Option Investor
Newsletter

Daily Newsletter, Thursday, 7/10/2014

Table of Contents

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

Market Wrap

Small Worries Big Decline

by Thomas Hughes

Click here to email Thomas Hughes
A handful of small global fears turned into a basket full of worry sending the markets seeking support.

Introduction

It's amazing just how much can change overnight. I went to bed thinking there would not be much for the market to think about today and woke up with a plateful of market moving events. What happened? A domino effect of small worries swept the globe and sent the markets seeking support. I will begin where the trading day always begins, in Asia. Asian markets began the day in positive territory following the rally in our market yesterday. Soon after the open of trading in Japan new data revealed that machine order fell by nearly -10% versus an expected gain of about 5%. This news sent the Japanese indices plummeting. Next up, in China, weak import/export data left Shang Hai and Hong Kong indices mixed and confused. The data shows that both imports and exports rose in the current data but that neither were as strong as hoped. Both pieces of data renewed talks of potential stimulus moves that may or may not be needed by the respective central banks.


The bearish sentiment only gained strength in Europe. Traders already concerned with growth in Asia were hit with a one two punch from their industrial production data and a growing unease over the state of Portugese banking giant Banco Esperito Santo. Industrial production fell throughout the EU with noted weakness in the peripheral countries including Portugal. While being a small concern in the near term, Portuguese banking has little to do with us so far as I know. France was another country with a notable decline in production. EU indices fell hard during their trading day, only finding support after the open of the US market. The early indication here at home was for a much lower open, in the range of -1% or better. A little good news was released in the early part of the morning but it did not seem to have much affect; jobless claims fell more than expected.

Other news that may have had an affect on early trading includes the growing round of violence in Israel and the West Bank.

Futures trading was markedly down throughout the morning. The SPX was indicated lower by nearly -20 points going into the open. Once trading began the indices did indeed open lower and move down to the indicated levels they did not slam down to support like I thought they might but drifted, almost gently, down to support. Almost as soon as the SPX reached the 1950-1955 level it began to show signs of buying activity and began its move back higher. The rest of the day saw the indices push their way back up to near yesterday's closing prices but not quite. The sluggish trading may not be over but I think it is safe to say that at least for now the indices seem to have support at or below today's closing prices. There is still concern for earnings and the need for positive economic data is as strong as ever but next week promises to provide plenty of opportunity to fill that need.


The Economy

Initial claims for unemployment, released before the bell at 8:30AM, fell more than expect from last weeks unrevised numbers. Claims fell by -11,000 to 304,000. This is just of the long term lows set a few months ago. This is better than expected, analysts had estimated that claims would remain steady at last weeks reported 315,000. The four week moving average also fell, to 311,500. On an unadjusted basis claims gained by 16,542 or 5.4%. On the table of adjusted data claims are trending lower and could break through 300K any time. However, this may not need to happen for the labor market to improve. With so many available workers it makes sense to me that there is going to be turnover until the jobs find the workers they like and the workers find the jobs that they like. On a state by state basis NJ and MA led with increases in claims of +8,579 and +4,566. California and Pennsylvania had the biggest declines with drops of -7,294 and -4,608.


Continuing claims, a slightly better gauge of employment trends, gained 10,000 from last week's revised figure. Last week was revised lower by -5,000 making this weeks gain an actual +5K. This is just off the 7 year low. Although this is the third weekly rise in continuing claims the over all trend here is still down. Total claims for unemployment, which is not revised, fell by -3,427, a negligible amount. Total claims remain at long term lows and trending lower.


At 10AM wholesale inventories were reported as rising 0.5%, as expected. There were no major revisions to last months data. The sales component of the data rose by 0.7%. This is a factor in GDP and part of 2nd quarter data.

The Gold Index

Gold prices made a big move higher today. The lack of firm indication of when interest rates will rise was one catalyst along with possible flight to safety sparked by the early sell off in global stocks. Adding to the bullishness may also have been a hope that the new government in India would lower gold tariffs which now stand at 10%. Gold shot up by roughly $20 on an intraday basis but fell back just before the close. Gold settled today above $1340. The move by India, or lack of move, could add to downward in pressure in gold prices over the next week. Economic data next week will also play an important factor.

The India government did not lower the tariff on gold, a move that many had hoped would increase consumption. This may be why gold prices did not close at the day's high and why the Gold Index, which can often foreshadow gold prices, created a bearish candle with a long upper shadow. The Gold Index moved strongly higher after the open, shadowing gold prices, but then fell back from strong resistance at $105 with a growing divergence in the indicators. Both MACD and stochastic are bullish at this time so there could be more testing of resistance but I refrain from getting bullish on this one. At best the gold sector has bottomed but I'm not calling that either.


The Oil Index

Oil prices fell in the early part of the day as global growth fear was gripping the market. That lasted bor a little while and then prices started to slowly creep back up into the green. WTI settled just under $103 today with a 0.65% gain. Brent also gained but only about a half percent. Although there are many concerns for oil traders now including global growth concerns, potential increase in Libyan supply and other sources of potential disruptions none of them are realities yet so oil prices may hover in this range until something changes.

The Oil Index fell hard this morning during the early sell off breaking support. The index was able to regain its footing before the close but it looks like it may test support further or even move down to next support. Bearish momentum is on the rise still and there is a ways to go before stochastic is oversold. A break below 1650 would find support just below that in the range of 1600 to 1625. The longer term trend is up in the sector so this may turn out to be another opportunity for the bulls. Earnings will be the factor of course, along with oil prices, the economy etc. The oil companies tend to report about a month into the season. Today Connoco Phillips raised it's dividend by 5.8% to $0.73 per share.


Sector Watch

The Utilities sector was today's leading sector, followed by technology. This could be due to the higher rates of dividend returns typically found in the sector. The Dow Jones Utility Average added another half percent to a bounce from long term support begun late last week. This support is the previous all time and long term resistance turned support. The index is trending higher in the long and short term with stochastic and MACD both consistent with a strong market. In the near term the index is indicated lower further testing of support is not unlikely. Top names in the sector report earnings toward the end of the month and in the first week of August.


In The News

Costco June comp sales rose 6%, ahead of the expected 5.5%. This was on higher gas prices. Net sales for the five weeks in June were up 10%. Shares of Costco opened lower but found bullish momentum which carried about a quarter point higher. MACD and stochastic are on the rise but the stock is still beneath resistance. A break above $119 would be bullish.


Family Dollar missed estimates and revenue by a small margin. The consensus estimate was for adjusted earnings of $0.89, the actual was only a few pennies shy at $0.85. The good news is that the company guided to the high end of the range for the next quarter. Shares of Costco opened sharply lower but found support at $62.50 and, after a wild day of trading, closed only about a quarter percent lower than yesterday's closing prices.


The Indices

The Nasdaq suffered today's worst declines falling more than -1.25% at the open. The tech heavy index opened right at the 30 day EMA, just below long term support. Almost immediately the index found buyers who quickly pushed it back up break even. There were quite a few techs among today's leaders with some big names posting gains in today's session. The Nasdaq itself closed in the red but created a large white candle moving up from the moving average and retaking support levels. The indicators are still bearish but if support holds will quickly turn. There could be a retest of support at 4350 until either the data or the earnings dictate longer term direction.


The SPX did not open at support but quickly moved down to it. The broad market opened only slightly lower, then drifted down to support before bouncing back up to break even during the day. As I mention earlier the SPX, once it moved down to the 1950-1955 zone, immediately found buyers. This support level is coincident with the EMA for added confirmation. The indicators are still bearish, but also still weak, and consistent with a test of support for now. Until further developments this is looking like another buy on the dip scenario with a possible retest of the 1950 region before moving higher.


The Dow Jones Industrial Average also fell today from a slightly lower opening. The blue chips were actually able to pierce the moving average before finding support but find it they did. Momentum has just turned bearish on this one but is so weak, and with the previous peaks so weak, it still looks more neutral than anything else. The stochastic only adds to the feeling of sit-and-wait. This indicator is still firmly in the middle of the range, consistent with support and yet showing no real sign of direction. Earnings could be the ticket, one way or another.


The Transports continue to lead the other indices. The Dow Jones Transportation Average fell only -0.23% today, the least of the four majors I tend to follow. The index opened slightly lower. Moved down to test support at the moving average and top of my bull triangle before moving back to brush break even and then fall back to close near the open. Momentum is bearish but consistent with support in the near term. As for stochastic, %D is flat, flat. I'm not sure what to make of it except that the near and short term are in synch with no direction.


Today was a wild day. It was one of those days when I started out thinking Oh No and ended up thinking nothing to worry about. Yet. What happened today is a ripple of fear swept the market and sent the indices running for cover. These fears are not misplaced but I think for now are over blown. This is how I see it; Japan isn't in awesome shape but it hasn't been for decades, but it's getting a little better. China is China, we will never really know for sure anything that goes on over there but the data, although weak, was expansionary. In Europe, Portuguese banking is a problem for the Portuguese, the ECB and the EU. Its a small country that won't affect us too much but could cause the ECB to act in some way which, in the end, would be good for the economy.

What we really need to focus on now is the earnings. So far its hard to say. Earnings from Alcoa were good but there have been some warnings. Tomorrow the big banks begin Wells Fargo, the bulk of them reporting mid to late next week. There are also quite a few other big names reporting next week as well, not to mention all important housing, inflation data, Fed Beige Book and US Industrial Production.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Investors Seem Nervous

by James Brown

Click here to email James Brown

Editor's Note:

Investors seem nervous. The disappointing economic news out of China this morning and the troubling headlines from Portugal sparked a sharp sell-off at the open. Yet there was no follow through. Most stocks immediately rebounded.

There was money flowing into "safe haven" trades like bonds and gold but bonds pulled back from their morning highs. Of course the short-term trend for bonds is higher.

The S&P 500 index pierced short-term support at its simple 20-dma and the bottom of its intermediate bullish channel but managed to bounce back by the closing bell.

Market leaders like the semiconductors and the transport are still holding up pretty well. Meanwhile the small cap Russell 2000 continues to underperform and tested possible support near 1150 today.

Overall it feels like investors are using the Portugal and China news as an excuse to take some money off the table.

No new positions tonight.




In Play Updates and Reviews

Stocks Plunge On Europe & China

by James Brown

Click here to email James Brown

Editor's Note:

Disconcerting headlines out of Portugal reignited worries over the health of the European banking system. At the same time China's export numbers came in significantly below expectations, which fueled fears of a global economic slowdown.

The market didn't react well and stocks plunged at the open but managed to pare their losses by the closing bell.

APC hit our stop loss.


Current Portfolio:


CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 133.16 change: -0.42

Stop Loss: 129.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
07/10/14: AAP weathered the market's weakness this morning pretty well. Shares only dipped to $132.00 before bouncing. I don't see any changes from last night's new play description.

We're currently suggesting a trigger to buy calls at $134.25.

Earlier Comments: July 9, 2014:
The average car on the road in the U.S. today is over 11 years old. Even though the pace of new car sales has been strong in 2014 there are large chunks of the consumer that are still struggling. Older cars mean higher demand for auto parts.

AAP is in the services sector. The company is one of the largest auto parts retailers in the nation. They recently bought General Parts International for $2.08 billion in a cash deal that closed early this year. That added 1,233 Carquest stores and 103 Worldpac branches.

AAP believes they will be able to achieve about $190 million in synergies over the next three years. Analysts believe that AAP, now even bigger, will be able to negotiate better prices with wholesalers and rev up its supply-chain efficiencies.

The company delivered strong gains in the first quarter in spite of the lousy weather. That's a feat many retailers failed to accomplish with same-store sales up +4%. The company is also seeing improvement in its gross margins.

While the U.S. economy is slowly improving we are not seeing significant wage inflation. Consumers are still looking for bargains. That means more older cars on the road and more consumers buying auto parts to keep their older cars running.

IHS Automotive said the average age of light vehicles is currently 11.4 years. This includes cars, SUVs and light trucks. That's the average. This is expected to rise to 11.5 years by 2015 and 11.7 years by 2019. Older cars require more maintenance and more replacement parts. This is a strong tailwind for AAP.

AAP's recent breakout past resistance at $130.00 is bullish. The recent pullback looks like a buying opportunity. However, I'd like to see some follow through on today's bounce. Yesterday's intraday high was $133.99. I am suggesting a trigger to buy calls at $134.25.

FYI: We are not setting an exit target tonight but the Point & Figure chart for AAP is bullish with a $154.00 target.

Trigger @ $134.25

- Suggested Positions -

Buy the Sep $140 call (AAP140920C140)

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

Entry on July -- at $---.--
Average Daily Volume = 818 thousand
Listed on July 09, 2014


Apple Inc. - AAPL - close: 95.04 change: -0.36

Stop Loss: 88.80
Target(s): To Be Determined
Current Option Gain/Loss: +15.7%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: There are always a ton of headlines regarding AAPL, one of the world's biggest corporations. Today there was news that AAPL lost a patent lawsuit in China over is SIRI personal assistant to another company involving man-machine interaction. AAPL plans to appeal. Meanwhile the EU's highest court gave AAPL permission to trademark its retail store layout and design. AAPL has already trademarked its retail store design in the U.S.

The stock was a bit volatile today thanks to the market's widespread drop this morning. Shares of AAPL gapped down and hit $93.52 before bouncing.

I am not suggesting new positions at this time. Investors need to decide. Will you exit your calls as AAPL near resistance at the $100.00 mark? Or will you hold on as until we get closer to the expected iPhone 6 product launch in September.

Earlier Comments: June 28, 2014:
You don't get any more high-profile than Apple Inc. (AAPL). Many consider AAPL a technology company but they are known for their consumer electronics. Their ecosystem continues to grow with iPods, iPads, iPhones, Macintosh computers, Apple TV, and soon Beats music headphones and possibly an iWatch.

Right now the market is focused on Apple's upcoming launch of its next iPhone, rumored to be the iPhone 6. It's also rumored to be coming out on September 19th. Everything seems to be a rumor these days when it comes to Apple's next product. Right now the big rumor is that Apple might introduce two different iPhone 6s. One with a 4.7 inch display and one with a 5.5 inch display.

It really doesn't matter what the display size is. There is a legion of loyal iPhone customers that will jump at the chance to upgrade. One analyst firm is estimating that iPhone 6 sales could hit a record-breaking 80 million units in 2014 alone. That's amazing if the phone doesn't come out until mid September.

Why do we care about Apple's next iPhone launch? We care because the stock tends to see a pre-launch rally in its stock price. Now that shares have split 7-for-1 just a few weeks ago we can actually trade it. AAPL stock rallied seven out of eight weeks in a row until it peaked at round-number resistance near $95.00 on June 10th. The stock split was June 6th.

Since peaking at $95.00 AAPL has slowly consolidated sideways. I heard a lot of traders on CNBC saying they wanted to buy it at $85.00. It looks like that may not happen. Investors have jumped in to buy the dip at $90.00. The point & figure chart is bullish and forecasting at $131.00 target. I think AAPL can rally toward $100 before its iPhone launch in mid September as long as the broader market cooperates.

Be careful when choosing an option strike. There are a lot of weird strikes due to AAPL's 7:1 split. We are listing the October $95.00 call. (FYI: Look for the Oct. $95 call with more than 22,000 in open interest)

- Suggested Positions -

Long Oct $95 call (AAPL141018C95) entry $3.93

06/30/14 triggered @ 92.75
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $92.75
Average Daily Volume = 38 million
Listed on June 28, 2014


Ameriprise Financial - AMP - close: 120.27 change: -0.89

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: + 5.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: AMP followed the market lower with a gap down and a drop to $118.87 this morning. Shares managed to bounce back above $120 before the day was over.

We're raising the stop loss to $115.75.

I am not suggesting new positions at this time. Readers may want to raise their stop loss.

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

07/10/14 new stop @ 115.75
06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

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


Cheniere Energy, Inc. - LNG - close: 70.62 change: -1.68

Stop Loss: 66.40
Target(s): To Be Determined
Current Option Gain/Loss: -19.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: LNG completely erased yesterday's bounce with a -2.3% decline. The stock is testing support near $70.00.

I am raising the stop loss to $66.40. More conservative traders may want to raise their stop even higher.

Earlier Comments: June 28, 2014:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 5.53 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

Just a couple of days ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been consolidating sideways the last few weeks after the sharp end of May rally. That big pop at the end of May was market reaction to news that the U.S. Department of Energy proposed new rules to streamline their approval process and focus on projects with the best chance of actually getting built. That was good news for LNG and the company is on track to be the first to export LNG produced in the U.S.

- Suggested Positions -

Long Sep $75 call (LNG140920C75) entry $3.45

07/10/14 new stop @ 66.40
06/30/14 triggered @ 70.25
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $70.25
Average Daily Volume = 3.0 million
Listed on June 28, 2014


Starbucks Corp. - SBUX - close: 78.85 change: -0.60

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +46.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: SBUX gapped lower as did most of the market this morning. Shares briefly traded below short-term technical support at its 10-dma before recovering.

I am not suggesting new positions at the moment.

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

07/05/14 new stop @ 74.75
06/28/14 new stop @ 73.40
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: 55.37 change: -0.44

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: +20.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: SLCA gapped down this morning but immediately bounced near short-term support at $54.00 and its 30-dma.

I am not suggesting new positions at this time.

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*

07/01/14 new stop @ 49.25
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


Energy SPDR ETF - XLE - close: 99.16 change: -0.96

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
07/10/14: The widespread nature of today's market sell-off did not leave the energy stocks unscathed. The XLE dipped to a two-week low before trimming its losses to -0.9%.

We are currently on the sidelines waiting for a new relative high. Our suggested entry point is $100.75.

Earlier Comments: July 5, 2014:
Energy stocks are some of the stock market's best performers this year. The S&P 500 index is up +7.4% year to date. The XLE is up +13.4%. Earlier in the year a harsh winter helped drive demand for heating fuels. Now the industry is boosted by rising geopolitical events between Ukraine & Russia and more recently a Sunni jihadist uprising that is pushing Iraq toward a civil war.

Iraq is the third largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). The country produces about three million barrels of oil a day. Iraq also accounted for over half of OPEC's recent production growth. Today the world is concerned that a civil war between hard-line Sunni Muslims in the north and northwest of Iraq and the Shia Muslim government in the south and southeast could damage or severely handicap Iraq's oil production. Meanwhile the Kurds will carve out their own independent nation at the very northern tip of Iraq.

Why should we care about a civil war in Iraq and its three million barrels of oil production a day? We should care because the difference between global oil demand and global oil supply is very tight. The U.S. Energy Information Administration (EIA) estimates that global oil demand will be in the 92 and 93 million barrels a day (mb/d) range in 2014-2015. Furthermore demand will rise 1.2 mb/d both in 2014 and 2015. The Paris-based International Energy Agency (IEA), from the latest data in June 2014, estimates global demand will rise 1.3 mb/d in 2014 to a total of 92.8 mb/d. Yet global supplies are only at 92.6 mb/d.

The world is already falling behind on oil supplies. People often forget that once you drill an oil well production is always declining as there is less and less oil in that well. Eventually wells run dry. Globally this lost production is between -3% and -5% a year. Not only do we need to discover, drill, and produce another +1.3 mb/d to meet growing demand we also have to replace the -3.6 mb/d we're losing every year due to maturing wells. That's almost 5 million barrels of oil a day!

You can see now why Iraq's 3 mb/d production is a focus for the equity markets. We've been lucky so far that nearly all of the fighting in Iraq has been in the northern half while most of the country's oil production and infrastructure is in the southern half. Thus far Iraq's production has not been seriously damaged. There is no guarantee the fighting will stay contained to the north. What happens if Baghdad falls or if the country is permanently divided? Terrorist could target Iraq's production facilities and pipelines.

Fortunately oil production in the U.S. is booming. America just hit 11 million barrels a day. That makes the U.S. the biggest single producer in the world. Current forecast put U.S. production hitting a peak of 13.1 mb/d in 2019. Unfortunately global demand might rise by another 5 or 6 mb/d by then (let's not forget the lost production from declining wells).

Oil prices will most likely remain elevated for an extended period of time. That should mean good news for all the energy companies, up stream, down stream, and everyone in between. A good way to play this strength in energy demand is the XLE, the Energy Select SPDR Exchange Trade Fund (ETF).

The XLE is a basket of over 40 of the biggest names in the energy space from production, to drilling, oil services, and refining. The XLE's top ten components are:

Exxon Mobil (XOM)
Chevron Corp. (CVX)
Schlumberger Ltd. (SLB)
ConocoPhillips (COP)
EOG Resources (EOG)
Pioneer Natural Resources (PXD)
Halliburton Co (HAL)
Occidental Petroleum (OXY)
Anadarko Petroleum (APC)
The Williams Companies Inc. (WMB)

As the violence in Iraq worsened last month we saw the XLE sprint higher in the first three weeks of June. When the stock market experienced some widespread profit taking on June 24th traders rushed into to lock in profits on the XLE. Since then the ETF has been slowly drifting higher.

We believe the up trend continues. The July 1st high was $100.66. Tonight we're suggesting a trigger to buy calls at $100.75. We'll start this trade with a stop loss at $97.95.

Trigger @ $100.75

- Suggested Positions -

Buy the Oct $105 call (XLE141018C105)

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

Entry on July -- at $---.--
Average Daily Volume = 8.8 million
Listed on July 05, 2014




PUT Play Updates

Tractor Supply Co. - TSCO - close: 59.92 change: -1.46

Stop Loss: 62.65
Target(s): To Be Determined
Current Option Gain/Loss: +22.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: I found TSCO's performance today a bit frustrating. We were expecting shares to gap down after last night's earnings warning. Sure enough TSCO opened at $58.20 and traded down to $57.20 at its worst levels of the session (a -6.8% decline). Yet TSCO reversed midday and rallied back toward $60.00 and reduced its loss to just -2.3%.

The $60.00 level and yesterday's close at $61.38 should both be overhead resistance.

Last night's earnings warning did spark some downgrades and multiple analysts lower their price targets on TSCO. One firm actually upgraded the stock.

Earlier Comments: June 24, 2014:
TSCO has everything from cowboy boots to chicken coops and everything you might possibly need on the farm. The company has over 1,300 stores in 48 states. This specialty retailer is focused on the "lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses."

A lot of things are on the rise for TSCO. They have rising sales, a rising dividend, rising stock buyback program. What is not rising is their stock price. Shares peaked in January this year after surging to all-time highs in 2013. The company has been raising its dividend, now up to 16 cents a share. They also recently announced another $1 billion to their stock buyback program. Unfortunately these do not seem to be helping the share price.

Their last earnings report was April 23rd. TSCO reported Q1 earnings of 35 cents a share on revenues of $1.18 billion. That missed estimates of 37 cents on revenues of $1.21 billion. To be fair the terrible weather in the first quarter really did affect their sales, given their farm and rancher focus. Management believes these sales will return as the weather improves. TSCO reaffirmed their 2014 sales guidance of $5.62 billion to $5.7 billion and same-store sales of 2.5% to 4%. The company plans to open over 100 new stores this year.

Not everyone on Wall Street believes TSCO is a buy. The company was recently downgraded thanks to its high valuation (over 26 times its 2014 earnings estimates) and weaker gross margins. TSCO also seems to be suffering from slowing same-store sales. Last year their average same-store sales growth was +4.8%. The fourth quarter's was +3.5%. The first quarter of 2014 it was down to +2.2%. Again, you could blame that on the weather but it's not a good trend.

We are not setting an exit target tonight. It is worth noting that the point & figure chart is bearish and suggesting a $46 target.

- Suggested Positions -

Long Oct $60 PUT (TSCO141018P60) entry $2.45

07/09/14 after the closing bell TSCO issued a Q2 earnings warning
07/01/14 new stop @ 62.65
06/26/14 triggered
Option Format: symbol-year-month-day-call-strike

Entry on June 26 at $61.90
Average Daily Volume = 871 thousand
Listed on June 24, 2014



CLOSED BULLISH PLAYS

Anadarko Petroleum - APC - close: 106.14 change: -1.36

Stop Loss: 105.85
Target(s): To Be Determined
Current Option Gain/Loss: + 25.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/10/14: Thursday's widespread market weakness this morning sent APC sharply lower. The stock gapped down at $105.98 and hit our stop at $105.85. APC did rebound off technical support at its 40-dma.

- Suggested Positions -

NOV $110 call (APC141122C110) entry $4.80* exit $6.00 (+25.0%)

07/10/14 stopped out
07/05/14 new stop @ 105.85
06/28/14 new stop @ 102.40
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