Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/15/2014

Table of Contents

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

Market Wrap

Yellen Sell Signal

by Jim Brown

Click here to email Jim Brown

Janet Yellen put a sell rating on social media and biotech stocks. Who knew she was a stock analyst and a Fed head?

Market Statistics

The Empress of the Doves showed her hawkish side today by calling out two sectors as being overvalued. The exact statement in the report was this. "Valuation metrics in some sectors appear substantially stretched particularly for smaller firms in the social media and biotech industries, despite a notable downturn in equity prices for such firms early in the year."

The statement was in a report that accompanied her prepared testimony to the Senate Banking Committee this morning. The market did not catch it immediately but eventually some analysts noticed it and the opening rally was immediately reversed.

The Biotechnology Index ($BTK) dropped -2% on the news. Some analysts said they appreciated her comments because it showed the Fed was concerned about a market bubble as a result of five years of Fed stimulus. Other analysts were dismayed by the comment since the Fed has failed nearly 100% of the time in projecting future economic events. Why should we think they will have a better record in predicting stock movement? Stocks are valued differently by different people. Some biotech stocks may be undervalued because of their future drug pipelines while others may be permanently overvalued. For the Fed to basically issue a sell signal on two sectors was a shock to the investment community. The last time the Fed Chairman tried to burst a stock bubble was in 1996 when Greenspan gave his "irrational exuberance" speech.

The break from tradition by Yellen poses a new problem for investors whenever she speaks. You never know when she might say the "ABC sector is overvalued now." For example if you are in energy and she dumps on that sector it will not be fun. On the flip side I doubt she is ever going to say "(XYZ sector is now oversold and undervalued."

We can always speculate the Fed was short Russell futures going into the announcement. I am joking of course.

If the Fed believes biotechs and social media are overvalued then what do they think is fair value? You can't just throw out a comment like that without finishing the thought. If you are going to play stock analyst then give us a complete report.

We have entered a new era in Fed communications and it may be laced with market potholes. Instead of just worrying about rate announcements now they may be making market calls with no track record of success. That means the market will be even more tentative ahead of important speeches.

Obviously Yellen is aware of the criticism against the Fed creating asset bubbles and she is trying to take some wind out of the markets with the call on social media and biotechs. It worked today but will it work in the future? Do we really want the Fed making market calls? Personally I would appreciate it if they would just stick to the economy and try to get that forecast right for a change.


Economic reports were mixed again with the good news coming from the NY Empire State Manufacturing Survey. The headline number spiked from 19.3 to 25.6 for July. This was a four-year high. This was well over expectations for a decline to 17.1 although the internals were not that positive.

New orders were flat at 18.4 and inventories declined from 9.7 to -3.4. Backorders declined from -1.1 to -6.8 and well into contraction territory. Prices paid rose from 17.2 to 25.0 and prices received rose from 4.3 to 6.8. However, the employment component rose from 10.8 to 17.1 suggesting employers were hiring. Unfortunately the hours worked component declined from 9.7 to 2.3. This suggests companies are cutting back on hours per person and hiring more "less than 30 hours a week" workers to avoid the Obamacare expenses.

The six-month outlook component fell from 39.8 to 28.4 and that is really negative when coupled with the sharp rise in prices paid.


Retail sales for June came in below estimates at +0.2% compared to the consensus for a +0.6% gain. However, April was revised higher from +0.5% to +0.6% and May was revised up from +0.3% to +0.5%. Autos were the major drag with the ex-autos headline number rising +0.4%.

The big decliners were building materials -1.1%, food service and drinking -0.3%, motor vehicles and parts -0.3%, furniture and home furnishings -0.1%. Winners were clothing and accessories +0.8%, sporting goods +0.6%, gasoline stations +0.3%, general merchandisers +1.1% and nonstore retailers +0.9%.

The report showed the consumer is still weak and housing may be slowing further with the decline in building material sales. This is one more report providing evidence of a slow growth economy.

Business Inventories for May rose only +0.52% compared to +0.63% in April and estimates for +0.6%. Business sales growth slowed to +0.4%, which should make businesses slow to rebuild inventories. Nobody wants to be stuck with a warehouse of stale products if sales continue to decline. Inventories can rise two ways. They can rise because companies buy more on speculation or they can rise because sales slow and normal reordering starts to push inventory levels higher. Businesses have to forecast sales and order replacement inventory based on those forecasts. If sales continue to slow you can bet they will cancel or delay those orders.

Economics for Wednesday include the Producer Price Index (PPI) and Industrial Production. Neither is expected to move the market. The Fed Beige Book in the afternoon could be a market mover if it shows economic activity declined from the prior report. Analysts expect continued improvement but at a snail's pace.

The big event is the Janet Yellen testimony in the morning. The House members will have had 24 hours to analyze her comments from the Senate testimony today and she will probably be questioned on the bubble call on social media and biotechs. I would expect some more fireworks from the testimony and that normally drags on the market. However, she may try to smooth over the impact from the stock comments and that could remove the investor worry.


The earnings headlines are starting to heat up and some of them are not good. However, so far the impact has been neutral. After the bell today Intel (INTC) reported earnings of 55 cents that rose +40% compared to estimates for 52 cents. Revenue rose +8% to $13.83 billion compared to estimates for $13.7 billion. The company forecast revenue for Q3 of $14.4 billion compared to estimates for $14 billion. Gross margin is expected to be 66% and +3 points above analyst estimates. Intel said it was going to buyback an additional $20 billion in stock over time with $4 billion this quarter.

The CFO said Intel was firing on all cylinders and revenue growth for the full year was now expected to be +5% compared to flat estimates earlier this year. They estimate there are more than 600 million PCs in the U.S. that are more than 4 years old. That is a polite way of saying they are running Windows XP or older operating systems and need to be upgraded.

Intel shares rose +1.30 in afterhours and will lift the Dow at the open on Wednesday.


Yahoo (YHOO) reported earnings after the close of 37 cents that missed estimates by 2 cents. Revenue declined -3% to $1.04 billion compared to estimates for $1.08 billion. Nearly everything said on the conference call was negative except for the Alibaba news. Yahoo said they had signed another agreement with Alibaba to reduce the number of shares they are forced to sell in the IPO from 208 million to 140 million. This is the second reduction they have announced. They entered into an agreement last year to sell a specific number of shares in the IPO and that has been reduced twice. This will leave Yahoo with 75% of their current stake. Yahoo currently has a 23% stake in Alibaba. The company said they were planning on returning to shareholders 50% of the IPO proceeds through buybacks and dividends.

The company forecast revenue in the current quarter of $1.02-$1.06 billion and analysts were expecting $1.1 billion. Ad sales have been declining as Google and Facebook have been gaining market share. Research firm eMarketer expects Microsoft to pass Yahoo as number three in the near future. Mayer said the decline in display advertising was accelerating.

Shares of Yahoo declined from $35.61 to $34.80 in afterhours after a volatile session during the conference call.


CSX Corp (CSX) reported earnings of 53 cents compared to estimates of 52 cents. Revenues rose +7% to $3.24 billion and that was just slightly below estimates of $3.25 billion. Those were record numbers. The earnings were not the important news. CSX guidance is considered a proxy for the economy. The company said the economy was improving strongly and they were increasing their capital spending to $2.4 billion because of the strong demand. The CEO said demand for the rest of the year should be 8% growth with a +7% increase in intermodal shipments. Coal shipments were up +15% thanks to the high prices for natural gas and electric companies rebuilding inventories after a severe winter.

He said shipments of construction materials for housing were up strongly as well as sand and gravel for fracking and cement. It was a bullish call on the economy and suggests the overall outlook is improving. CSX shares were unchanged in afterhours.


After the bell IBM and Apple announced a partnership to develop new applications for iPads and iPhones for the enterprise market. Apple has typically been a consumer product manufacturer and IBM an enterprise marketer. Combining the two together will be a sword in the heart of BlackBerry, which is barely hanging on to its enterprise customers as the saving grace for the company. If IBM and Apple can combine their resources they are going to be tough to beat.

They have targeted more than 100 business applications for the iProducts that will fuse big data and analytics into Apple's ubiquity and usability. Apple's words, not mine. The companies will develop the apps and IBM will sell the iProducts to its corporate customers while Apple sells the apps to its retail customers. The initial apps will be released late in 2014 and continue throughout 2015.

This is a landmark deal with the two giants teaming up to offer products not currently available that will revolutionize the way users interact with the data at the fingertip level. IBM shares rallied +$5 in afterhours and Apple shares rallied about $2. This will be positive for the Dow and the Nasdaq at Wednesday's open. Blackberry shares declined 50 cents to $10.88.



At the open Goldman Sachs (GS) reported earnings of $4.10 or $2.04 billion. That crushed the $3.09 analyst estimates. They earned $1.25 billion in the Investing and Lending segment. That was almost double the $640 million analysts expected. This is a highly volatile segment and is not normally repeatable. Bond trading revenue fell -9% and equities trading revenue declined -11%. The bank said trading clients are the least active in several years. Goldman also received $506 million in financial advisory fees for M&A advice. That is also a volatile number.

Goldman shares only rallied $2 on the earnings report because of all the special situations earnings that are not repeatable from quarter to quarter.


JP Morgan (JPM) posted earnings of $1.46 that declined -8% as fixed income and equity trading revenue fell -15%. Analysts were expecting $1.29 per share. Revenue declined -3% to $24.45 billion. The decline in trading revenue was less than the 20% analysts had expected. Citigroup also posted a 15% decline in trading revenue. JPM said mortgage lending profits declined -38% as it pulled back from the mortgage business in fear of future foreclosures. The bank is becoming much stricter in its mortgage lending to avoid another disaster in the future. Application volumes had declined -54%. Assets at the end of June totaled $2.52 trillion. Shares rallied $2 on the news.


Michael Kors (KORS) was knocked for a 7% loss after multiple analysts stated concerns over the slowdown in retail sales. Citigroup lowered its price target from $107 to $98 saying a survey of 62 retailers suggested that Kors products lacked "newness." More than 17% of the respondents said the stores missed sales targets in the quarter. Barclays said the number of Google searches for Michael Kors declined over the same period in 2013. During the previous 4 years only one week had shown a decline in searches. Barclays reiterated an $82 price target. Maxim analyst Rick Snyder downgraded Kors from buy to hold and lowered his price target from $109 to $85.


Markets

After setting a new high on July 3rd the S&P has been relatively flat. The dip to 1,953 on the 10th was the low point and today's high at 1,982 was the high point. The index has been volatile and lacking direction. The 1,980 level has emerged as resistance and we need to close above that level on Wednesday or risk the beginning of a new trend lower.

The material resistance is still well above at 2,000 but I don't see a catalyst to push us that high this week. The earnings have been mostly positive but with the exception of Intel tonight they have been lackluster. Volume picked up slightly to 6.0 billion shares with nearly 2:1 declining over advancing volume. Declining stocks were 4,873 compared to advancers of 2,081. That is hardly a bullish day. Down volume, negative internals with all the indexes negative except for the Dow and the Transports. That does not suggest a positive week ahead.

We could hang in this 1,950-1,980 range for the rest of the week while investors look at two more days of active earnings. If those earnings don't improve significantly I see the S&P breaking support rather than resistance.


The Dow made a new intraday high for the last two days but has failed to close over the 17,068 level for a new closing high. The blue chips are attracting all the money thanks to their liquidity and relative strength.

The afterhours gains in Intel and IBM should be good for about 56 Dow points at the open if those gains hold overnight. While that should insure a positive open the rest of the day could be in doubt with Yellen at the microphone and earnings reports that could be weak.

The Dow has resistance at 17,100, 17,150 and 17,300. The narrowing uptrending wedge is providing less room for the Dow to run and a breakout is imminent. Only the direction is unknown.



The Nasdaq faded fast after the opening spike. It did rebound +26 points from its lows at 4,390 but still ended with a -24 point loss. The Nasdaq deserves to be weak after the six weeks of gains. If it can hold at this level we have a chance of another retest of the highs but the outlook is cloudy. It all depends on the earnings from this point forward.

Resistance is 4,465 and support 4,344 giving the index more than 120 points to wander without changing the trend.



Before I left for vacation last week I warned that the Russell 2000 was at the perfect place for a double top after it closed at 1,208 on July 3rd. Don't look now but the Russell has been the weakest index for the last 7 days and closed at a new 5 week low today.

The Yellen sell signal for biotechs and social media stocks hit the Russell hard. That was like kicking an index when it was already down. The biotechs were already in the ditch with a lot of really steep declines last week. The Yellen comments just pushed them and the Russell 2000 lower.

The Russell closed below the 100-day at 1,157 and right above the 50-day at 1,150. The 200-day is jsut below at 1,130. Any further declines could trigger some serious technical sell signals.



The Russell futures are declining again tonight. It is not a big drop but simply a continuation of the trend. As long as the Russell is weak we can't expect the big cap indexes to surge higher. They may post minor gains but I doubt they are going much higher. We know from experience these things can reverse at any time. We could see the Russell reach a point where traders think it is worth buying and we could be off to the races again. I don't see a catalyst for that this week.

I would be cautious about adding to long positions until the Russell begins to rebound. July is normally the best month in Q3 because of the earnings cycle. If the earnings continue to be lackluster we could see the late summer doldrums arrive early.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Poised To Breakout

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Emerge Energy Services LP - EMES - close: 109.36 change: +0.35

Stop Loss: 104.75
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:
The shale energy rush in America continues. Widespread hydraulic fracturing wells means big demand for sand. The process of hydraulic fracturing or "fracking" happens deep underground. Oil and natural gas drillers reach deep into the shale formation. Then they pump tons of water and proppants (usually sand) into the formation to fracture the rock and allow the oil and natural gas to escape and be pumped up to the surface.

Drillers use sand to prop open the tiny cracks in the shale rock formation, which allows for a better flow and larger output from the well. The demand for fracking sand is expected to grow +10% a year for the next 8 years. Drillers have figured out how to boost their production. Instead of fracturing the well just once they could do it up to 40 times. The amount of proppant used has jumped from 2,500 tons to 8,000 tons per well.

According to the EMES website, Emerge Energy Services is a diversified energy services company that operates in two key segments of the energy industry: Sand Production and Fuel Processing and Distribution. Through its subsidiaries, Emerge Energy Services provides critical products and services to both the upstream and midstream energy segments.

Emerge Energy Services' sand subsidiary produces silica sand that is a key input for the hydraulic fracturing of oil and gas wells. While the Company is able to produce sand suited for the stimulation of both oil and gas wells, the Company has developed a strong reputation in the industry for producing sand that meets the strict requirements for use in oil wells.

Emerge Energy Services' Fuel Processing and Distribution ("FP&D") segment is primarily focused on acquiring, re-refining and selling transportation mixture ("transmix"). Transmix is received by the business from a number of common carrier pipelines that include the Explorer, Plantation, and Colonial pipelines, as well as via truck and private pipeline from independent refinery and terminal operators. Additionally, the FP&D division includes wholesale, terminal and biodiesel operations.

EMES last reported earnings on May 5th. It was their Q1 results, which came in at 77 cents a share. Wall Street was expecting 69 cents. EMES' revenues soared +80% to $274 million, surpassing estimates of $261 million. EMES' Chairman of the Board said it was the company's strongest quarter as a public company. The Chairman also said, "even with an industry wide shortage of railcars, we sold a company record 882,000 tons of sand, while our fuel division continues to outperform our expectations." Analysts have forecasted EMES' 10-year earnings growth at 33%.

The company is investing over $100 million into two new sand mines that are expected to be ready for production by the end of next year. This will add 5 million tons of sand capacity, which would make EMES the largest fracking sand producer in the country.

I will note the stock's gap down on June 20th. That was a reaction to a secondary offering of 3.5 million units at $109.06 a share. Fortunately there was no follow through on the drop and shares of EMES have been drifting higher. Currently shares are hovering just below resistance at $110.00. We are not setting an exit target tonight but the Point & Figure chart is forecasting at $133 target. More than one Wall Street firm has a $120 price target on EMES.

Tonight we are suggesting a trigger to open bullish positions at $110.25.

Investors should note that shares of EMES can be volatile. We love the story and the bullish outlook but I would probably label this an aggressive, higher-risk trade due to the stock's volatile moves.

Trigger @ $110.25

- Suggested Positions -

Buy the Sep $115 call (EMES140920C115) current ask $6.40

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

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 586 thousand
Listed on July 15, 2014



In Play Updates and Reviews

Did Yellen Spook The Market?

by James Brown

Click here to email James Brown

Editor's Note:

Stocks fell to their lows of the day on the Fed Chairman's comments.


Current Portfolio:


CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 132.64 change: -2.17

Stop Loss: 129.40
Target(s): To Be Determined
Current Option Gain/Loss: -20.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: AAP did not see any follow through on yesterday's breakout past short-term resistance near $134.00. In fact the stock has reversed and is back inside the $132-134 trading range. I am not suggesting new positions at current levels.

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.

- Suggested Positions -

Long Sep $140 call (AAP140920C140) entry $3.50*

07/14/14 triggered @ 134.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $134.25
Average Daily Volume = 818 thousand
Listed on July 09, 2014


Apple Inc. - AAPL - close: 95.32 change: -1.13

Stop Loss: 88.80
Target(s): To Be Determined
Current Option Gain/Loss: +17.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: It was a disappointing day for shares of AAPL. The stock was upgraded this morning and given a $115 price target. Yet that did stop AAPL from reversing under $97 and giving back nearly all of yesterday's gains. Shares tested short-term support at $95.00 and its simple 10-dma. Technically today's session has created a bearish engulfing candlestick reversal pattern. These patterns normally need to see confirmation.

The bulls may be in luck. The reversal pattern may not see confirmation as AAPL is spiking higher on news after the bell that the company is announcing a partnership with IBM. Focusing on iPhone and iPad consumers, IBM and AAPL will bring IBM's enterprise big data expertise and combine it with AAPL's consumer electronics focus. This helps AAPL dig deeper into the corporate enterprise market while IBM gets more exposure in the mobile market. Shares of AAPL are up after hours on this news.

FYI: AAPL is scheduled to report earnings on July 22nd.

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: 122.30 change: +0.53

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: +30.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: AMP bounced off its simple 10-dma midday. Shares are hovering under their July highs.

I am not suggesting new positions at this time.

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


Harman Intl. Industries - HAR - close: 114.90

Stop Loss: 109.90
Target(s): To Be Determined
Current Option Gain/Loss: -21.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: HAR displayed relative weakness today with a -1.9% decline. I don't see any news to account for the move. Today's move combined with yesterday's intraday pullback almost looks like a bearish reversal pattern. HAR could test its simple 10-dma tomorrow near $113.25. More conservative investors may want to raise their stop loss. I'm watching the $114.00 level for short-term support.

Earlier Comments: July 12, 2014:
Automobile sales in the U.S. have been strong this year. Instead of playing the carmakers, which run the risk of announcing yet another recall, consider a derivative play. HAR makes speakers and electronics that are part of the growing "connected car" trend (a.k.a. infotainment systems).

HAR is developing a very bullish trend of beating Wall Street's earnings estimates. Their last two reports were both upside surprises in January and May. Both times HAR not only beat estimates on the top and bottom line but management also guided earnings higher.

The most recent report was May 21st. Analysts were expecting a profit of $1.00 a share on revenues of $1.27 billion. HAR delivered $1.12 a share with revenues hitting $1.4 billion. HAR said recovering demand in European luxury cars and growing demand in China helped fuel their gains.

Management explains that consumers want the connected car experience. The HAR teams says there is pent up demand in Europe that will likely stabilize soon. Meanwhile their business in China is surging. China is now the largest automobile market in the world and HAR's sales surged +60% in China last quarter.

Looking at that last quarter HAR reported revenues were up +32% from a year ago to $1.4 billion. Their bottom line EPS grew +41% to $1.12. They expect to end their fiscal year 2014 with revenues of $5.275 billion, up +23% from the year before.

HAR has also been making acquisitions. They recently announced a $365 million deal to buy AMX LLC, which is an enterprise control and automation system company. HAR plans to roll that up into their professional division. HAR also bought Yurbuds last month. Yurbuds is the number one brand of sports headphones in the U.S.

Last month HAR announced they were raising their quarterly dividend from 30 cents to 33 cents a share.

Technically shares have broken out from a five-month consolidation phase in the $100-115 zone. Shares have weathered the market's recent weakness pretty well. Friday's close at $116.51 is a new seven-year high. I suspect HAR can rally into the $125-130 zone, which has been resistance in the past. The Point & Figure chart is more bullish and currently projecting at $146 target.

Tonight I'm suggesting a trigger to buy calls at $117.25. More patient investors may want to use a different strategy and buy a dip or a bounce from the $114.00 level, which looks like it could be short-term support.

We'll start with a relatively wide stop loss at $109.90.

- Suggested Positions -

Long OCT $120 call (HAR141018c120) entry $6.00*

07/14/14 triggered @ 117.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $117.25
Average Daily Volume = 715 thousand
Listed on July 12, 2014


Cheniere Energy, Inc. - LNG - close: 70.55 change: -1.45

Stop Loss: 66.40
Target(s): To Be Determined
Current Option Gain/Loss: -24.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: LNG was also showing relative weakness today with a -2.0% decline. The stock is testing short-term support near $70.00 again. More conservative investors may want to raise their stop loss.

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


Sanderson Farms, Inc. - SAFM - close: 102.00 change: -0.59

Stop Loss: 97.25
Target(s): To Be Determined
Current Option Gain/Loss: -12.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: SAFM spiked to a new high at the opening bell but the rally didn't last. Shares spent most of the day hovering under the $102 level and erased yesterday's gains by the closing bell. If this dip continues we could see SAFM testing the $100 level and its 10-dma.

Considering today's weakness, readers may want to wait for SAFM to dip near $100 before initiating new positions.

Earlier Comments: July 12, 2014:
Sanderson Farms actually started out as a farm supply business back in 1947. A few years later they started raising chickens. Today they are the third largest chicken ranch in the United States processing more than 9.3 million chickens a week.

If you have been shopping for a little backyard BBQ this summer then you already know that meat prices are high. A long, widespread drought has been plaguing cattle ranchers for months and beef prices are soaring. At the same time disease has killed millions of pigs this year reducing the supply of pork. This has fueled a surge in beef and pork prices. Chicken has been on the rise as well but consumers appear to be buying more chicken as an alternative to pricier meats.

SAFM has developed a very strong trend of beating Wall Street's earnings estimates. They have beat analysts' estimates the last two quarters in a row by a very wide margin. Consensus estimates for the first quarter of 2014 was 85 cents. SAFM reported $1.25. Analyst estimates for the second quarter was $1.75. SAFM smashed that with a profit of $2.21 a share. Revenues have also beaten expectations. For the whole year SAFM's earnings are expected to rise +68%.

Summer is the peak season for chicken demand. Investors could start to bid up shares of SAFM ahead of its next earnings report in late August. Meanwhile SAFM could provide a floor in the stock price. Earlier this year management extended their stock buyback program to buy up to 1.0 million shares. That is almost five percent of the stock's 20.3 million share float. They have 23.0 million shares outstanding.

It is also worth noting that SAFM could be a buyout target. Back in May this year shares of Hillshire Brands Co (HSH) soared from $37 to $45 on a takeover bid. Suddenly a bidding erupted and three weeks later HSH had popped to $62 a share. Bloomberg thinks that SAFM could also be a takeover target as the meat industry continues to consolidate.

A takeover would be bad news for all the shorts in SAFM. The most recent data listed short interest at 17% of the float. The current breakout to new highs and the rally past round-number resistance at $100.00 could fuel more short covering.

Friday's high was $102.28. I am suggesting a trigger to buy calls at $102.55. More nimble traders might want to consider waiting for a potential dip into the $100.00-100.50 zone instead as an alternative entry point. The low on Friday was $99.90. We're not setting an exit target yet but do plan to exit prior to earnings in late August.

- Suggested Positions -

Long NOV $110 call (SAFM141122C110) entry $5.80

07/14/14 triggered @ 102.55
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $102.55
Average Daily Volume = 305 thousand
Listed on July 12, 2014


Starbucks Corp. - SBUX - close: 78.89 change: +0.33

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +43.3%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: SBUX is still churning sideways. Shares did manage to close up +0.4% and thus outperforming the major indices today. I am not suggesting new positions at current levels.

The company has earnings on July 24th.

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: 55.97 change: +0.15

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: +23.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: It was a relatively quiet day for shares of SLCA but investors remain in a buy-the-dip mood. SLCA looks like it is coiling for a breakout to new highs soon.

Earnings are coming up on July 29th.

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: 98.82 change: -0.43

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:
07/15/14: Crude oil continues to sink and hit six-week lows today. WTI is down to $100 a barrel. Brent crude is about $106 a barrel. This oil weakness could be pressuring the energy stocks. The XLE underperformed with a -0.4% decline.

We are still on the sidelines. The newsletter's 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

Ross Stores Inc. - ROST - close: 65.27 change: +0.21

Stop Loss: 67.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
07/15/14: ROST traded below support near $65.00 and hit $64.90 before bouncing back. This level is support so a bounce would not be a surprise. We're expecting shares to break down through support. Our suggested entry point is $64.75.

Earlier Comments: July 14, 2014:
According to the company website, Ross Stores, Inc. is an S&P 500, Fortune 500 and Nasdaq 100 (ROST) company headquartered in Dublin, California, with fiscal 2013 revenues of $10.2 billion. The Company operates Ross Dress for Less ("Ross"), the largest off-price apparel and home fashion chain in the United States with 1,146 locations in 33 states, the District of Columbia and Guam at fiscal 2013 year end.

Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. The Company also operates 130 dd’s DISCOUNTS in ten states.

The retail sector has had a rough year. 2014 started off with a harsh winter that kept consumers at home. Just about everyone blamed the terrible weather on terrible sales numbers in the first quarter. ROST joined the crowd when they reported earnings in February and lowered guidance. The first quarter has been followed by a tough Q2 as well.

Winter seemed like it would never go away. When spring finally showed up retailers were fighting for every consumer dollar. The apparel stores are facing a very competitive and highly promotional environment. There have been warnings and bearish commentary from all sort of retail players including Family Dollar, The Container Store, Rent-A-Center, and retail giant Wal-Mart.

This year the consumer has had to suffer through elevated gasoline prices at the pump and a sharply rising food prices. Everything from beef, pork, vegetables, and eggs have been rising. Every dollar spent on groceries and gas is another dollar that doesn't make it into the discretionary items.

ROST has been no exception. The company's most recent same-store sales figures had fallen to just +1% growth. Wall Street is concerned as well. There is a growing worry that ROST's sales growth will remain stuck in low single digits. Margins are also under pressure and will likely be flat to down. It's no surprise

Technically ROST's bearish trend of lower highs and lower lows has pushed the stock to key support near $65.00. This is where the stock bounced back in February. The intraday February 2014 low was $65.15. Today ROST dipped to $64.96 intraday.

I am suggesting a trigger to buy puts at $64.75. If triggered our short-term target is $60.00. Earnings are coming up on August 21st. We may choose to exit prior to the earnings announcement.

I am listing the November puts but you might want to use the August puts, which have more volume. Today the August $65 put was popular with over 2,000 contracts trading.

Trigger @ $64.75

- Suggested Positions -

Buy the Nov $62.50 PUT (ROST141122P62.5) current ask $2.25

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

Entry on July -- at $---.--
Average Daily Volume = 1.4 million
Listed on July 14, 2014


Tractor Supply Co. - TSCO - close: 60.98 change: +0.33

Stop Loss: 62.15
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/15/14: TSCO is just not cooperating. Shares outperformed the broader market with a +0.5% gain. This is the stock's third gain in a row. The high today was $61.19. I have been expecting TSCO to roll over under resistance in the $61.00-62.00 zone.

More conservative investors may want to just abandon ship since TSCO is not working with us. Our option is back to breakeven tonight. I am not suggesting new positions at this time.

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

07/15/14 TSCO is not cooperating. Readers may want to exit now with our option back to breakeven.
07/12/14 new stop @ 62.15
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