 4,250 level. No major gains and losses only a slow rotation inside the major Nasdaq stocks. Momentum stocks have stalled and recent winners are taking a break. There is nothing to be determined from the chart except that resistance has held but traders have prevented a material sell off. The deadlock is sure to be broken soon and without any materially negative headlines I would expect it to move higher.

The Nasdaq has only lost -3 points in total over the last five days. There is plenty of dip buying but no price chasing.



The Russell 2000 remains the weakest link. The Russell closed down again to close at a six-day low. The rebound rally has lost traction although there is buying on every dip. It is enough to lift the index off the lows of the day but not enough to turn it positive. Eventually these buyers are going to get tired of lower lows and ignore the dip so they can see how far it drops.

The 1,120 support level at the 200-day average was breached intraday but quickly bought to close at 1,126. Another lower low on Wednesday could put it below that 1,120 level and that would be a sell signal.


As long as the Russell remains above the 1,120 level my market bias is slightly bullish. However, as we have seen numerous times in the past there can be huge sell programs launched whenever a critical economic event is perceived to be bullish. It happens regularly although we have not seen any recently. As we approach the summer doldrums and increasingly lower volume the potential for a sudden sell program reversal is growing. Investors are simply too bullish and too complacent. I would be cautious about being too long until after Friday's Nonfarm Payrolls. Trading the market this week is a coin toss for direction. Do you really want to risk your trading capital or retirement funds on a coin toss?

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

It Could Be A Slow Wednesday

by James Brown

Click here to email James Brown

Editor's Note:

The stock market delivered a relatively mild session on Tuesday. Trading activity could be slow again tomorrow as traders wait for word from ECB President Mario Draghi. Markets are expecting the ECB to announce some sort of stimulus program for Europe. It doesn't matter what Mr. Draghi says as market participants might choose to sell the news, whatever that news is.

We also have the jobs report out on Friday morning.

We're not adding any new trades tonight.

If you are looking for new bullish candidates then consider checking out CLR, DLPH, LEA, ZBRA, BDX, EMN, CTRP and AKAM. These are on the top of my list as potential plays.




In Play Updates and Reviews

Waiting for Draghi

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market turned in a quiet session as investors appear to be waiting for Thursday's ECB meeting and Friday's jobs report.

Our new bearish play on BYI was triggered today.


Current Portfolio:


CALL Play Updates

The Boeing Company - BA - close: 135.88 change: -0.02

Stop Loss: 129.90
Target(s): To Be Determined
Current Option Gain/Loss: + 1.7%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: BA saw a spike higher this morning but spent most of the day inside the $135.75-136.15 zone. All in all a pretty quiet day. If stocks see a pullback we can look for BA to find short-term support near $134.00.

NOTE: More conservative investors might want to wait for BA to close above $136.50 as an alternative entry point since the top of the January 2014 gap down could be resistance (near $136.00-136.50).

Earlier Comments:
BA is in the industrial goods sector. The company is a major manufacturer for aerospace, aviation, and a defense contractor. The company last reported earnings on April 23rd and held an analyst day in mid May. Earnings results were strong. Wall Street expected a profit of $1.56 per share on revenues of $20.21 billion. BA delivered $1.76 per share with revenues rising to $20.46 billion for the quarter.

BA said their total company backlog had ended the first quarter at $440 billion. That's up from $390 billion a year ago. About $374 billion is for commercial airplanes and the rest is defense and space related. This represents about 5,100 aircraft orders and several years worth of production. BA recently reaffirmed their 2014 guidance and their airplane delivery scheduled.

Analysts have been positive and raising their price targets and earnings estimates thanks to BA's strong Q1 results, their improving margins, and BA's stock buyback program. Margins are a big deal. BA has been slowly growing its margins over the last couple of years and suggested they will continue to see margin improvement in 2014.

There has been some concern that the U.S. defense budget might be cut again and that could impact BA's defense sales. Yet the New York Times recently reported that BA is close to signing another multi-billion deal with the U.S. Navy for 47 more fighter jets. This deal is expected to close over the summer.

BA has also seen strong growth overseas with international sales accounting for 30% of its backlog. China is expected to grow into the largest aircraft market by 2032. BA is strengthening its position in China with another big sale of fifty 737 jets to a new Chinese budget airline. The retail price on this deal is estimated to be in the $3.8 to $5.5 billion. BA's China president said the company will deliver 140 aircraft to China this year following 143 deliveries in 2013.

Asia will also be a growing market for BA's defense and security business. A recent Bloomberg article mentions how territorial disputes in Asia are getting worse and there will be rising demand for maritime and aerial surveillance systems. BA's defense business chief believes aerial surveillance equipment and machines will continue to grow steadily for the "foreseeable future."

Technically shares of BA are on the up swing after spending more than three months consolidating in the $120-132 area. The recent strength has pushed BA through resistance and the stock closed at new four-month highs.

The point & figure chart is bullish and forecasting at $160 target. I do expect BA to see some resistance at its 2014 high near $145.00.

- Suggested Positions -

Long Aug $140 call (BA140816C140) entry $2.25*

06/02/14: Triggered @ 135.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on June 02 at $135.55
Average Daily Volume = 2.95 million
Listed on May 31, 2014


Biotech ETF - BBH - close: 91.67 chang6: +0.68

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: - 9.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: Biotech stocks were showing relative strength on Tuesday. The BBH added +0.74% and closed at new six-week highs.

Traders could use today's rally as a new bullish entry point.

Earlier Comments:
Last year the biotech industry doubled the market's growth with +60% gains in the BBH. The rally continued into January and February with almost another +20%. Then sentiment reversed. Suddenly traders did not want to own the momentum names or the high-growth names. News articles and debates about the extremely high costs of some biotech treatments like Sovaldi helped feed the sell-off. Biotech experienced 20 percent correction (actually -22.6%) in less than two months.

Now it appears that investors are losing their fear over the growth names again. The BBH has been consolidating sideways the last several weeks. Many believe the correction in biotech is providing a great entry point. There are plenty of high-profile biotech firms with low multiples. A lot of the big names have high-quality pipelines. The group could see more M&A activity as older firms seek to buy up younger rivals.

We want to be ready to buy calls if the BBH can breakout from this consolidation phase. Currently shares of this ETF are testing resistance near $90.00 and its 50-dma and 150-dma. I am suggesting a trigger to buy calls at $90.25.

Bear in mind that biotech stocks can be volatile. The BBH does not see a lot of volume and the option spreads are wide. Add it all up and I would label this a more aggressive, high-risk/high-reward trade. Investors may want to start with small positions.

- Suggested Positions -

Long Sep $95 call (BBH140920C95) entry $3.55*

05/27/14 triggered @ 90.25
*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

Entry on May 27 at $90.25
Average Daily Volume = 119 thousand
Listed on May 22, 2014


Capital One Financial - COF - close: 78.78 change: +0.15

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: - 3.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: COF bounced from support near $78.00 again this morning. If the $78 level fails the next level of support is probably near $76 and its 50-dma.

Earlier Comments:
COF is in the financial sector. The company provides financial services and products in the United States, United Kingdom and Canada. They're probably best known for the Capital One credit cards.

The financial sector took a leadership role in today's widespread market rally. The group has been lagging the big cap indices the last few weeks. If financials resume their up trend it's going to be a rising tide that helps lift shares of COF to new highs.

Financials should also benefit from the big picture view that interest rates will rise. Some of the federal reserve governors have been hinting that the Fed may have to raise rates sooner than expected. If rates do start rising then investors could start buying financials ahead of this trend.

Credit card companies are also showing strength in their loan quality. COF said their charge off rates have been dropping (losses from unpaid loans).

Technically shares of COF have a long-term bullish trend of higher lows and it's about to breakout past resistance and hit new multi-year highs. The point & figure chart is already bullish and suggesting an $83 target.

- Suggested Positions -

Long Sep $80 call (COF140920C80) entry $2.30*

05/28/14 triggered @ 78.75
*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

Entry on May 28 at $78.75
Average Daily Volume = 3.0 million
Listed on May 27, 2014


CVS Caremark Corp. - CVS - close: 77.71 change: -0.59

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: + 4.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: CVS saw some profit taking today, down -0.75%. If you look at the last three sessions it resembles a bearish reversal pattern. I would not be surprised to see CVS test the $77.00 level tomorrow. If $77 fails then look for support near $75 and its 50-dma. A bounce near $75 could be used as a new bullish entry point.

Earlier Comments:
CVS is in the services sector. The company provides integrated pharmacy healthcare services in addition to running a drug store chain with over 7,600 locations. CVS' largest rival is Walgreen's with 8,650 locations.

The company's most recent earnings report was mixed. CVS delivered a profit of $1.02 per share. That missed estimates by a penny. Revenues came in above expectations at $32.69 billion in the first quarter. Wall Street appears to have accepted CVS's "blame it on the weather" excuse. Last month CVS also disclosed they had finalized a settlement with the SEC over events dating back to 2009 that stemmed from its acquisition of Longs Drug Stores in 2008. In the settlement CVS did not have to admit any wrongdoing and does not have to restate any earnings reports. They're happy to put the ordeal behind them and for investors it's old news.

More importantly the company is seeing strong growth in its PBM business. Its pharmacy services segment saw revenues climb +10.3% to $20.2 billion in the second quarter. Management said CVS is "beginning to develop integrated products for both hospitals and health plans."

They're also growing into a broader healthcare provider with the retail-based clinic subsidiary MinuteClinic. According to CVS' website, "MinuteClinic launched the first retail medical clinics in the United States in 2000 and now has more than 800 locations in 28 states. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to provide treatment for common family illnesses, skin conditions and injuries, administer vaccinations, conduct physicals and wellness screenings, and offer monitoring for chronic conditions seven days a week without an appointment, including evenings and holidays."

American's growing acceptance of the MinuteClinic for quick healthcare services will grow. Long-term CVS will benefit from an aging population more dependent on their prescriptions. Plus, CVS will benefit from the growing number of new Americans being covered under Obamacare. Payments for these services will be covered by health care plans, Medicaid, and now the Affordable Care Act mandate.

Wall Street is happy with its steady growth. The most recent earnings report showed profits rising 18% year over year for the fifth consecutive quarter of double-digit earnings growth.

We're not setting a bullish exit target yet but the Point & Figure chart for CVS is bullish with a $102 target.

- Suggested Positions -

Long Aug $80 call (CVS140816C80) entry $1.04

05/22/14 triggered @ 77.25
option format: symbol-year-month-day-call-strike

Entry on May 22 at $77.25
Average Daily Volume = 5.1 million
Listed on May 21, 2014


Express Scripts Holding - ESRX - close: 69.59 change: -0.45

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: - 6.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: ESRX spent most of Tuesday's session bouncing along the $69.60 level. Unfortunately its intraday high failed near $70.00, which looks short-term bearish. I suspect ESRX will test $69.00 again tomorrow. I am not suggesting new positions at this time.

Earlier Comments:
ESRX is in the healthcare sector. The company provides pharmacy benefit management (PBM) services in the U.S. and Canada. Both the NASDAQ and shares of ESRX peaked in early March. It would appear that investors considered ESRX one of the higher-growth, momentum names since it has been sinking with that group over the last couple of months.

That big drop you see on ESRX's daily chart was market reaction to its latest earnings news. The results were disappointing. You could call it a trifecta of bad news. ESRX missed Wall Street's estimates on both the top and bottom line. Management guided lower for 2014. Plus they disclosed three separate subpoenas from different state authorities as the company is investigated for its relationship with drug makers.

Investors already had lowered expectations for ESRX's earnings because the company lost UnitedHealth Group (UNH) as a client last quarter. The loss of UNH accounted for about half of ESRX's lost revenues. ESRX complained that a lot of expected new enrollments had been postponed. They didn't see quite the impact from the new Obamacare exchanges previously expected.

It sounds like plenty of bad news for ESRX. Yet here's the interesting part. The stock lost -6% following its earnings report but there was no follow through lower. Investors have been buying the dip. Shares are up two weeks in a row and slowing chewing through resistance. With a drop from $79 to $65 (-17.7%) it is possible that all the bad news is already priced into ESRX stock price. The long-term trend for ESRX is still higher. As the new affordable healthcare policy changes gain momentum it should mean more enrollments for ESRX.

- Suggested Positions -

Long Aug $70 call (ESRX140816C70) entry $2.45*

05/21/14 triggered @ 69.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/19/14 adjust entry trigger from $70.50 to $69.50
adjust the strike price to the August $70s.

option format: symbol-year-month-day-call-strike

Entry on May -- at $---.--
Average Daily Volume = 6.5 million
Listed on May 17, 2014


Facebook, Inc. - FB - close: 63.08 change: -0.22

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: -19.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: It was a bit of a choppy day for FB but the stock spent most of the session within a $1.00 range. I do not see any changes from my earlier comments, "I am not convinced the pullback is over. I would consider buying calls on a dip near $61.00 or a breakout past $64.30."

Earlier Comments:
FB is in the technology sector. The company operates the largest social network on the planet with monthly active users up +15% year over year to 1.28 billion as of March 31st, 2014. Mobile monthly users were up +34% to 1.01 billion.

When investors started selling the momentum stocks and high-growth names in March shares of FB were not immune. The stock corrected from $72 to $55, a -23.6 percent correction. We suspect when investors return to the high-growth names they will flock to FB.

The company is firing on all cylinders with a strong Q1 report. Analysts were expecting a profit of 24 cents a share on revenues of $2.35 billion. FB delivered a Q1 profit of 34 cents with revenues soaring +71.6% year over year to $2.5 billion. Advertising revenues were up +82% from the same quarter a year ago. Mobile advertising has increased from 30% of ad revenues to 59% of ad revenues.

Wall Street is pretty bullish on shares of FB. Many analysts have price targets in the $75-85 zone. David Tepper's Appaloosa Management initiated a new position in FB last quarter. ITG Research recently offered positive comments on FB suggesting the current quarter could also come in ahead of estimates.

Update on the P&F chart: The recent rise above $64.00 has created a new P&F chart buy signal with a $79.00 target.

- Suggested Positions -

Long Sept $70 call (FB140920C70) entry $3.42

05/29/14 triggered @ 64.25
Option Format: symbol-year-month-day-call-strike

Entry on May 29 at $64.25
Average Daily Volume = 62 million
Listed on May 24, 2014


Gilead Sciences - GILD - close: 81.55 change: +0.34

Stop Loss: 77.90
Target(s): to be determined
Current Option Gain/Loss: +50.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/03/14: GILD shot higher this morning with a rally to $82.82 before trimming its gains. This looks like a reaction to news that Medicare will cover the cost of screening for hepatitis C. This could generate more customers for GILD's $84,000 cure (named Solvaldi).

Earlier Comments:
More conservative traders may want to move their stop closer to $80.00 or just take profits now.

We have less than three weeks left on our June calls.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/15/14 new stop @ 77.90, readers may want to exit now to lock in potential gains.
05/10/14 new stop @ 75.75
05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00

Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014


Hanesbrands Inc. - HBI - close: 84.69 change: -0.38

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
06/03/14: HBI traded down toward the $84 level this morning before traders started buying the dip. I don't see any changes from my earlier comments. I am suggesting a trigger to buy calls at $85.25.

Earlier Comments:
HBI is in the consumer goods sector. The company designs and manufacturers apparel. You wouldn't normally think of basic apparel maker as a momentum stock but HBI has been outperforming. Shares just ended the week at a new all-time high.

The company has delivered on its earnings results. When HBI last reported in January and April this year the company beat Wall Street's estimates both times and raised their guidance both times.

Think about that. HBI is not a retailer but their products are sold through retailers. Most of retail got hammered in the first quarter due to lousy winter weather. Yet HBI managed to beat estimates and then raised its guidance.

Jim Cramer has pointed out what many analysts are saying on the company. HBI has strong brand names like Hanes, Champion, Playtex, and Bali. HBI owns most of their supply chain, which allows them to keep and improve their strong margins. Their first quarter saw margins increase 180 points. Most of Wall Street is bullish on HBI's recent acquisition of Maidenform. HBI believes they can generate significant margin improvement in the Maidenform brand by 2016.

Technically the stock has been strong and traders quickly bought the dip last week. Currently HBI sits just below round-number resistance at $85.00. We are suggesting a trigger to buy calls at $85.25.

The Point & Figure chart for HBI is bullish with a $92 target.

Trigger @ $85.25

- Suggested Positions -

Buy the Oct $90 call (HBI141018C90)

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

Entry on May -- at $---.--
Average Daily Volume = 690 thousand
Listed on May 31, 2014


LyondellBasell Industries - LYB - close: 100.20 change: +0.63

Stop Loss: 94.75
Target(s): to be determined
Current Option Gain/Loss: +52.9%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/03/14: LYB tagged another new all-time high on an intraday basis at $101.00 this morning.

I am raising our stop loss to $94.75. More conservative traders may want to raise their stop even higher.

FYI: LYB is scheduled to present at an analyst conference tomorrow so the company might see some new headlines.

Earlier Comments:
The Point & Figure chart for LYB is bullish with a $110 target.

- Suggested Positions -

Long Sep $100 call (LYB140920C100)* entry $2.55**

06/03/14 new stop @ 94.75
05/15/14 new stop @ 93.75
05/12/14 LYB gapped open higher at $96.20 (+75 cents)
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.
symbol-year-month-day-call-strike

Entry on May 12 at $96.20
Average Daily Volume = 3.1 million
Listed on May 10, 2014


MasterCard Inc. - MA - close: 76.35 change: -0.70

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: -15.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: It was a disappointing session for the bulls. MA did not see any follow through on yesterday's rally. The stock reversed this morning. On a positive note MA did find support near $76.25 several times today.

Earlier Comments:
MA is in the financial sector. The company provides transaction processing and payment-related services. Globally cash is still the most dominant method of payment. That may not be true in the most developed countries but worldwide there is a long-term trend with consumers moving away from cash more toward cards and electronic payments, which will benefit MasterCard.

MA's latest earnings on May 1st was positive. The company beat Wall Street's estimates on both the top and bottom line. The company said a 14% increase in transactions, on a local currency basis, hit $1.0 trillion. They also saw a +14% jump in processed transactions. Cross border volumes were up +17%.

MA's CEO and President Ajay Banga said the company signed new deals with Wal-Mart (WMT), Sam's Club, and Target (TGT). WMT and Sam's will move their co-brand portfolios to MasterCard. TGT will also shift its co-brand cards to MasterCard and use MA's chip and PIN technology to upgrade their security. Banga said MA will, "continue to invest in technology and acquisitions that will speed our development of mobile and online solutions."

Both Visa and MA were caught up in the sanction backlash between Russia and Europe and the U.S. The two companies were not singled out but new legislation in Russia was going to force the two American companies out of the country. Working with Russian officials MA and Visa have found a way to sidestep the issue by creating a domestic (Russian) payment system within six months and create a Russian company to handle domestic transactions.

Technically shares of MA saw a -20% correction on an intraday basis from its January 2014 highs to the April intraday lows. The stock bounced near its long-term up trend. Now MA appears to be breaking out past resistance near $76, resistance at its 100-dma and 150-dma, and resistance at its five-month trend of lower highs. We're not setting an exit target yet but the point & figure chart is bullish with an $87 target.

- Suggested Positions -

Long Oct $80 call (MA141018C80) entry $2.85*

05/27/14 triggered @ 77.25
*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

Entry on May 27 at $77.25
Average Daily Volume = 5 million
Listed on May 24, 2014


3M Company - MMM - close: 142.89 change: +0.57

Stop Loss: 138.75
Target(s): to be determined
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/03/14: MMM initially spiked lower this morning but traders were in a buy-the-dip mood. The stock rallied to a new closing high. Our call has bounced back to breakeven. More conservative traders may want to exit now to avoid a loss.

FYI: Our current suggestion on the June calls will expire in less than three weeks.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/24/14 if you open new positions, use the July or October calls
05/20/14 adjust stop loss to $138.75 due to the dividend
05/15/14 new stop @ 139.49
05/08/14 triggered @ $142.00

Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014


PPG Industries - PPG - close: 201.72 change: -0.61

Stop Loss: 192.90
Target(s): To Be Determined
Current Option Gain/Loss: - 9.5%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/03/14: PPG snapped a four-day winning streak with a -0.3% decline. Nimble traders could use a dip near $200.00 as a new bullish entry point.

Earlier Comments:
Big cap industrial names have been leading the market higher. PPG is one of them. The company is in the basic materials sector. PPG manufacturers coatings, specialty materials, and glass products.

PPG has developed a strong trend of beating Wall Street's earnings estimates. They just did it again when they reported earnings on April 17th with EPS coming in 10 cents above estimates. Revenues were up +17% year over year to $3.64 billion. Earnings were up +33% from a year ago at $1.98 per share. The company is also seeing margin improvement.

Last month PPG's management announced a $2 billion stock buyback program and raised their dividend by +10% to $0.61 per share. PPG's CEO said that his company saw volumes improve in Europe for the first time in ten quarters. The tough winter in the U.S. did not hurt them. Thus far PPG has been able to pass along small price increases to offset rising commodity costs.

Technically the stock is in a long-term up trend. Shares have spent the last three months consolidating below the $200 level. Now the bullish pattern of higher lows is about to push PPG through major resistance near $200-201.

The Point & Figure chart is bullish and forecasting at $222.00 target.

- Suggested Positions -

Long Aug $210 call (PPG140816C210) entry $3.65*

05/30/14 triggered @ 202.00
*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

Entry on May 30 at $202.00
Average Daily Volume = 552 thousand
Listed on May 29, 2014


United Parcel Service - UPS - close: 103.43 change: -0.65

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 99.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/03/14: The rally in UPS hit a little profit taking today with a -0.6% pullback. If the 10-dma doesn't hold then the nearest support might be the $101.50 area.

Readers may want to adjust their stop loss higher.

Earlier Comments:
I am concerned that the $105 level could be resistance. More conservative traders may want to start taking profits now or closer to $105.00.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $123 target (up from $114 a few weeks ago).

- Suggested Positions -

Long Jul $100 call (UPS140719C100)* entry $1.98

05/29/14 more conservative investors may want to start taking profits now or as UPS gets closer to potential resistance at the $105 level.
05/12/14 triggered @ 100.25
*I've provided the more standardized option symbol format.
symbol-year-month-day-call-strike

Entry on May 12 at $100.25
Average Daily Volume = 2.9 million
Listed on May 10, 2014




PUT Play Updates

Bally Technologies - BYI - close: 57.01 change: -0.92

Stop Loss: 60.35
Target(s): To Be Determined
Current Option Gain/Loss: - 6.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: Our brand new trade on BYI is open. The stock fell to new lows for 2014 and hit our suggested entry point at $57.25. I would still consider new bearish positions now at current levels.

Earlier Comments:
BYI is in the services sector. The company designs, manufactures, and sells gaming equipment (gambling type games, slot machines, etc.). After an incredible run in 2013 shares of BYI have reversed sharply and is in a bear market with a -29.9% drop from its January 2014 highs.

Looking at the earnings news you would think BYI should be doing better. They raised guidance after their Q4 report and offered bullish guidance again when they reported earnings on May 1st. Their most recent results missed Wall Street estimates by two cents with a profit of $1.10 per share but revenues came in better than expected. Revenues were up +30% thanks to its acquisition of SHLF entertainment. In spite of this news investors were not happy with the results and have continued to sell BYI.

It would appear that the game-making business is facing industry-wide headwinds. BYI is considered one of the biggest and strongest in the industry but the big names are losing market share with new comers making an already competitive business even worse. Casino operates are delaying or cutting back on upgrading new machines. Expectations on how many slot machines Vegas is going to replace in 2014 has been downgraded.

A number of analyst firms have been downgrading their price targets on BYI over the last few months. News of a new CEO came as a shock. After less than a year and a half on the job BYI announced they were replacing their CEO with its former CEO effective May 23rd. This was a surprise. As one analyst put it, "You don't change CEOs when things are going well."

FYI: The Point & Figure chart for BYI is bearish with a $50 target.

- Suggested Positions -

Long Oct $55 PUT (BYI141018P55) entry $3.30

06/03/14 triggered @ 57.25
Option Format: symbol-year-month-day-call-strike

Entry on June 03 at $57.25
Average Daily Volume = 697 thousand
Listed on June 02, 2014


Intl. Business Machines - IBM - close: 184.37 change: -1.32

Stop Loss: 187.50
Target(s): To Be Determined
Current Option Gain/Loss: -13.3%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/03/14: Great news! There was no follow through on yesterday's bullish move in IBM. Instead the stock has reversed yesterday's gains and is now back beneath $185 and its 200-dma. Readers could use today's move as a new bearish entry point to buy puts.

Earlier Comments:
IBM is in the technology sector. The company has grown from a massive hardware manufacturer into a global information technology services company.

The company reported earnings on April 17th. Results were in-line with Wall Street estimates on the bottom line at $2.54 per shares. Revenues fell -3.9% and missed estimates by a wide margin. Management reaffirmed their 2014 guidance. This was the fifth quarter in a row that IBM missed analysts' revenue estimates and its eight quarter in a row of revenue declines. Shares plunged from $196 to $187 on this earnings news. Since its quarterly report IBM's stock has rallied just high enough to fill the gap and then reverse lower.

The company is currently facing a new problem and that's China pressuring local companies to stop using U.S. technology. Actually it's not a new problem. This has been trending for a couple of years and the issue was exacerbated after the Edward Snowden scandal. Now many foreign governments distrust any tech hardware from big name U.S. corporations for fear there could be U.S. spying malware on it.

This tension between China and U.S. has escalated following America's recent allegations of five Chinese military officers hacking American businesses. In response the story now is China's government is pressuring large state-run banks to stop using IBM servers and replace them with local domestic hardware. Chinese officials are arguing that using IBM machines could be a national security threat. The Chinese market accounts for about 5.5 percent of IBM's total sales.

This political pressure to stop buying U.S. technology could last a while, especially as China takes a more belligerent pose against the west and its neighbors.

Technically shares of IBM are underperforming. The stock just broke down below support near $185.00 and technical support at its simple 200-dma. There appears to be significant support near $172.00. Coincidentally the point & figure chart is bearish and forecasting a $172 target.

We're not setting a target but $175-172 is a good spot to aim. I wouldn't be surprised to see a short-term bounce at $180.

- Suggested Positions -

Long Aug $180 PUT (IBM140816P80) entry $4.50*

05/29/14 trade begins. IBM gapped higher at $183.64
*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

Entry on May 29 at $183.64
Average Daily Volume = 3.2 million
Listed on May 28, 2014


Whole Foods Market, Inc. - WFM - close: 37.71 change: -0.05

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: -10.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/03/14: WFM found support near $37.00 again this morning. The stock spent the rest of the session slowly recovering from its morning spike lower.

Earlier Comments:
WFM is in the services sector. The company runs a grocery chain focused on natural and organic foods. As of May 2014 they had 379 stores. Unfortunately their success in the higher-margin organic foods has fueled significant competition.

The stock has been sinking for months as investors worried about growing competition. WFM's recent earnings report confirmed their fears. The stock crashed -19% after WFM missed estimates on both the top and bottom line and confessed they were facing tougher rivals. Management then lowered their 2014 guidance.

WFM said revenues still grew +10% and their same-store comparable sales were up +4.5%. Unfortunately profits were relatively flat and margins are getting squeezed with higher cost of goods sold and rising capex.

WFM is facing competition on all sides. Sprouts Farmers Market (SFM), The Fresh Market (TFM), Kroger (KR), Wal-mart (WMT), and regional competitors like HEB and Trader Joe's are all jumping on the organic and natural food bandwagon.

- Suggested Positions -

Long Aug $35 PUT (WFM140816P35) entry $1.01

05/19/14 trade begins. WFM opens at $37.89

Entry on May 19 at $37.89
Average Daily Volume = 9.2 million
Listed on May 17, 2014