Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/17/2014

Table of Contents

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

Market Wrap

Waiting on Yellen

by Jim Brown

Click here to email Jim Brown

The market was pretty quiet as traders held their positions ahead of Yellen's press conference on Wednesday.

Market Statistics

The Dow and S&P edged slowly higher ahead of the FOMC announcement and Yellen press conference. However, the Nasdaq and the Russell 2000 surged ahead and provided a sentiment boost to the overall market. When the small caps and tech stocks are leading it suggests the big caps are poised to make new highs as long as Yellen does not disappoint.

That is a big IF because the spike in inflation as represented in the CPI this morning could cause some uneasiness around the FOMC conference table this week. How Yellen addresses that point in the meeting statement and the press conference could either power the market higher or send it off the cliff.

The Consumer Price Index (CPI) for May rose +0.4% overall and the core rate rose +0.3%. This was the seventh straight month of gains. While that may not sound like much the monthly gains from February to May were +0.1%, +0.2%, +0.3%, +0.4%. Are you seeing the trend there? The core rate progression since February was +0.1%, +0.2%, +0.2% and +0.3%. The Fed can't say this time that it is only the headline rate increasing while the core rate remains muted. Both are moving in the same direction and picking up speed.

The real kicker is the 12 month inflation rate. In February it was +1.1%, March +1.5%, April +2.0% and May +2.1%. The core rate rose from 1.6% to 1.9% over the same period.

Energy prices rose +0.9% in May. The food and beverages rose +0.5% and the food at home component rose +0.7% and the biggest gain in three years. The trailing 12 month rise was +2.5% for overall food prices.

The recent spike in oil and natural gas prices is going to cause havoc with overall prices in the coming months. There is almost no way we won't see a continued surge across the board and the Fed is not going to be happy. They continually claim that inflation is subdued and will remain low for a long time. Over the last four months that claim is starting to wear thin.

There is a growing number of analysts that believe the Fed will have to accelerate its timetable for rate increases and possibly even end QE earlier than expected. This makes the FOMC statement and press conference this week especially troublesome. They have to mention the rising inflation and how they view the coming months. This could be a touchy topic and the market should be concerned.

As you can see in the chart below inflation has been abnormally low since the recession and there were a couple spikes that eventually faded. I expect the FOMC to say this is another spike as a result of the snapback in demand from the harsh winter and factors like the rising energy prices that will eventually fade.


Also weighing on the FOMC meeting will be the drop in new residential construction for May. The headline number came in at 1,001,000 compared to April at 1,071,000. Estimates were for 1,036,000 new homes. That -6.5% drop from April in what should be the busiest part of the building season is definitely troubling. Single family starts declined from 664,000 to 625,000 and multi-family starts fell from 407,000 to 376,000.

The decline in activity was nationwide and not just one region. The Southern region did buck the trend with a +7.3% increase in starts. Permits fell -6.4% to 991,000 and now -1.9% below year ago levels.

Analysts tried to use the weather excuse again saying the surge in April was the snapback in starts and not really a new trend. They may be right since starts in January were 897,000, February 928,000 and March 950,000. The weather did depress the late winter months since December, not normally a big month, did register 1,034,000 starts. The three month lull was definitely weather related and that lends credence to the snapback theory in April.

Regardless of the weather the Fed will be discussing the weakness in housing along with their future plans for cutting stimulus.


The calendar for tomorrow is highlighted by the FOMC announcement and the Yellen press conference. The worry for me is how Yellen handles the rising inflation in the press conference and the potential for an accelerated end to QE. Potential changes to the current QE taper are extremely unlikely but always a possibility.

This could be a pivotal meeting for the Fed. The economics are slowly improving and earnings estimates for Q2 are nearing four times the +2.4% growth in Q1. There is some incentive for the Fed to stand pat and just let the QE expire at the current pace because ending it early could upset the markets before the economic rebound becomes self sustaining.

Thursday's Philly Fed Survey would normally be a highlight for the week as the first major manufacturing report for June but it will probably be lost in the whirlwind of headlines left over from the FOMC events and the Iraqi war.

Friday is a quadruple witching and that is normally bullish. However, the week in June after the quadruple witching has been down 21 of the last 24 years. There is probably some technical explanation for the decline but it may be as simple as the arrival of the summer vacations and investors are cashing out and heading for the beach.


Also on the calendar for Wednesday is the Amazon smartphone announcement. The phone is widely rumored to have 3D features thanks to six tracking cameras that feature facial recognition to tilt the images depending on how the phone is held in relation to your face. Amazon is expected to sell the phones for just over cost and that could upset the current balance in the smartphone market.

On the downside there is a rumor that they signed an exclusive agreement with AT&T for service. That would be a negative since the AT&T network is less dense with large blocks of the country having spotty service. Amazon has been having talks with the major carriers in Europe but no word on which one has the best chance for getting the contract.

Samsung had a 31% market share of the 288 million phones shipped internationally in Q1. Apple had 15%. If you only count the USA Apple had 37% with Samsung at 29%. Amazon is not going to suddenly gain a large percentage of the market. If they are lucky they may gain 2-3% over the first year but they have a lot of competition from Microsoft, Nokia and the dozen or more Asian competitors.

Amazon is hopeful that phone users will take a picture of a product in a store and then instantly buy it on Amazon. That would be the best outcome for Amazon and they would be happy to give the phones away at cost if all the users would become Amazon buyers.

With all the Amazon products the one they make the most money with is rarely heard. This is their cloud services division. They sell space on their servers to anyone with a very low entry fee as in FREE. Once you get hooked and start adding additional servers, memory capacity, processors, etc the free price becomes a monthly commitment that grows and grows and grows. Now Amazon Web Services has FIVE times the COMBINED computing capacity of the next 14 service providers according to Gartner Group. Five times the next 14 providers. The amount of scale is unbelievable. Some analysts expect Amazon to eventually sell more in annual cloud services than they will in retail merchandise. They sold $41 billion in retail products in North America alone in 2013. The average person does not have a clue how big Amazon really is.


SunTrust Mortgage (STI) agreed to pay $968 million to settle a federal probe into improper mortgage originations. SunTrust is the seventh largest mortgage originator. The settlement also covers 49 attorneys general so they will not have to worry about a new problem cropping up at the state level. In the settlement the bank said it improperly originated loans in the 2006-2012 period where loans did not have the proper documentation or verifications. Basically SunTrust wrote loans to anyone who applied just like every other mortgage bank. STI has previously set aside $1.2 billion to resolve the legal issues. Five other banks paid $25 billion to settle similar allegations in 2012.


SolarCity (SCTY) caught fire today after they agreed to buy Silevo for up to $350 million. The purchase price is $200 million plus an additional $150 million upon achievement of certain milestones. Silevo manufactures solar panels. Last week the Commerce Department announced tariffs on solar panels made in China and SolarCity gets their panels from China. CEO Elon Musk said the move was to gain control over their own panel costs and to manufacture them to fit SolarCity applications.

Musk said despite the excess of panels in the market today, with the majority coming from China, there is still a shortage of quality "unsubsidized" high efficiency panels to compete with the fossil fuel energy supplied by gas and coal. The Chinese tariffs would raise panel prices from 72 cents per watt to more than 80 cents. Musk said the majority of the excess panels on the market are low efficiency. Silevo has a manufacturing plant in China. However, they have plans underway to build a larger plant in New York using the proven manufacturing techniques they developed in China. With the SolarCity buyout the plant is expected to be upsized. Musk said "our intent is to combine what we believe is fundamentally the best photovoltaic technology with massive economies of scale to achieve a breakthrough in the cost of solar power. At a targeted capacity of more than 1 gigawatt within the next two years, it will be one of the single largest solar-panel production plants in the world. This will be followed in subsequent years by one or more significantly larger plants at an order of magnitude greater annual production capacity."

Some analysts called this the "Tesla-zation" of SolarCity. Tesla is taking control of their battery supply by building a $5 billion giga-factory. Now Musk is putting SolarCity in charge of making their own panels and being in charge of their own destiny by constructing multiple giga-factories for solar panels. If anyone can make this project it is Elon Musk.


Flash memory maker Fusion-IO (FIO) got a flash deal from SanDisk (SNDK) on Monday. Sandisk offered to buy FIO for $1.1 billion in cash and the deal is likely to close in Q3. Fussion-IO makes flash memory solutions for PCs using the PCI-e interface. It is a really high dollar, high performance product for users that need lots of fast memory rather than waiting on a slow disk drive. The PCIe-based SSDs are in high demand for online transaction processing and data warehousing.

The announcement was on Monday but SNDK shares not only spiked on the news on Monday but again today. The street really likes this deal.



Adobe (ADBE) reported earnings after the bell and the stock rocketed from $67.50 to $74 on the news. Net income rose +16% to $88.5 million or 17 cents per share. Excluding one-time items the earnings rose to 37 cents and analysts were looking for 30 cents. Revenue rose +6% to $1.07 and analysts were looking for $1.03 billion. Adobe said it had 2.3 million paid Creative Cloud subscribers, up from 464,000 just three months ago.

For the current quarter Adobe projected earnings of 22-28 cents and analysts were expecting 27. While that forecast was weak apparently the other metrics made up for it.


American Airlines (AAL) said it was cutting flights to Venezuela because the country is holding $750 million in revenue and won't release the funds because of the country's financial problems. American said starting July 2nd it was cutting flights from 48 per week to only 10. They will only fly from Miami and they are dropping the existing flights from New York, Dallas and San Juan, Puerto Rico.

The International Air Transport Association, a trade group for major world airlines, said Venezuela is holding $4 billion in airline money because of the currency problems. The government gets to say what companies get to use dollars and for what reason. Apparently airfares are not an approved reason. The government tries to force companies to use the local currency but the exchange rate is so bad it does not work. Air Canada and Air Alitalia have suspended all flights and Panama's Copa has reduced services. Several other U.S. airlines have also restricted flights because the government won't release their money.

Last month the government let six Latin American airlines repatriate revenue from 2012 and 2013. Otherwise Venezuela would barely have any service today. Airlines from America are not likely to get any money soon. America is the great satan according to the late Hugo Chavez and his successor Maduro is keeping the tradition going by refusing to pay American companies operating in Venezuela. Several oil companies have already pulled out and some of their rigs were nationalized by Maduro, meaning they no longer belong to the companies and cannot be removed from Venezuela.

AAL shares rose +2% on the news.


You probably won't be surprised to learn that the war in Iraq is still in progress. The battle between Sunni and Shia has been ongoing for 1,300 years so it is not likely to end soon. The U.S. said it was sending 275 soldiers to Iraq to protect the embassies. The Iraq embassy has more than 5,000 employees and it is the largest in the world. With the ISIS only 40 miles away from Baghdad today I am sure those employees are getting nervous. However, Baghdad is now an armed Shia city and the potential for the ISIS to take it over is practically nonexistent. The biggest threat to Baghdad now is car bombs as a demoralizing weapon.

The price of crude oil peaked at $107 as I expected because the potential impact to Iraq's crude production is very small. The slide in crude prices and the lack of any major headlines out of Iraq took the weight off the equity markets. I predicted the headlines would have little impact on the markets this week because it is now old news.

Despite the Fed's sleeping potion that has removed nearly all volatility from the equity markets the indexes sleepwalked a little higher today. The S&P traded in a 10 point range to close at 1,942 and -1 point below the intraday high. The extremely low volatility on the S&P is the worst in 35 years. It has gained only 12 points in the last three days and remains -9 points below its historic high close at 1,951.

That lack of volatility could disappear on Wednesday afternoon as Yellen speaks. There is a very good possibility her press conference could send the markets in a sprint in either direction or both. The post announcement direction is normally a head fake. After a few minutes the indexes normally reverse and head off in the opposite direction. The following day is also known as a reversal day after the analysts have all night to post their ideas on what the Fed really said and how it will impact the market.

The S&P has support at 1,925 and resistance at 1,951 and the odds are very good we will touch one of those numbers this week.


The Dow is slowly edging higher as it tries to shake off that huge bout of profit taking from last week. The spike was out of context with the prior gains and was begging to be sold. That consolidation appears to be fading and the index is slowly retaking the lost ground.

The various Dow components have turned mixed after a strong majority were positive over the last four months. The Dow is moving higher but it is on the back of a few strong gains and it is not broad based. That could easily change but it suggests some investors are still lightening the load for the summer.

The Dow is a long way from the resistance highs at 16,970 with initial support at 16,700.




The Nasdaq Composite returned to the scene of the crime today with the retest of resistance at 4,344. This time the index did not recoil as a result but hugged that resistance level the rest of the day. The small -7 point drop at the close was profit taking from the lack of a breakout. Astute investors saw the stall and facing the FOMC on Wednesday they cashed in a few chips.

I view the decent gain and minimal selling on the resistance touch as bullish.



The Russell 2000 rallied nearly a full percent to also touch strong resistance at 1,180 without a material decline after it was reached. I view the strong performance by the Russell and the Nasdaq as very positive for market sentiment. If the Russell were to move over 1,180 I think it would cause significant short covering.


Wednesday is sure to be a pivotal day in the markets. We can only hope that Janet Yellen continues her Empress of the Doves imitation and the market is pleased. She will have a tight rope to walk and her inexperience in FOMC press conferences has gotten her into trouble before. Let's hope she is at home practicing right now.

The market should go directional by next week. The FOMC uncertainty will be over and the headlines from Iraq should continue to diminish. Unfortunately, the week after the June expiration has been down for 21 of the last 25 years. While it may or may not happen again in 2014 we should plan accordingly.

As I said last week I believe we are in "buy the dip" mode until proven wrong. After the FOMC events there may be no headlines on the horizon to push the market in either direction but the ones that count are never expected as we saw with Iraq. We are headed into the summer doldrums season so try not to overload your accounts with longs. Summer corrections can be ugly. However, summer rallies are always unexpected and the short squeezes on low volume are always fun.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Cloud-Based Commerce

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Demandware, Inc. - DWRE - close: 65.69 change: +0.53

Stop Loss: 59.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DWRE provides cloud-based digital commerce solutions. They first introduced their platform in 2004. According to DWRE's website they "power more than 200 retail brands across more than 800 sites around the globe."

The stock was hammered lower this spring as investors sold everything that might be considered high-growth or a momentum-stock. DWRE corrected from $80 to $45 but shares have since rebounded.

Earnings have been strong. The company reported Q4 numbers in February that beat estimates and DWRE management raised their Q1 and 2014 guidance. DWRE reported their Q1 numbers on May 6th. Wall Street was expecting a loss of 9 cents per share on revenues of $29.0 million. DWRE delivered a loss of 7 cents. Revenues were up +57% to $32.2 million. DWRE's CEO said their momentum from 2013 carried over into 2014. The first quarter this year saw record subscription revenues.

Technically shares of DWRE have broken through resistance in the $60-65 zone and all of its major moving averages. The stock also has short interest that is about 8.5% of the small 31.8 million share float. New relative highs could spark more short covering. Currently the point & figure chart is bullish and suggesting a long-term target of $99.00.

Today's high was $66.63. We're suggesting a trigger to buy calls at $66.75. I would consider a more aggressive, higher-risk trade. DWRE can be volatile and the options are not cheap. I'm suggesting small positions to limit our risk.

Trigger @ 66.75 *small positions*

- Suggested Positions -

Buy the Oct $70 call (DWRE141018c70) current ask $6.10

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

Annotated Chart:

Entry on June -- at $---.--
Average Daily Volume = 705 thousand
Listed on June 14, 2014



In Play Updates and Reviews

Stocks Deliver Widespread But Mild Gains

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market's major indices all posted gains but the rally was relatively mild. The small cap Russell 2000 and the NASDAQ composite looked the strongest today.

ESRX hit our stop loss.

SBUX and SLCA hit our entry trigger.


Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 107.41 change: -0.95

Stop Loss: 99.90
Target(s): To Be Determined
Current Option Gain/Loss: + 32.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: APC saw some profit taking today with a dip toward $107. I am not suggesting new positions at the moment.

Earlier Comments: June 10, 2014:
APC is in the basic materials sector. The company is a very active oil and natural gas producer. They have assets in the Rocky Mountains, the Southern U.S., the Gulf of Mexico, and Alaska. Plus, APC is active internationally with assets in Algeria, Brazil, China, Colombia, Ghana, Liberia, Mozambique, New Zealand, Sierra Leone, and South Africa. Altogether APC has a strong onshore and off-shore portfolio.

The company's latest earnings report on May 5th was better than expected. Wall Street was expecting $1.14 per share. APC delivered $1.26. APC said they set record volumes in the quarter at 819,000 barrels of oil equivalent (BOE) per day. Management went on to raise their full-year sales-volume. A week later they increased their dividend by 50% from 18 cents to 27 cents per share.

APC could end up a big liquefied natural gas (LNG) producer with their assets in Mozambique (Southeast Africa). Last year APC drilled two natural gas off-shore wells. This year they could drill up to eight new wells. The company recently upgraded their view on how much recoverable gas in their northern Mozambique assets to 50 trillion to 70 trillion cubic feet. APC is developing an LNG project and plan to deliver their first LNG cargo in 2018.

One of the biggest headlines for APC has been its settlement over the TROX litigation. This refers to a large lawsuit over the bankrupt Tronox company, which was spun-off from APC's Kerr-McGee division. Previously the estimated penalty range for this TROX lawsuit was in the $5.15 billion to $14.17 billion with many analysts estimating the final results would probably be around $10 billion. On April 3rd this year APC reported they would settle this for $5.15 billion, the very low end of the range and the stock exploded higher. Getting past this TROX liability has removed a very dark cloud for the company and the stock price.

It is worth noting that APC still has potential legal risk from the April 2010 Macondo well blow out. BP Plc was the operator and majority owner of the well but APC did own 25% of it. The U.S. judges are arguing that APC will be held responsible for its 25% of the penalties. The final numbers could be huge. The U.S. Clean Water Act allows the government to fine the companies $1,100 per barrel of oil spilled into the Gulf. Plus, they could add another $4,300 penalty per barrel for gross negligence. Right now BP is arguing with the courts over how much oil was spilled. The U.S. is claiming 4.2 million barrels of oil escaped into the Gulf of Mexico. BP estimates only 2.45 million barrels. APC management has suggested they may not be fined for any gross negligence penalties since they did not have any direct operational involvement. The penalty phase for this lawsuit is scheduled for January 2015. This issue is clearly not stopping the rally in shares of APC today.

Technically shares of APC have been consolidating sideways under resistance near $105 with a bullish trend of higher lows. Now the stock is on the verge of breaking out.

- Suggested Positions -

Long NOV $110 call (APC141122C110) entry $4.80*

06/11/14 APC hit our trigger at $105.25
rumors this morning that XOM might buy APC.
*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 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014


The Boeing Company - BA - close: 132.45 change: -0.09

Stop Loss: 131.25
Target(s): To Be Determined
Current Option Gain/Loss: -47.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: After last week's sharp pullback shares of BA are not bouncing. The stock has been stuck drifting sideways near $132 and just above its 150-dma. We're growing concerned about BA's lack of strength. Tonight we're adjusting the stop loss to $131.25.

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*

06/17/14: new stop @ 131.25
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: 91.74 chang6: -0.75

Stop Loss: 91.45
Target(s): to be determined
Current Option Gain/Loss: -15.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: Biotechs were seeing some profit taking on Tuesday and the BBH lost -0.8%. We are raising our stop loss to $91.45. More aggressive traders may want to move their stop to just below $90.00 instead.

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*

06/17/14 new stop @ 91.45
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: 80.90 change: -0.14

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: +36.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: COF spent Tuesday's session consolidating sideways. Shares look like they might retest support near $80.00 again.

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: 76.20 change: +0.06

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: -47.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: CVS drifted sideways along the $76 level on Tuesday. I don't see any changes from my previous comments.

The company is due to present at two conferences this week. One on June 18th and the other on June 19th.

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


Expedia Inc. - EXPE - close: 77.62 change: +3.04

Stop Loss: 71.45
Target(s): To Be Determined
Current Option Gain/Loss: +15.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: Shares of EXPE were upgraded this morning. The stock reacted by gapping higher at $76.56 and closing with a +4.0% gain. The next level of resistance is probably the $80.00 mark.

Earlier Comments: June 9, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a trend of beating analysts' estimates with strong profit and revenue growth. This past quarter EXPE reported revenues of $1.2 billion. That is the fifth quarter in a row that EXPE has delivered double-digit year over year revenue growth. The company has also seen surging growth in its bookings. Q3 2014 saw 15% bookings growth. Q4 2014 was +21%. Q1 2014 was +29%.

Analyst firm Cantor Fitzgerald recently offered bullish comments on EXPE and raised their price target. The company is having success with its Expedia Traveler Preference program. In Q3 2013 there were about 35,000 hotels in the program. By Q1 2014 that has grown to 51,000 hotels. As more hotels join it will boost EXPE's room nights metric and sales.

Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014.

Bears could argue that EXPE, PCLN and OWW could face competition from companies like Google and Facebook as they seek to boost their ad revenues to their large audiences. Reuters has reported that Google is experimenting with some programs with a few hotels. This threat is probably a few years away and could eventually make EXPE as potential takeover target.

Technically EXPE experienced a correction from $81 to $67 earlier this year. The stock found support in the $67 area and just recently EXPE has broken out past some key resistance.

At the moment shares of EXPE are flirting with a breakout past potential round-number resistance at the $75.00 mark. The Point & Figure chart is bullish and forecasting at $90.00 target. I do expect the $80.00 area to offer some overhead resistance. We will choose a target later as the play progresses.

- Suggested Positions -

Long Oct $80 call (EXPE141018C80) entry $4.15*

06/11/14 triggered @ 75.75
*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 June 11 at $75.75
Average Daily Volume = 1.6 million
Listed on June 09, 2014


Hanesbrands Inc. - HBI - close: 87.44 change: +1.75

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: + 2.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: HBI displayed relative strength with a +2.0% rally and a new closing high.

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.

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

- Suggested Positions -

Long Oct $90 call (HBI141018C90) entry $2.94

06/04/14 triggered @ 85.25
Option Format: symbol-year-month-day-call-strike

Entry on June 04 at $85.25
Average Daily Volume = 690 thousand
Listed on May 31, 2014


PPG Industries - PPG - close: 202.51 change: -0.51

Stop Loss: 199.85
Target(s): To Be Determined
Current Option Gain/Loss: - 9.5%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/17/14: PPG tried to bounce but shares failed near $204 and its 10-dma. PPG looks headed for what should be support at $200.00.

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


Starbucks Corp. - SBUX - close: 75.31 change: +0.22

Stop Loss: 71.75
Target(s): To Be Determined
Current Option Gain/Loss: -7.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: SBUX managed to trade to new three-month highs and hit our suggested entry point at $75.65 before paring its gains. Our trade is officially open but I would wait for a move above today's high (which was exactly $75.65) before initiating positions.

Earlier Comments: June 14, 2014:
The twin-tailed siren of Stabucks could be ready to sing for investors again. The company is named after the first mate in Herman Melville's Moby Dick. According to company literature their mission is "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time."

Notice it didn't say one cup of coffee at a time. Make no mistake. Coffee is big business. According to Business Insider coffee is worth about $100 billion globally and planet earth drinks about 500 billion cups of coffee every year. Quite a few of those cups are consumed at Starbucks' ubiquitous coffee chain, which now has over 10,000 company-run stores and over 9,500 licensed stores.

Believe it or not but tea is a bigger market. Tea producers churn out more than 4 billion kilograms of tea every year. Tea is the second-most consumed beverage behind water. Several months ago SBUX purchased the Teavana chain for $620 million. Now they're planning to update and expand the brand into 1,000 tea bars in the next five years.

SBUX recently said that food remains a big opportunity and currently food sales are only 22% of its U.S. business. SBUX purchased the French bakery chain "La Boulange" in 2012 and they've started distributing some of the bakery's products in more than 6,000 Starbucks stores. These should reach all of their coffee stores by the end of this year. They're also testing lunch items and testing alcohol sales in certain states. That means Malbec wines and bacon-wrapped dates could be available at a Starbucks store near you soon. The company said that adding food items has increased purchases and boosting ticket growth.

This past week SBUX said they're going to roll out wireless charging mats for smartphones in some of their stores soon.

Put it altogether and the company has big plans. Their latest earnings report in late April was mixed. Profits were in-line with estimates but revenues were a miss although same-store sales came in above expectations. SBUX management raised their Q4 guidance and 2014 guidance following its results.

Technically SBUX looks ready to breakout again. After correcting from its 2013 highs near $82 the stock tested $68 in April this year. The last several days have seen SBUX trying to breakout past big moving averages like the 150-dma and 200-dma. The June 6th high was $75.54. We're suggesting a trigger to buy calls at $75.65.

- Suggested Positions -

Long OCT $80 call (SBUX141018c80) entry $1.66

06/17/14: triggered @ 75.65
Option Format: symbol-year-month-day-call-strike

Entry on June 17 at $75.65
Average Daily Volume = 3.5 million
Listed on June 14, 2014


U.S. Silica Holdings - SLCA - close: 53.24 change: +1.92

Stop Loss: 48.40
Target(s): To Be Determined
Current Option Gain/Loss: +14.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: Our new trade on SLCA is open. The stock displayed relative strength with a +3.74% gain and a breakout past short-term resistance near $52.00 and its 10-dma. Our suggested entry point was hit at $52.15.

Earlier Comments: June 14, 2014:
There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long Sep $55 call (SLCA140920C55) entry $3.15*

06/17/14 triggered @ 52.15
*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

Entry on June 17 at $52.15
Average Daily Volume = 1.2 million
Listed on June 14, 2014


United Parcel Service - UPS - close: 101.61 change: +0.43

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 25.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/17/14: UPS was making headlines this morning when they announced pricing based on dimensional weight. This move follows its rival FedEx (FDX) who is changing their pricing structure to not just consider the weight of the package but also the volume of the package.

Shares of UPS bounced but its +0.4% gain was in-line with the rebound in the transportation average.

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

Currently we do not have any active put trades.



CLOSED BULLISH PLAYS

Express Scripts Holding - ESRX - close: 69.85 change: -0.89

Stop Loss: 69.90
Target(s): to be determined
Current Option Gain/Loss: +19.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/17/14: Monday's display of relative weakness in ESRX worried us. Last night we raised the stop loss to $69.90. Today shares fell to support near $70 and its 200-dma and hit our stop loss at $69.90.

ESRX almost made it through the day without hitting our stop but a late day drop finally tagged it.

- Suggested Positions -

Aug $70 call (ESRX140816C70) entry $2.45* exit $2.93 (+19.5%)

06/17/14 stopped out
06/16/14 new stop @ 69.90
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

chart:

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