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Daily Newsletter, Saturday, 6/21/2014

Table of Contents

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

Market Wrap

All Aboard!

by Jim Brown

Click here to email Jim Brown

The market train is climbing the mountain of worry. Is there still time to climb on board?

Market Statistics

The Dow, Nasdaq Composite, S&P-500, S&P-100 and Midcap 400 all closed at new highs on a Friday ahead of a weekend that could have some seriously negative headlines. The quadruple witching expiration Friday is normally a bullish day and that helped add to the gains. It would appear the market train is gaining momentum as we head for Dow 17,000 and S&P 2,000 but should we buy the breakouts?

I have said many times that new market highs attract new money faster than a picnic attracts flies. That does not mean it is always a buying opportunity. This time the market is slowly overcoming serious geopolitical events including the war in Iraq and the Russian buildup on the Ukraine border.

The markets ignored a cut in the economic forecast by the Fed and charged higher because Janet Yellen convinced investors that Fed stimulus would continue well into 2015. The Fed cut its 2014 GDP forecast from 2.9% to 2.3% but they used the "weather ate our economics" excuse so investors breathed a sigh of relief and charged ahead.

While it remains to be seen if the market will continue in rally mode for the rest of the summer it has proven one thing. Never short a dull market. With hedge funds currently net short S&P and Russell 2000 futures the most hated rally ever just keeps building on its gains in a very unspectacular fashion.

The slow melt up is confusing the bears. A market struggling to post gains day after day is normally one that is about to roll over. The bears are betting on that failure but so far those bets have been in vain. Now we are seeing the results of a rotation out of those short bets. Funds may not yet be convinced to go long but they are reducing their shorts.

Summer rallies are strange creatures. They are normally on low volume and without any material momentum. They just creep higher until one day they don't. When the direction changes in a low volume market it can be dramatic. This fear of the future is keeping a lot of traders on the sidelines.

Another factor adding to the confusion is the approaching Q2 earnings. S&P is predicting +7.1% earnings growth compared to only 3.5% in Q1. The forecast is based on the snapback concept from the horrible weather in Q1. Since hardly a day goes by without a couple high profile earnings warnings it makes you wonder where S&P is getting their bullish estimates.

The final GDP revision for Q1 will be on Wednesday. The initial estimate was for 0.11% growth. The second revision showed a contraction of -0.98%. The final revision is now expected to be a serious contraction of -1.9% according to Moody's estimates. Granted that was Q1 and Q2 did see an increase in activity but was it enough to send the markets to new highs? We still don't have any proof that earnings improved significantly in Q2 and that makes the coming earnings cycle a potential minefield for investors.

Bullish sentiment may be contagious as the market makes new highs but eventually there will have to be fundamentals to back up those record gains.

I am not saying earnings are going to be bad. I am only suggesting that without some positive earnings news we could see the current rally begin to fade. If the initial earnings begin to confirm the optimistic estimates we could see further short covering and potentially the conversion of those bears into bulls. Stranger things have happened.

We have not yet entered into the full blown mudslinging ahead of the midterm elections. When that begins history has proven that investors tend to pull back from the markets. The campaigns should shift into high gear in August so be prepared because the political climate is more adversarial than I can remember in years past. This is going to be a very heated election cycle.

Friday's economics were lackluster. The regional and state employment for May was little changed from April. The unemployment in the western region remained the highest at 6.9%. The state with the highest unemployment was Rhode Island at 8.2% with North Dakota the lowest at 2.6%. The unemployment rate rose in 16 states and declined in 20 with the remaining states unchanged. Nonfarm employment rose in 36 states and declined in 14 states. The report was ignored.

The calendar for next week has three regional Fed manufacturing reports from Chicago, Richmond and Kansas. The outlook is mixed and the numbers could decline as a result of the fading snapback.

We will see the latest new home sales and existing home sales and minor improvements are expected as a result of the spring selling season. Overall the activity is expected to be weaker than the Fed would like.

The GDP on Wednesday could be a pothole for the market since a lot of investors will not be expecting a major decline. It always amazes me that some of the largest traders don't really pay attention to economic forecasts. When a bad number appears it always seems to be a shock. I would rather expect the worst and then be pleasantly surprised. Economists seem to have a bullish bias and major estimate misses are common.


The stock news was sparse on an early summer Friday. We have one more week before we go to basically four trading days a week for the rest of the summer. Friday volume will die before noon as institutional traders head out early for the beach and leave the backup team to doze at their PCs while pretending to watch the markets.

Friday's quadruple witching produced the highest volume since March 21st, which was also a quadruple witching Friday. Volume then was 9.75 billion shares compared to only 7.7 million on Friday. That -2 billion share decline should be a clue to the diminishing interest in the market.

One of the few stocks making headlines last week was Coach (COH). Coach shares continued the decline from Thursday after the company said it was closing 70 locations or about 13% of its stores. This will cost Coach up to $300 million over the next several quarters. Coach said the retail environment had shifted and it had failed to keep pace. The company reported a -21% decline in same store sales for last quarter. Coach shares are down -$5 in two days.

Surprisingly Michael Kors, which saw same store sales increase over 20% last quarter is also down -$5 over the last several days. KORS is quickly gaining market share both in the U.S. and globally and I will be looking for a bottom in this decline to go long the stock. I believe they are being punished by the warnings in the sector because there was no news on KORS. The 200-day at about $86 would be my target for support.



Carmax (KMX) shares rallied +16% after the company reported earnings of 76 cents compared to estimates of 67 cents. Revenue was $3.75 billion and also beat estimates of $3.59 billion. Used vehicle sales rose +9.8% and same store sales rose +3.4%. Income from auto loans rose +8.7% to $94.6 million.

The key here is the spike in sales of used cars rather than new cars. This is a symptom of the shrinking consumer budgets that are also biting Coach, Walmart, Costco, etc. Consumers are looking for cheaper options.


Owens Corning (OC) warned for the full year for 2014 saying roofing volumes were -20% below year ago levels. That is a major decline, which points not only to the slowing sales of new homes but also to the shrinking budgets of consumers. The company said 2014 earnings would be less than the $500 million previously forecast but did not give a new number. They earned $416 million in 2013. If you reduce volume by 20% you would expect earnings to reduce by more than 20% since margins decline on lower volume. That may be why they did not give a new number because it would have been below the 2013 levels.


Turn out the lights, the party is over. Shares of Radio Shack (RSH) traded as low as 91 cents on Friday to put the stock in danger of being delisted by the NYSE. The chain is in the middle of yet another restructuring to try and save itself from going out of business. In March they announced the closing of 1,100 stores, leaving it with 4,000 locations. However, the lenders protested the massive closures and forced them to rethink their plans. In early June the company said its losses were larger than expected and revenue was shrinking because of competition in its mobile business. Shares declined -35% since the earnings miss on June 9th.

There have been miraculous recoveries in the past from companies that imploded because of changing times and or business models but very few come back from this level of decline. Rising debt, shrinking revenue and a shrinking customer base may be the death knell for Radio Shack. Far fewer consumers are running to Radio Shack to pick up some electronic parts, cables, connectors, etc. For non-hobby items like smartphones and CD players there is always Walmart and Amazon. I am a prime example. Decades ago I bought electronic parts for my computer hobby at RS at least a couple times a month. Now I have not even been in a RS store in a decade. Will the last customer please turn off the lights?


Software giant Oracle (ORCL) reported earnings of 92 cents that missed analyst estimates of 95 cents. Revenue of $10.94 billion was also below estimates of $11.48 billion. Making the move to cloud computing is proving harder than they expected. Oracle has posted sales growth of less than 5% for the past 11 quarters.

Oracle is fighting a flood of cloud providers like SalesForce.com and the profit margins are shrinking. New license sales were weak as customers are finding competitors that are offering cheaper solutions. Oracle projected revenue to climb 4-6% in the current quarter with earnings in the 62-66 cent range. Analysts were expecting a 5% rise in revenue and earnings of 64 cents. It definitely looks like Oracle scanned the analyst estimates and chose the median average on purpose to prevent a disaster. Time will tell if they will meet that forecast or miss again.

Oracle shares have been on the rise with a $10 gain since last summer but some analysts are now calling it dead money for the next couple quarters given the slow growth. Larry Ellison said the company just bought LiveLOOK, a real-time technology for co-browsing and screen-sharing. No price was given. He is also said to be in talks to buy Micro Systems (MCRS) for $5 billion. Oracle has been a serial buyer of other companies for years as a way to gain technology without inventing it and as an excuse for not growing earnings. Ellison is a compulsive spender and the every acquisition clouds the future earnings potential. The acquisition of SunMicrosystems was a failure for several years and the potential acquisition of MCRS suggests the SunMicro deal is still a failure.


Amazon (AMZN) shares rallied on the phone announcement but gave back a couple dollars on Friday. The phone has the technology to scan an item and immediately give you multiple buying options online. This is not entirely new but the Fire Phone has taken it to a new level. The phone's Firefly button/camera recognizes 70 million products and 100 million items. Not just bar codes but ANYTHING you can point the camera at. Hear a song playing in a restaurant, click, listen, identify, download. Point it at a TV show and Firefly will tell you what it is and even what episode it is. Point, identify, download. Point your phone at any product, push the button, buy. Walk into a store, look at the range of product offerings, point to the one you want and Amazon sells it to you cheaper and puts it on your doorstep within two days with free shipping. This is better than Google Goggles, Bing Vision and Shazam combined. You don't have to wait in a sales line, remove cash or a credit card from your pocket and have your brain register the pain of payment. Instead, point, click, buy in a very painless process and because there is no visible cash leaving your pocket and no credit card swiping, which makes the psychological barrier to spending money disappear.

Casino's use chips instead of money for a reason. They know your brain does not process the decline in a pile of chips in the same way it does a pile of $20 bills. Chips are not money therefore gamblers spend more of them at the tables. Amazon's Firefly button is not money. It is unfettered convenience without the pain of paying at the register. One analyst said the phone was unique. "Amazon launched a shopping machine and called it a smartphone." Shares were already up ahead of the announcement so a sell the news event was likely. However, regardless of what everyone says about Amazon's lack of profitability you have to admire them as a marketing machine.

I am the perfect example of a Prime customer. In the last three weeks I have purchased 11 items and 5 e-books from Amazon worth about $600 in total. All were cheaper than I could have bought them locally, I did not have to leave the house and they were delivered within two days for free. I won't be buying a Fire Phone because I like my existing Android phone but for those who do buy a phone they are putting an Amazon cash register in their pocket. As an added inducement to buy the $199 phone Amazon is giving a free 12 month Prime membership with every phone, a $99 value. In a few years we won't need the NSA because Amazon will know everything about everybody. We have truly arrived in the 21st century.


The Volatility Index ($VIX) hit a new seven-year low at 10.34 on Friday morning. In theory this should mean there is a disaster ahead. However, as Art Cashin has been proclaiming for the last couple weeks the VIX is broken. The VIX is based on call and put option premiums on the S&P-500 ($SPX). The volume in these options is now huge. When I used to trade SPX options 15 years ago there was one-tenth the volume we have today, maybe even less. The close to the money June SPX options had open interest of 20,000, 50,000 and even 100,000 or more on some strikes at expiration. With higher volume came cheaper premiums and narrower spreads. Those lower premiums translate into a lower VIX.

The S&P is also affected by the trade in the underlying shares of the S&P-500 components. Volume in those individual shares have declined as more and more institutions and individual use ETFs as their investment of choice rather than buying shares of individual stock. The ETFs are not as volatile, many times are cheaper and they have high volume and low bid ask spreads. While an institution buying 100,000 shares of an ETF can affect the prices of the underlying S&P shares the change is miniscule. The SPY ETF traded 101 million shares on Friday. Buying 100,000 shares of some S&P stocks could move the price significantly and impact the S&P.

The VIX is broken in terms of how it reacted in the past but I think we have moved into the new normal and we just need to understand how the VIX relates to this new paradigm. The VIX at 10.34 is still extremely low and it is cautionary for investors long the market. However, three times in the last year the VIX was over 21 and all three times were great buying opportunities. While the spikes over 21 lasted only a couple days the declines to record lows can continue for days, weeks or even months. In late 2007 the VIX traded between 9.00-12.50 for a record five months before suddenly rising to a record high of 89 in October 2008.

In the late 1990s a routine high was 40-45 and the lows were in the 17-20 range. The last time we hit 45 was in October 2011 when the debt ceiling debate was in progress. Since early 2012 the high has been 27, then 23. In 2013 it hit a high of 21+ three times. Art is right about the VIX appearing broken but it is broken for one main reason.

The main reason the VIX is broken is the Fed. The late 2012 spike was due to the end of Operation Twist 2. The current QE3 program was announced shortly after that and the Fed has been buying a boatload of treasuries every month for the last two years. They will still be buying $35 billion in July with an end to the taper in November. The constant inflow of that mountain of cash has broken not only the VIX but the markets themselves. There is no volatility because the Fed is preventing it with their fire hose of monthly cash. When the S&P can only go in one direction the VIX is going to be abnormally low. Yes, we have had some potholes in the road to 1,960 but they were minor and every dip was bought thanks to the constant flow of cash. I believe once that cash flow stops we will see the return of the VIX we used to know.



The S&P closed at 1,962.87 and a new historic high. That was the culmination of a +24 point move since the Janet Yellen press conference. It was aided by the quadruple witching but mostly by Yellen's "stimulus forever" stance in response to the questions. While she did not say stimulus forever that is the outlook. With the Fed cutting its economic forecast and projecting low inflation into 2016 a continued stimulus posture is implied. Of course they claim they are not on automatic pilot and they will react to the conditions but they admitted the conditions were weaker than they expected.

The Fed is going to keep putting money into the market through November at their current rate of tapering. When QE ends and the elections are over the market will get a chance to stand on its own two feet. Will it teeter slowly forward or face plant right into the asphalt? That depends on how well the economy is doing at the time but without that constant IV drip of Fed cash into the system there are going to be some stumbles.

Fortunately we don't have to worry about 2015 today. We only need to worry about next week and that could be a stress test for investors. The week after June expiration has been down 21 of the last 24 years. While past performance is no guarantee of future results that is a pretty strong record.

However, we just had a -30 point decline from 1,955 to 1,925 and the dip was bought despite geopolitical headlines from Iraq and Ukraine and the worry about some FOMC disappointment. Next week should be a cake walk compared to the prior week. We have found out in the past we can't run down to Staples and pickup an "easy" button for the markets. When the yellow brick road to profits seems the easiest something always pops up. The market needs a wall of worry to climb and we are going to have to depend on weak economics for our wall next week.


Overhead resistance is now 1,970-1,975 with round number resistance at 2,000. Support is 1,925-1,940 and well below Friday's close.


The Dow is edging slowly higher and closing in on that short term uptrend resistance at 17,000. This is also round number psychological resistance. This is now the official target and once targets are reached there is sometimes a sell the news event. "Ok, we made it, now what." This could be especially true heading into the summer doldrums. Unless something has changed in the market any dip will probably be bought. Last week's consolidation created some decent support in the 16,725 range.



The Nasdaq almost did the impossible last week of breaking through the 4,344-4,371 resistance top. Even though the Nasdaq closed at a new 14 year high at 4,367 it is not yet through the resistance band created by the two intraday touches of 4,371 back in March. We are really close but we need to complete the breakout over that level.

The Nasdaq rebound has been remarkable. The index has rebounded +333 points since the May 15th low at 4,035. That includes two separate weeks of consolidation where it traded flat to down for the week.

The last week it had to do it without Apple. Shares of Apple closed at a post split low of $90.91 on Friday as the post split depression period slowly takes its toll. Apple hit $95 the day after the split but it has faded ever since.


When the Nasdaq moves over 4,371 it will immediately face new resistance at 4,400 but that should be easier to overcome than the current resistance level.



The Nasdaq 100 ($NDX) is really struggling at the 3,800 level without the help from Apple. I thought we were going to see a breakout there last week but resistance was too strong.


The Russell 2000 turned in a good performance with a +2.2% gain for the week. It closed at the high of the day on Friday and the trend is our friend. However, with the Russell rebalance next week there is the potential for the index to decline. There are about 165 stocks coming out of the Russell 3000 and funds will be selling those stocks to make room for the 165 additions taking their place.

The amount of index movement may be minimal because the stocks leaving are normally the smallest stocks that no longer meet the requirements to be in the Russell 3000. Also reducing the impact is a coordinated effort to do a market on close order at Friday's close for all the stocks entering and leaving the index. However, we know how traders are. There will be a group of traders trying to game the rebalance by selling/shorting the deletions all week in hopes of profiting from the downward pressure the rebalance creates. Since the deletions are still in the index until Friday's close any downward pressure will push the index lower.

On the positive side the Russell 3000 ($RUA) is the 3,000 largest stocks in the USA and the 165 being deleted are the smallest of those 3,000 or they are being acquired by someone else. It is a very small subset of the index and pressure on the index should be minimal. The top 1,000 stocks in the Russell 3,000 are further defined as the Russell 1000 index ($RUI). The bottom 2,000 stocks make up the Russell 2000 ($RUT).

The Russell 2000 pushed through decent resistance at 1,180 and is now targeting 1,194 as the next stepping stone to a new high. The Russell is only 2% below its historic 1,208 close back in March. Support is strong at 1,160.


In theory the markets should continue to rise next week. As Yogi Berra once said "In theory there is no difference between theory and practice. In practice there is." We don't know what underlying events have worked together to push the market lower 21 of the last 24 June expirations. It could be something as simple as the Russell rebalance pushing the Russell 2000 lower and that negative sentiment drags the broader market lower. It could be a simply as individuals exiting the market for the summer after the June expirations. We don't know the answer but we need to hope for the best but expect the worst. A very large number of stocks are hitting new 52-week highs. If individuals wanted to take profits before the summer doldrums this would be the week to do it. With the summer vacation season starting the following week with a long July 4th weekend there may be some extra incentive for individuals to cash out.

Random Thoughts

ISIS fighters captured a Saddam Hussein chemical weapons depot on Thursday. The depot contains hundreds of tons of deadly poisons like mustard gas and sarin. The al-Muthanna facility is 60 miles north of Baghdad. A former British commander in the 2003 Iraq war said the facility had large stores of weaponized and bulk sarin and mustard gas. Most of these bunkers had been temporarily sealed under concrete to make them hard to access until the Iraqi government got around to destroying the weapons and materials. Under a 2012 agreement with Baghdad the MOD's Defence Science and Technology Laboratory was to provide training to Iraqi personnel in order to help them dispose of the chemical weapons and agents. Apparently they never got around to actually destroying the weapons. A US officer said they agents could not be readily loaded into the empty weapons without experienced personnel and a calm environment to study and prepare. "The only people who would likely be harmed by these chemical weapons would be the people who tried to use or move them." However, never underestimate the power of determined radicals.

Interesting read. 16 things you need to know about ISIS

Everything you need to know about Iraq in 4 minutes HERE

Putin is at it again. In President Obama's speech on Thursday he all but called for the removal of Iraq's Prime Minister Nouri al-Maliki to be replaced with someone able to create a new government that included Shia, Sunni and Kurdish representation. Within 24 hours Putin offered Maliki his "complete support." Putin is benefitting from the spike in oil prices and they are investing huge sums to renovate the vast West Qurna-2 oil field and increase production. Clearly Putin would not want it to fall into ISIS hands but more than anything he jumped at the chance to take another position opposite President Obama.

Putin is also building up Russia's military presence again in the Ukraine. Putin put 65,000 troops on alert and ordered them to take part in a drill a day after the Ukraine Prime Minister declared a one-week cease fire along the border. Putin said the drill would involve movement of 5,500 pieces of military equipment. Putin has been sending arms and equipment to pro-Russian fighters in the Ukraine. However, the Ukraine PM said the military had sealed the border crossings and future transfers of equipment would be impossible.

The U.S., Canada and EU states including France and Germany warned Putin there would be new and tougher sanctions imposed next week if he did not pull troops back from the Ukraine border and take concrete steps to de-escalate tensions in the region. On Friday Canada and the U.S. levied additional sanctions against 7 more Russians with "broader measures being readied against the finance, defense and technology industries."

Morgan Stanley warned that the rising oil prices were going to be a serious drag on the economy. The average price of gasoline has risen to $3.68 although several areas of the country are already over $4. One reporter paid $4.30 in California last week. Diesel is $3.90 on average. U.S. consumers burn 370 million gallons of gasoline a day. A 10 cent increase in gasoline prices will reduce consumer purchasing power by $37 million a day or $1.11 billion a month.

Gasoline prices are the highest for this time of year since 2008 and we know how that turned out. As gasoline prices soared consumers were no longer able to spend money on goods and services or make their mortgage payments and the downward spiral began.

Morgan Stanley said a $10 jump in oil prices would reduce GDP by -0.4% while a sustained spike in crude prices could stall the economic recovery and lower GDP by -1.7 points 12 months from now.

What is wrong with this picture? With the market at new highs investor sentiment must be soaring. Sorry, that is not the case. For the week ending on 6/18 the AAII Sentiment Survey showed that bullish sentiment collapsed from 44.69% to 35.17%. That is a -9.5% drop in just one week when the market was making new highs. That is the largest weekly drop since the first week of January. Bearish sentiment rose only +2.9% to 24.1%. Those in the neutral camp rose +6.6% to 40.7%. Yes, there are more people neutral on the market than bullish despite the new highs. That does not bode well for next week.

The pace of M&A activity suggests we could be at a market top. As stock prices soar those companies with a fat stock price tend to go shopping before their stock declines. This normally happens at market tops. According to Matthew Rhodes-Kropf, a professor at Harvard business School and an expert in the field, "Each of the last five great merger waves on record, going back more than 125 years, ended with a precipitous decline in equity prices." At the current pace of acquisitions we could see $3.51 trillion in deals in 2014. According to Dealogic that is the most since 2007. Matthew said this does not mean a market crash is imminent. "Everyone tends to call the bubble too soon," the M&A trend could last a while longer.

The S&P has not moved more than 1% in a single day in 42 days. That is the longest streak since 1995 when it went 96 days. Since 1950 there have only been 31 streaks of volatility this low. In 1963 there were 167 days from Feb-28th to Oct-24th without a 1% move. Boring!

With global interest rates at such absurdly low levels it should be no surprise to find out that global central banks are investing in the equity markets. Those banks are also charged with investing excess reserves, which they normally do by investing in treasuries issued by various countries including U.S. treasuries. With inflation higher than short term yields these banks have to do what every other investor does. They search for yield.

A research publication compiled by the Official Monetary and Financials Forum (OMFIF) titled "Global Public Investor 2014" (GPI) surveyed more than 400 public-sector institutions in 162 countries. There were 157 central banks, 156 public pension funds and 87 sovereign funds holding $29.1 trillion in investments. According to OMFIF the GPIs have lost up to $250 billion in interest income over the last several years. Over that period the GPIs have increased their investments in equities by more than $1 trillion. Obviously this has helped push global equities higher but it could also lead to a monster decline in the event of another crisis. When those GPIs exit the market to return to the "safety" of interest rate securities the decline in equities could be extreme. As long as rates remain absurdly low the equity markets should be safe. Once rates begin to rise toward normal levels we could have a rocky ride in equities. Read more here

I keep updating my graphic of year-end forecasts for the S&P as new predictions are discovered or prior predictions are updated. The average year-end target from the 24 firms listed below is now 1,974. It has been slowly rising as the market moves higher. The four companies in yellow recently upgraded their forecasts.

Revisions

Citigroup up from 1,975 to 2,000
Credit Suisse up from 1,960 to 2,020
RBC up from 1,950 to 2,075
S&P Capital IQ up from 1,985 to 2,100

Deutsche Bank, Bianco reiterated his call for a drop to 1,850.


Jonathan Golub, chief U.S. market strategist at RBC Capital Markets raised his forecast to 2,075 and warned that bull markets don't end until recessions appear. In a note to clients he pointed out that seven of the last eight bull markets ended only when a recession appeared. His chart below.

He said only one of his warning signals for a recession exists now and that is weak housing starts. He said, "The current economic rebound is the slowest of the post-war period. Growth is being held back by a modest housing recovery and weak business confidence. As a result, abundant spare capacity exists, which prolongs the length of the cycle." However, Jeff Kleintop at LPL Financial said one more thing needs to happen to keep the bull market going. The economic recovery must accelerate. Continuing to plod along at 2% GDP growth invites trouble. Any unexpected event could send us back to recession very quickly. The Fed lowered their GDP estimate for all of 2014 to 2.3% growth and that is barely over stall speed.


In theory the market should continue higher long term but each week has to stand on its own and there are quite a few economic reports this week that could upset investors.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Before this century is over, the Dow Jones Industrial Average will probably be over one million versus around 10,000 now. So for the long-term, the outlook is tremendously bullish if you buy stocks blindly to keep for a century."

Sir John Templeton, 2008

 


Index Wrap

Traders Even More Convinced of a Continued Bull Move

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Market continues to advance as I've been forecasting. My caution is that volatility is very low and bullish sentiment unusually high.

If we take very low S&P 500 Volatility Index (VIX) readings below 11 as a sign of 'complacency' and compare to a similar period of VIX readings, we need go back to the period from November 2006 into February 2007 when VIX also fell to below 11.

There was a steady rise in the SPX in the aforementioned period. After a minor dip in March (2007), there was another strong advance, with increasing volatility into a double top a few months later (July-October). Bullish 'sentiment' reached high levels prior to the July top and then again into the November price peak.

I continue to hold to an SPX objective in the 1980-1985 to 2000 price zone. I'm not forecasting a significant downside reversal but recognize that prices could stall as the Market is vulnerable to a price dip based on being overbought. Leading stocks higher has been the bullish performance of the Nasdaq 100 (NDX), but NDX has stalled around prior highs in the 3800 area. The Nas 100 Volatility Index VXN is also unusually low, ending Friday around 12. In and off itself, low volatility is showing less 'fear', more complacency regarding the dominant trend which isn't always bullish longer-term. While NDX may reach the 4000 area later this year, the tech sector acts a little 'tired' recently.

The high level of bullish sentiment as seen with my 'CPRATIO' indicator accompanying my SPX and COMP daily charts below can be a concern in getting 'complacent' regarding bullish positions. It may seem counter-intuitive, but a predominately bullish outlook by a majority of traders can precede a fall.

No 1-2 indicators are conclusive in a strong bull move like reversal type price action. When a pullback does get underway as signaled by topping at prior highs, key downside reversals, etc. the 'ground' was simply set so to speak in that various (technical) indicators suggested increasing risk for a pullback.

A chart 'correction', beside giving up much ground, can also be as simple as a sideways move or lateral price trend that helps 'throw off' an overbought condition; a sideways move also tends to cause bullish sentiment to taper off. We saw a minor pullback in bullish sentiment on Friday, although not by much.

CBOE equities daily call to put volume rose on Wednesday to as high as total daily call volume being 2.6 times total daily equities put volume. My 5-day moving average of my call to put volume ratio got over 2.1, which I haven't seen since mid-April 2010 when the 5-day average got up to 2.4. Later that month a correction started that took SPX down around 200 points, peak to trough, over a several week period.

At the same time (April 2010), the 13-day Relative Strength Index (RSI) was registering over 75. The key CHART pattern back then was a rounding top or what could also be viewed as a Head & Shoulder's top pattern. Be tuned to any such bearish price action 'trigger'!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500 (SPX) Index is bullish as the Index has yet again pushed on to new highs for the current uptrend. Recent lows found support at the latest SPX up trendline as can be seen in my chart highlights below. My target for a move to the 1980-1985 area seems on track. Fairly major resistance then comes in at the 2000 level which is a major milestone and representing a doubling of the Index within the last 5 years.

My concerns as expressed in my initial 'bottom line' comments above, is an RSI approaching an overbought 75 again and especially by another type of 'overbought' extreme in that traders have gone from bearishness in April to a bullish extreme recently, which may also be unrealistic. That said, there's been no bearish PRICE action in the S&P suggesting a pause or trend reversal, but the Dow is lagging some and the hot big cap tech Nas 100 may be stalled currently. SPX can go its own way of course but tech has been a bullish influence on mainstream S&P stock valuations previously.

Near support is seen at 1945, with next support in the 1925 area, with fairly major support at 1900. Near resistance is suggested in the 1980 area, extending to 2000.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish in the same way as the larger S&P 500 given OEX's similar push to yet another high for the current move.

My concerns about a stall in the trend, taking prices either sideways or lower, is an overbought situation both in terms of the Relative Strength Index (RSI) and extreme bullishness among options traders as I measure it; see my 'CPRATIO' indicator accompanying the SPX chart above.

A next objective and potential resistance in OEX is highlighted at 875, with upper trend channel resistance coming in currently at 885. It's hard for me to imagine an OEX move to close to 900 without OEX testing this level. Timing is an issue here as OEX may well hit 900, but WHEN is another story as it could be after a pause or pullback.

Near support is suggested at 860, with next support around 840, extending to 830.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) hasn't quite yet pushed on to a new intraday high but has gone to a new weekly Closing high. Right now the hourly INDU chart (not shown here) looks a bit toppy and has a pronounced bearish price/RSI divergence. Stay tuned on this hourly chart pattern being significant for the week ahead.

Near support is seen at 16800, then at 16600, which is also where the current 50-day moving average intersects. Near resistance is at 17000, then 200 points higher, in the 17200 area.

Very strong to continuing strong bullish moves are seen in less than half of the Dow 30 stocks currently but those 8 include CVX and XOM (oil!), INTC, JNJ, MMM, MRK, MSFT and TRV.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite Index (COMP) is tentatively bullish as the Composite is retesting prior highs in the 4370 area, but it's of course yet unclear what happens next: a bullish breakout to new highs or a stall and potential double top formation.

Working against a new up leg is the fact that COMP is already in an overbought area in terms of the Relative Strength Index AND a lot of bullishness among options traders as seen in my call to put (CBOE equity options) daily volume ratio, where mid-week, call volume was an unusually high 2.6 times put volume. Seems more bullish than the fundamentals of this economy warrant, regardless of what the Fed head says.

I had some trouble calculating next technical/chart resistance but it looks to come in above 4450, extending to 4465. Support is highlighted by the usual green UP arrow at 4300, extending down to 4250.

I wouldn't want to bet on a push to new highs in the Composite just yet but am waiting to see what the coming week brings.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) as I noted in my initial 'bottom line' commentary above, is stalled in the 3800 area, although, like the broad Composite, NDX went to a new weekly closing high.

I'd say that NDX is at key juncture here, currently trading at the LOW end of its uptrend price channel. A move to the HIGH end of its channel would carry the Index to 3900, where I've noted potential resistance. Next resistance comes in around 3950, with fairly major resistance at the even 4000 level; nothing like a new 1000 mark to get trader/investor attention.

Assuming that the Nas 100 pieces its up trendline, near support lies at 3760, with technical/chart support extending to the 3720-3700 area. I don't anticipate any pullback to below 3700, but a move to 3650, no lower, would successfully retest a next technical support implied by NDX's up trendline.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is currently drifting sideways in terms of its daily chart, as prior highs in the 93 area have not been pierced. QQQ did eke out a new weekly Closing high. Above 93 resistance, I've highlighted next resistance at 94.3.

93 take on pivotal near importance as a pullback from this area would suggest at least a minor top. 92 is key near support, with next support highlighted at QQQ's up trendline currently intersecting at 90.3. I should re-define chart support here as a zone from 91.5 to 90.8, with the strongest support at 90.3-90.

The On Balance Volume (OBV) line has dipped after the highest daily Close from Wednesday of this past week, which could represent a mildly bearish omen.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has retraced most of its prior steep decline, from the 1208 area to its double bottom low at 1083; and, what a buy in that area! Double bottom lows may look like an overly 'simple' pattern for a definitive bottom but it is one of the most reliable such patterns, especially accompanied by an oversold RSI.

I have no strong opinions as to whether the Russell re-tests the line of its prior highs around 1208 and then extends gains, versus forming a double top or just making a lower top then back in March. It depends most likely on what the Nasdaq does ahead.

Near resistance is noted in the 1193 area, extending to 1208 (to 1212). Very near support is suggested at 1171-1170. On the chart, I've noted key near technical support around 1155-1156, with next and lower support at 1140.

I would also note that RUT has a tendency to make tradable tops at the time of or somewhat later than when the 13-day RSI hits the upper extremes (at or near 70) of its typical range.


GOOD TRADING SUCCESS!




New Option Plays

Building Materials & Airlines

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Martin Marietta Materials - MLM - close: 134.91 change: +0.84

Stop Loss: 129.75
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:
96 percent of all paved roads in the United States are covered in asphalt. The material is a combination of asphalt oil, sand, and gravel. A lot of those materials come from MLM. The company also supplies stone, sand, gravel and concrete. They have over 300 quarries and distribution centers. They plan on growing as MLM is currently in the process of acquiring Texas Industries (symbol: TXI), which will immediately give MLM a strong presence n California and boost its cement business.

The U.S. economy has been struggling to maintain a +2% growth rate but the outlook seems to be improving. As the U.S. grows it's going to see improvement in the residential and non-residential construction. MLM expects sales to the residential market to grow at more than 10% in 2014.

MLM management has noted that historically low mortgage rates and slowly improving employment trends has been a boost for the residential construction market. Annual housing starts are expected to come in at more than one million homes for the first time since 2007.

Meanwhile non-residential is expected to grow in the high-single digits this year. The sector is seeing stronger fundamentals thanks to rising rents and occupancy rates. Rising property values has helped boost commercial real estate lending and that fuels construction.

MLM is also a major player in materials for roads and highways. Government contracts for highway construction and repair were up +14% for the year through last December. This year both the democrats and the republicans have voiced support for a new highway bill, which could mean more business for MLM.

Margins are improving. MLM said their prior quarter saw margins on its aggregates business improve 400 basis points. MLM plans to raise prices by 3% to 5% this year while production costs are expected to decline. That should further boost MLM's margins.

Investors should be aware that the U.S. Department of Justice is looking into MLM's acquisition of TXI but management does not expect any issues. They're suggesting it's just a review but if the DOJ were to block the deal it could rattle the stock.

Technically shares of MLM have been showing relative strength. The stock recently broke out past significant resistance near $130 and closed the week at multi-year highs. If this strength continues MLM could see more short covering. The most recent data listed short interest at 22% of the relatively small 46 million-share float.

Tonight we are suggesting a trigger to buy calls at $135.25.

Trigger @ $135.25

- Suggested Positions -

Buy the Oct $140 call (MLM141018C140) current ask $6.20

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

Annotated Chart:

Weekly Chart:

Entry on June -- at $---.--
Average Daily Volume = 419 thousand
Listed on June 21, 2014


Spirit Airlines - SAVE - close: 63.80 change: +0.73

Stop Loss: 61.90
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:
Have you looked at the airline stocks lately? The XAL airline index is hitting levels not seen since early 2002. The strength in the airlines has been a strong undercurrent for the transportation industry. SAVE is doing its part with new all-time highs on Friday.

SAVE is in the low-fare airline category. They currently offer about 250 daily flights to 50 destinations in the United States, Caribbean, and Latin America. While business is good the company has struggled with its reputation. They may be in the ultra-low fare business but they make up for it with lots of add on fees. Last year SAVE had the highest number of complaints per passenger than any other U.S. airline. They're hoping to change that. Last month SAVE launched a new brand overhaul program to better inform their customers about who they are and what to expect.

The company has been doing well in spite of the customer complaints. SAVE is developing a trend of beating Wall Street's earnings estimates. The company recently released its traffic numbers for May and revenue passenger miles were up +18.7% versus May 2013. SAVE's CEO Ben Baldanza echoed this growth in a recent interview where he said his company was on track to grow 18 percent in 2014 and 30 percent in 2015.

Wall Street certainly likes the stock. SAVE got a lot of positive comments and upgrades in April after their most recent earnings report. Analysts are upbeat on SAVE's Q2 and Q3 potential. They are expecting strong earnings and margin growth. SAVE will also grow after they add 24 new planes over the next 18 months.

Jim Cramer had some bullish things to say about SAVE. Cramer credits SAVE's efficiency to boost its ultra-low fare model. According to Cramer, "The company has 55 planes at the moment, but they use those planes more efficiently than the competition, keeping them in the air for 13 hours a day, whereas a Jet Blue only flies its planes for 12 hours a day, and at Southwest that number is less than 11 hours. Also, the company outfits its planes with more seats than the competition, too. On a Spirit Airbus A320 there are 178 seats, versus just 150 seats for Jet Blue on the same model of airplane. True, there's less legroom on a Spirit Airlines flight, however, the revenue potential per flight is greater."

This month the airline stocks did see some turbulence after a major German airline issued a profit warning but the details around the German company do not affect SAVE's business. What could affect SAVE is rising fuel prices. The violence in Iraq has boosted the price of oil and that affects jet fuel prices. Yet so far SAVE and the rest of the airline group have managed to shrug off the high price of oil.

Technically SAVE just closed at a new all-time high and look poised to breakout past resistance near the $64.00 level. We are suggesting a trigger to open bullish positions at $64.75. More conservative investors may want to wait for a rise past $65.00 before initiating positions.

Trigger @ $64.75

- Suggested Positions -

Buy the Sep $65 call (SAVE140920C65) current ask $3.90

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

Annotated Chart:

Weekly Chart:

Entry on June -- at $---.--
Average Daily Volume = 898 thousand
Listed on June 21, 2014



In Play Updates and Reviews

Quadruple-Witching Friday Gains

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market closed quadruple-witching Friday with gains and the S&P 500 at record highs.

AMP hit our entry trigger.

We want to exit our CVS trade on Monday morning.


Current Portfolio:


CALL Play Updates

Ameriprise Financial - AMP - close: 119.14 change: +1.34

Stop Loss: 114.40
Target(s): To Be Determined
Current Option Gain/Loss: + 8.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: Our new trade on AMP is now open. The plan was to buy calls if shares hit $118.80. AMP rallied at the open on Friday and closed up +1.13%. This is a new all-time high for the stock. I would still consider new positions now at current levels.

Earlier Comments: June 18, 2014:
AMP is in the financial sector. The company, and its subsidiaries, provides a range of financial products including advice and wealth management. The company had a record year in 2013 and it looks like the momentum has continued into 2014. The company' last earnings report was its Q1 results, reported on April 28th. Wall Street was expecting a profit of $1.88 per share on revenues of $2.84 billion. AMP delivered $2.04 with revenues rising +11% to $3 billion.

AMP's Q1 results were a +19% improvement from a year ago. Furthermore both revenues and margins are improving. AMP raised its dividend 12 percent to 58 cents (currently at a 2.0% yield) and announced a $2.5 billion stock buy back program.

Technically shares of AMP are in a long-term up trend and just recently broke out from a five-month consolidation. Traders have already jumped in to buy the dip at prior resistance near $115.00.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

chart:

Entry on June 20 at $118.80
Average Daily Volume = 823 thousand
Listed on June 18, 2014


Anadarko Petroleum - APC - close: 111.55 change: +1.33

Stop Loss: 99.90
Target(s): To Be Determined
Current Option Gain/Loss: + 76.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: The rally in energy stocks continued on Friday and APC has broken out past potential resistance at the $110.00 level. Investors may want to start raising their stop loss.

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

chart:

Entry on June 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014


Capital One Financial - COF - close: 83.43 change: +1.43

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: +100.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: COF continues to show relative strength with a +1.74% surge on Friday. This is a bullish breakout past recent resistance near the $82.00 level.

Our call option has doubled in value and more conservative traders may want to take some money off the table and/or raise their stop loss.

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

chart:

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


CVS Caremark Corp. - CVS - close: 76.79 change: -0.66

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: -42.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: Drug store stocks underperformed on Friday. It looks like the bounce in CVS is struggling. Shares dropped -0.85% on Friday. More importantly Friday's move has created a bearish engulfing candlestick reversal pattern.

While the long-term trend for CVS is still up the short-term trend has turned more treacherous. We're suggesting an immediate exit on Monday morning. The current bid/ask spread is $0.60/0.65.

- Suggested Positions -

Long Aug $80 call (CVS140816C80) entry $1.04

06/21/14 prepare to exit on Monday morning, June 23rd.
05/22/14 triggered @ 77.25
option format: symbol-year-month-day-call-strike

chart:

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


Demandware, Inc. - DWRE - close: 68.28 change: +0.13

Stop Loss: 59.85
Target(s): To Be Determined
Current Option Gain/Loss: + 1.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: Traders bought the dip in DWRE on Friday morning and shares made it back into positive territory before the closing bell.

Earlier Comments: June 17, 2014:
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.

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.

*small positions* - Suggested Positions -

Long Oct $70 call (DWRE141018c70) entry $6.92

06/18/14 triggered @ 66.75
Option Format: symbol-year-month-day-call-strike

chart:

Entry on June 18 at $66.75
Average Daily Volume = 705 thousand
Listed on June 14, 2014


Expedia Inc. - EXPE - close: 78.32 change: +0.44

Stop Loss: 71.45
Target(s): To Be Determined
Current Option Gain/Loss: +22.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: EXPE saw some volatility this week after an upgrade on the 17th and a surge toward $80.00. The volatility vanished on Friday with EXPE trading inside an 80-cent range.

I am not suggesting new positions at the moment.

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

chart:

Entry on June 11 at $75.75
Average Daily Volume = 1.6 million
Listed on June 09, 2014


Hanesbrands Inc. - HBI - close: 88.20 change: +0.95

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: +19.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: HBI continues to push higher and added +1.0% to close above the $88.00 level for the first time. Shares are still trading near a trend line of higher highs.

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

chart:

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


PPG Industries - PPG - close: 204.57 change: +1.35

Stop Loss: 200.75
Target(s): To Be Determined
Current Option Gain/Loss: - 6.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/21/14: PPG struggled with short-term resistance near $204 and its 10-dma all week. Friday's move is bullish with a close above this level. Now shares need to get past short-term resistance near $206.00.

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*

06/19/14 new stop @ 200.75
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

chart:

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


Starbucks Corp. - SBUX - close: 76.60 change: -0.63

Stop Loss: 71.75
Target(s): To Be Determined
Current Option Gain/Loss: + 8.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: After Thursday's upgrade-inspired rally shares of SBUX hit a little profit taking on Friday. The company also made headlines by announcing they would raise coffee prices soon. A drought in Brazil, the world's biggest coffee producing country, has fueled a 53 percent jump in coffee prices this year.

SBUX says they will raise the price for certain drinks between 5 cents to 20 cents starting on June 24th. The price of a 12-ounce bag off Starbucks coffee will jump from $8.99 to $9.99.

Personally, I find this a bit surprising since three months ago the company sais they had no plans to raise prices. Just a week or two ago SBUX said they had almost all of its 2014 coffee expense already price and almost 45% of next year's coffee already priced. Could this be a case of SBUX using the drought in Brazil as an excuse to raise prices and bump their margins? If their customers don't care, then why not? A 10-cent price increase is not going to stop me from buying a grande ice coffee at my local Starbucks.

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.

- Suggested Positions -

Long OCT $80 call (SBUX141018c80) entry $1.66

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

chart:

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


U.S. Silica Holdings - SLCA - close: 52.21 change: -1.24

Stop Loss: 48.40
Target(s): To Be Determined
Current Option Gain/Loss: - 4.7%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/21/14: Hmm... Friday's decline in SLCA (-2.3%) technically confirms Thursday's bearish reversal pattern. Yet at the same time traders bought the dip on Friday morning and SLCA's up trend remains intact.

I would hesitate to launch new positions. More conservative investors might want to adjust their stop loss.

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

chart:

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


United Parcel Service - UPS - close: 102.50 change: +0.13

Stop Loss: 101.75
Target(s): to be determined
Current Option Gain/Loss: + 48.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/21/14: The bounce in UPS has stalled the last couple of days. Companies like UPS and FDX could be facing higher fuel prices as oil pushes higher. That might be weighing on investors' minds.

More conservative traders may want to go ahead and take profits now. We are going to raise the stop loss to $101.75 and hope the bounce continues next week.

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

06/21/14 new stop loss @ 101.75
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

chart:

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.