Option Investor
Newsletter

Daily Newsletter, Thursday, 7/31/2014

Table of Contents

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

Market Wrap

The Perfect Storm

by Thomas Hughes

Click here to email Thomas Hughes
Inflationary worry and international hot spots create a perfect storm, sending the indices flying for cover.

Introduction

The international indices fell in overnight trading for a variety of reasons that carried into the US session. Profit taking in Asia led to a decline in European stocks that was amplified by speculation over the impact of new and increased sanctions against Russia. The downward bias carried into the US markets, pushing the futures trade down in the pre opening session. Prior to the release of today's data the SPX was indicated down about 8 or 9 points with the decline increasing post release. Today's pieces of the employment puzzle were not as expected and suggest a dip in economic activity may have occurred in July. This is of course in the face of other more positive data seen throughout the month.

Market Statistics

So what happened? Now that the Fed meeting is over the market was able to turn its attention to other matters. Maybe first and foremost is the ongoing situation in the Ukraine. New sanctions are going into effect and there is speculation they will lead to global slowdown. On top of that the Ukrainian PM made some new comments to the effect that Putin was fomenting war and trying to rewrite the outcome of WWII. After that some weaker than expected inflation data from the EU had the market on edge there and here as it raises concern for deflation in the region. Moving on to our own news some weak earnings and economic data added to concerns the second half may not be as strong as hoped. Other negatives influencing trading include the rising risk of financial meltdown in Portugal as well as a new default by Argentina on its bond debt. The combination of factors resulted in a market that went diving to support.

Economic Calendar

The Economy

First up on the list today was the Challenger, Grey & Christmas report on planned lay offs. The number of lay offs planned in July jumped 49% from last month's long term low. The July number is 46,887 new lay offs, led by Microsoft's announcement of 18,000 job cuts, which alone could account for the gain. This month's lay off's are 25% higher than those planned last July but down a little more than 1% on a year to date basis. So far this year the tech sector leads in job cuts; Hewlett Packard is another company making big cuts this year. Both HP and MSFT are seen as making strategic cuts in order to remain competitive and are not symbolic of the sector or jobs creation as a whole. Within the report one of the analysts is quoted as saying that a “shortage of skilled workers” remains a challenge for the economy.

Initial claims for unemployment rose this week, but not as much as expected. Claims gained 23K from a downwardly revised number to reach 302,000 this week. Last week was revised down by -5,000 for a net gain of 17,000 from last week's report. The consensus expectation for claims was in the range of 310,000. Last week was revised lower to 279,000, a new low. The four week moving average also fell this week, dropping by nearly 4,000 to fall below 300,000 for the first time since April of 2006. On an unadjusted basis claims fell, by -29,839 or -10.4%. The seasonal factors had expected a decline of 17% which could account for the rise in adjusted claims. Looking at the table initial claims have been trending lower since the beginning of the year and are now just off of the lows. This along with other reports that hiring remains steady to strong lead me to believe the NFP tomorrow will still be strong. The ADP number on Wednesday was good, just not as good as hoped which is not unusual for data this year.


Continuing claims also rose this week, by 31,000 to 2.539 million. The previous weeks figure was revised higher by 8,000. The four week moving average of claims fell by -9,000 to a low not seen since early 2007. Continuing claims are also trending lower, today's gain is minute in terms of the decline seen this year and, for now at least, only a blip on the radar. Total claims rose this week as well. The total number of Americans gained by 6,244 to reach 2.618 million. This is up from last week but near the long term low. On a state by state basis increases in claims were led by Kansas with a gain of 867. Decreases in claims were led by NY and PA with declines of -18K and -7K respectively.


The quarterly employment cost index was also released today. The index rose by 0.7% in the 2nd quarter, ahead of the expected 0.5% and the previous quarter's 0.3%. This is the fastest increase in labor costs since the third quarter of 2008. The increase in costs fueled speculation of inflation in the economy. Wages and salaries rose by 0.6% while benefits such as insurance and other items increased by a full 1%. While the increase in costs is a negative in terms of inflation it is a positive in terms of labor market recovery and the consumer. I would like to point out that just about two weeks ago, and I forget exactly who, an analyst on CNBC said the next sign/stage of the recovery will be an increase in wages.

Chicago PMI was a big miss and helped to send the market to the daily low. The number, released at 9:45AM, was a full 10 points below the expectations and last month's reading of 62.6. This is still expansionary but a possible warning sign of economic slow down. The drop was due mainly to declines in production and ordering but, according to those cited in the report, seen as a lull in activity and not the start of a decline. The numbers behind the number also reveal that hiring remains steady in the region, edging higher over last month. This is not the first report to reveal hiring increases this month.


The Oil Index

Oil prices fell today in a move that was hard to predict. A variety of factors including an increase in OPEC supply, high US stockpiles and weaker than expected data overcame news of a major shut down to a mid west refinery and the ongoing geopolitical events that have had oil prices up in recent weeks. WTI had been down about $0.50 in early trading but extended that loss to $0.75, $1.50 and more, settling down by over $2.00 to close just above $98 per barrel.

The Oil Index lost more than one percent, breaking the short term moving average and the support of the previous all time intraday high. The indicators are bearish and point to a possible correction to trend. The index is about 4.75% above my trend line at the current level with shorter term supports before that. Longer term analysis of the indicators still shows there is support for the index so any correction that ensues from here may not be too severe. Further, oil prices are subject to reverse today's declines at the drop of a headline, which could help support index prices. Another factor impacting the Oil Index today is oil sector earnings. Exxon and Conoco Phillips reported today, Chevron reports tomorrow.


Exxon reported earnings that blew away the expectations but nonetheless failed to satisfy the market, at least for today. The company reported adjusted EPS of $2.05, $0.19 above the consensus but it was the production levels that grabbed trader attention. Production in the quarter was down by 5.7% leading to fear future profits would not be as robust and speculation of reserve supply. The stock dropped over 4%, breaking near term support and coming to rest just below the long term 150 day EMA.


The Gold Index

Gold prices fell today, as expected following the GDP and Fed meeting yesterday. The economic data of today, albeit not as strong as expected, is still leading to higher interest rates, and speculation of when those rates will come. The current consensus is starting to move in from mid 2015 to sometime sooner with no real indication given. Today's data, along with the GDP and other fundamental factors, outweighed any flight to safety moves that may have been inspired by the drop in stocks or geopolitical concerns focused on Ukraine, Russia or Argentina. Gold was down about $3 in the early part of the session with that loss extending to more than $13 on an intraday basis with a close near $1285.

The move in gold prices was able to drag the Gold Index back below the short term moving average to what may prove to be a critical level. The index is now sitting just above the 150 day moving average and a potential entry point for longer term traders. The indicators are bearish at this time on the daily with an indication that support along the 150 day EMA could be tested. A break below the 150 day EMA is in line with the underlying trend and could take the index down to support at $95, $90 and $85 in the long term. I see the Gold Index and gold prices closely tied together, if gold continues to decline then I expect the Gold Index to follow.


GoldCorp reported earnings today although most of the major miners report next week. The company reported strong earnings and reversed a loss to share holders experienced in the 2nd quarter of last year. The company reported adjusted earnings per share of $0.22 versus a loss of ($2.38) last year. Shares of the stock opened lower and then traded higher than yesterday's close before falling under today's selling pressure to close near the bottom of the daily range. Earnings this quarter are better than expected but gold prices are down from last quarter and declining, putting third quarter earnings in jeopardy. The stock remains at or near the middle of a longer term trading range with bearish indicators.


The VIX

The VIX moved sharply higher today. The Volatility Index, which measures the value of options relative to the value of the S&P 500, climbed by nearly 27% in today's session. This is the second spike in the VIX of this magnitude this month, and like the previous one, I expect to see a sharp rebound in it tomorrow. Earlier this month the index spiked by 32% on a very similar bundle of global concerns. The very next day the index fell by roughly 20%, as it has done following each such spike over the past couple of years. The pull back does not always come the very next day, but always within a week, depending on how the fear inducing catalysts play out. The market was faced with a handful of items today that may take a few days to sort through, not to mention the fact that the Ukraine situation is likely to be resolved in the foreseeable future, so volatility may persist.


The Indices

Today's decline in stocks was broad. All 30 Dow components and all 10 S&P sectors traded into the red. The broad market S&P 500 index fell -2%, slightly ahead of the Dow Jones Industrial Average's -1.88%. The S&P began it's fall in the pre market session, driven by a number of factors that to me at least were not as bad as today's sell off was worth. However, the decline that began in the early part of the pre opening session extended into the opening and then throughout the day, with the SPX and other major indices finishing at or just off the daily low. A number of near and short term support levels have been broken so the action tomorrow will be very important.

The index is now sitting on the long term trend line. A trend line that has provided numerous profitable entry points for longer term positions over the past two years. So far, nothing appears to be any different. There is a possibility of a further retest of the trend line, but equally a chance for sharp reversal in the next one to two trading days. A break below the long term trend line could take the index down to the 1900 level in the near term. Regardless of short/long term direction I expect the index will be active along the 1930/1940 level and the trend line tomorrow.


The Dow Industrial's fell by -1.86%, coming to rest just below the previous all time high and the 150 day EMA. The near term looks pretty bearish for the index, both indicators are pointing down and today's action created a pretty nasty black candle. In the longer term the index is approaching the long term moving average and an attractive entry point for longer term traders. Over the past 12 months the 150 day EMA has supported the index four times for an average gain of 500 points each. A break below 16,500 could take the index down to the 16,000 level which is still about 1.5% above the long term trend line. However, there is strong support indicated in the 16,250 range. Until a break occurs beneath support and the long term trend line I remain long term bullish. There is risk that the sell off will continue or a consolidation may form but the trends are still up so I am looking to buy the dips.


The Tech's were today's most hardest hit sector. The Nasdaq composite, tech heavy index that it is, fell by -2.09% in today's session. This index also broke its short term 30 day EMA, coming to rest on the support of previously broken long term high levels. The index is sitting on a potentially strong support level here with indicators consistent with that support. Now, that being said, there is now a risk the index may make a short term reversal if any further declines are made. Price action over the past month has created two peaks of equal height, with current support as a baseline. A drop below this level, with a confirming retest of resistance, would constitute a double top with a target about 150-200 points below the current level. A failure to break, or hold a break on a test of support, is bullish and in line with longer trends.


The Tranports were the least affected of the major indices. The trannies fell only -1.63% today, dropping from the short term moving average and coming to rest at support around 8,140. The indicators are bearish in the near term but remain bullish in the longer term. Unless trader sentiment picks up in the next day or two the index could drift modestly lower along the down trending support line until it meets up with the long term up trend line sometime in the next month. However, the NFP will likely be a catalyst for the market to snap back or test current support levels and could have the market moving sharply before the open.


Today's headlines were not that bad on an individual basis but taken together provide a lot of reason for worry. The thing is, most of them are incredibly short term in nature and could disappear as easily as they have appeared. This could lead to an equally large bounce for the indices which are all currently indicated at longer term support.

Starting at the top of the list Portugal and Argentina are non events in my view as they have very little to do with the US marketplace. Their value as a trading catalyst comes as an aggregate of all headlines leaving them the least likely to impact trading on their own. Take for example two, three?, weeks ago when Portugal most recently came into the news, it caused a sell off but only because it was preceded by weak Chinese data and followed by weaker than expected US data. As for Argentian, this isn't the first time they have defaulted and the current default is tied to bond holders who did not swap their holding when they had the chance.

Next up as catalyst for today's drop is the data and the Fed. The economic data, the Fed and the interest rate debate is a damned if you do, damned if you don't scenario. We want better economic data because it means the economy is growing and recovering. Growth and recovery lead to higher interest rates which are seen as both good and bad for the market. We want a better economy, just not too much better and that is what we have, a slow and steadily growing economy. Today the market seemed to be scared the good data = higher rates and that bad data = bad economy. Now the market need to decide what is worse, a good economy and higher rates or a bad economy.

Russia and the Ukraine are a persistent worry. This is an ongoing risk to the market that is now beginning to show up in the market. Until now we have sit back and watched to see what would happen. What has happened is sanctions, and more sanctions that now may have a global impact on recovery and growth.

My thoughts on the NFP are as follows. I think it is going to be strong, somewhere in the 250K-300K range with the possibilities of more. This is because of a two things. First, every report on the economy I have read or covered in the last month has had positive things to say about job creation, hiring and wages. Second, unemployment claims are trending lower and have made new lows on an initial, continuing and total claim basis this month. The ADP number was not as good as expected but that is not too troublesome, it is still above 200K and firm enough to keep us on the slow and steady track. Also, it is not very accurate as an indicator of the NFP so there could be a large difference. As for the Challenger number, the pick up in jobs cuts is almost completely caused by MSFT and not really an indicator of general labor trends. Plus, everywhere I look there are job openings, maybe not the jobs people want but jobs.

The selling today was not a mad rush to get out the exits. It seemed to me to be more of a domino effect of news events that led to a break of near term technical support that may have led to some profit taking that led to additional breaks of support and more selling. Adding to the downward pressure was a lack of active buying as traders wait and see what the NFP will bring. Even though the long term trends are up and the 2nd quarter GDP supports a broad based recovery, not one centered on housing, the market is still susceptible to near term fluctuations in data and in need of lots of affirmation.

There are other important data points being released tomorrow as well. Unemployment, auto/truck sales, construction spending ISM and Michigan sentiment on all on the list too. The market needs affirmation and may get it tomorrow, or not.

Until then, remember the trend!

Thomas Hughes


New Option Plays

European Markets Lead Sell-Off

by James Brown

Click here to email James Brown

Editor's Note:

Disappointing earnings results both here in the U.S. and abroad helped spark the sell-off in stocks today.

European markets started the downturn with all of the major European markets posting losses. The German DAX was the worst performer with a -1.94% decline.

Concerns over a global economic slowdown seem to intensify on Thursday. There are also concerns about the U.S. jobs numbers tomorrow. If the jobs numbers is too low then it might suggest the economy is stalling. If the jobs numbers is too high then investors worry the Fed might hike rates faster than anticipated. Yesterday the U.S. reported a much stronger than expected Q2 GDP number but the stock market failed to react positively to it.

Today the S&P 500 and the NASDAQ Composite both fell -2.0%. The small cap Russell 2000 index lost -2.3%. The Dow Jones Industrials plunged -317 points and erased its gains for the year.

Looking at the futures trading for Asian markets it would appear that this wave of selling will continue once Asian markets open tomorrow.

The July jobs report could spark more volatility on Friday morning.

We are not adding any new trades tonight.




In Play Updates and Reviews

A Wave of Selling

by James Brown

Click here to email James Brown

Editor's Note:

Worries have been circling the markets for days and a wave of selling pushed the S&P 500 to its worst one-day loss in four months.

HAR and XLE were stopped out. JBHT has been removed.


Current Portfolio:


CALL Play Updates

Gilead Sciences, Inc. - GILD - close: 91.55 change: -2.24

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: - 4.0%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: Today's stock market slide erased the last couple of days of gains in GILD> Look for likely support near $90.00.

Earlier Comments: July 28, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

07/29/14 triggered @ 92.25
*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


Golar LNG Ltd. - GLNG - close: 61.61 change: -1.32

Stop Loss: 59.65
Target(s): To Be Determined
Current Option Gain/Loss: -11.1%
Average Daily Volume = 1.3 million
Entry on July 25 at $62.25
Listed on July 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: Today's decline in GLNG was likely just market related. The S&P 500 finished down -2%. GLNG lost -2%. GLNG should have short-term support at its 20-dma and the $60.00 mark.

Earlier Comments: July 22, 2014:
GLNG describes themselves as, "one of the world's largest independent owners and operators of LNG carriers with over 30 years of experience. We developed the world's first Floating Storage and Regasification Unit (FSRU) projects based on the conversion of existing LNG carriers. We lead the industry with committed projects. We are progressing plans to grow our business further upstream via Floating liquefaction (FLNG). Our strategic objective is to become an integrated midstream player in the LNG industry."

The big picture play here is LNG exports. The shale-gas industry in the United States is booming so there has been a surge in supply. Meanwhile demand remains strong globally and the price of natural gas in Europe is double what is in the U.S. and the price is triple in Asia. Seeing an opportunity the American gas industry is planning on exporting more natural gas. The problem is that natural gas has to be liquefied before it can be transported. Turning natural gas to liquefied natural gas means cooling the material to -259 degrees Fahrenheit. Creating an LNG export terminal is a multi-year, multi-billion project. The U.S. is currently building several LNG export terminals to be completed in the next few years.

At the same time there has been a rise in the number of LNG transport ships to move all of this natural gas. Unfortunately the timing is a bit off. At the moment there is more LNG transport ships than really needed. The current global LNG fleet is about 365 vessels. That number is supposed to grow by another 29 ships this year but several of them have been delayed. However, by 2017-2018 it looks like there could be a shortage of LNG transport ships, which will drive rates higher for the shipping companies.

GLNG has about a dozen ships. They should take delivery of several more in the next 12 to 18 months. Instead of scrapping their older ships the company has decided to turn some of them into floating storage & regasification units (FSRU). They are also working on a floating liquefaction (FLNG) project.

Long-term the company looks poised to capitalize on the natural gas transport market. Investors have taken notice with a strong rally this year. Of course a +3.2% dividend yield doesn't hurt either.

Shares of GLNG have been consolidating sideways in the $57.50-62.00 zone for the last few weeks. Today GLNG is on the verge of breaking out from this trading range. We want to be ready if it does.

We are suggesting a trigger to buy calls at $62.25. Earnings are coming up in late August (potentially around the 27th) and we will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $65 call (GLNG140920C65) entry $3.32

07/29/14 new stop @ 59.65
07/25/14 triggered @ 62.25
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 80.86 change: -3.35

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on July -- at $---.--
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: Yes, see below

Comments:
07/31/14: Traders rushed to lock in profits given the market's sharp decline today and PANW was hit hard with a -3.9% pullback. The stock did start to bounce from round-number support at $80.00.

Currently we are on the sidelines with a suggested entry point at $84.55. We'll give PANW another day or two and then re-adjust our entry point or remove PANW as a candidate.

Earlier Comments: July 30, 2014:
Customer data mining is big business. It doesn't matter of the company is online or a bricks and mortar store they want to know all they can about you. Who are you? How old are you? What zip code do you live? They track your purchases and store your credit card data.

Last year retail giant Target (TGT) disclosed a cyber breach that affected up to 110 million customers to potentially having their credit card data stolen. Months later, Target's president and CEO resigned over the fiasco. Target isn't the only one being targeted. The University of Maryland recently disclosed an online security breach. The number of cyber attacks on small business doubled last year.

Sadly it's only getting worse. The Justice Department called the online landscape for cyber threats and hacking extremely dangerous. They used the term "pre-9/11 moment" suggesting that any day now someone could launch a massive cyber attack. The government is worried about protecting our infrastructure and electrical grid. Corporate America wants to protect their data (and your data). That's why cyber security is big business and getting bigger.

PANW is making a splash in the security world. The stock IPO'd in 2012 and while it has been a rocky ride so far the company seems to have found its groove. Founded in 2005 and headquartered in Santa Clara, California, PANW describes their company as, "leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content."

More than 70 of the Fortune 100 companies use PANW's products and services. In 2013 PANW saw revenues grow +55% year over year, outpacing their rivals. They have added more than 1,000 customers per quarter for the last ten quarters in a row. PANW most recently reported earnings on May 28th and said it was their "highest rate of new customer acquisition in our history and now serve more than 17,000 customers."

Another important event last quarter was the settlement of a three-year patent lawsuit with rival Juniper Networks (JNPR). Resolving this issue has removed a significant black cloud over PANW.

Wall Street has noticed. The last few weeks have seen a number of price target upgrades. Deutsche Bank upped their PANW price target to $95.00. Goldman Sachs raised their price target to $97.00. Morgan Stanley is forecasting at PANW price target of $105.00.

Shares of PANW have rallied back toward their all-time highs set just five weeks ago. A bullish breakout appears imminent. Tonight we're suggesting a trigger to buy calls at $84.55. More conservative investors might want to consider waiting for a new high above $85.80.

Keep in mind that PANW is scheduled to report earnings on September 9th and we will likely exit prior to the announcement.

Trigger @ $84.55

- Suggested Positions -

Buy the SEP $90 (PANW140920C90)

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




PUT Play Updates

Pall Corp. - PLL - close: 77.47 change: -2.22

Stop Loss: 81.05
Target(s): To Be Determined
Current Option Gain/Loss: +26.9%
Average Daily Volume = 437 thousand
Entry on July 30 at $79.45
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: The sell-off in PLL accelerated lower today with a -2.78% decline and a new 2014 low. I would not chase PLL here.

Earlier Comments: July 29, 2014:
PLL is in the industrial goods sector. It is considered part of the diversified machinery industry. They market to a lot of different customers around the world. PLL operates in the aerospace and defense industry, the animal health, biopharma, food and beverage, fuels and chemicals, graphic arts, laboratories, machinery and equipment, medical, microelectronics, power generation, and water treatment.

The company describes themselves as, "Pall Corporation is a filtration, separation and purification leader providing solutions to meet the critical fluid management needs of customers across the broad spectrum of life sciences and industry. Pall works with customers to advance health, safety and environmentally responsible technologies. The company's engineered products enable process and product innovation and minimize emissions and waste."

PLL's latest earnings report on May 29th was a disappointment. Wall Street was expecting a profit of $0.83 a share. PLL delivered 81 cents. Revenues did come in better than expected. Guidance was only in-line with prior estimates. The results failed to generate any investor excitement for the stock.

Quite the opposite seems to have happened. PLL produced what appears to be a triple-top pattern from late May through June. Then in July the stock has collapsed through several layers of support. Today we are seeing PLL breakdown under significant support at the $80.00 mark, support at its 300-dma, and support at its long-term trend line of higher lows (see weekly chart below).

Today's intraday low was $79.65. Tonight we're suggesting a trigger to buy puts at $79.45. We're not setting an exit target yet but I will point out that the point & figure chart is bearish and forecasting at $72.00 target.

Keep in mind that PLL is scheduled to report earnings again in very late August. There is no confirmed date yet. We will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $80 PUT (PLL140920P80) entry $2.60*

07/30/14: triggered @ 79.45
*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


United Natural Foods, Inc. - UNFI - close: 58.62 change: -0.73

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: +1.4%
Average Daily Volume = 443 thousand
Entry on July 28 at $59.00
Listed on July 26, 2014
Time Frame: exit PRIOR to earnings in mid September
New Positions: see below

Comments:
07/31/14: Warning! UNFI should be sinking a lot faster. Last night Whole Foods reported earnings and issued bearish guidance. That alone should have fueled another leg down in UNFI. Yet we also had the market-wide sell-off. UNFI spent most of the day churning sideways and closed with a -1.2% decline. The trend is still down but its resilience today is a bit worrisome.

Earlier Comments: July 26, 2014:
Natural and organic foods are a growing business today. The consumer is choosing healthier and typically more expensive foods, which had driven long-term gains for companies like UNFI and Whole Foods (WFM). Yet all of this growth has caught the attention of competitors.

According to UNFI's website the company, "is the leading independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce, in the United States. In addition to excellent distribution services, we provide a range of innovative, value-added services for our customers and suppliers, to foster mutual success and growth. Our services include marketing and promotional tools, merchandising, category management and store support services."

UNFI's business also includes a chain of retail stores with their Earth Origins Market brand. They also do a lot of importing and processing of nuts, seeds, and fruits with their Woodstock Farms company. UNFI just recently announced the acquisition of Tony's Fine Foods.

The challenge is that grocery and food products are normally a low-margin business. The organic and natural niche has enjoyed bigger margins but those margins are contracting as more and competition tries to hop on the natural and organic bandwagon. Large regional food chains and nationwide titans like Wal-mart and Target could steal market share. It has been a serious problem for Whole Foods (WFM) and that makes it a problem for UNFI because WFM is UNFI's biggest customer. WFM accounts for over one third of the company's revenues.

If growing competition wasn't enough the grocers and processors like UNFI also face rising input costs as suppliers raise prices. Margins are getting squeezed from both sides.

Now UNFI's latest earnings report wasn't that bad. The company announced earnings on June 11th. Results were in-line with Wall Street estimates. Sales improved +13.8% from a year ago. Yet gross margins inched down from 16.8 percent to 16.7 percent. That doesn't seem like much but it confirms the trend. Furthermore, while the prior quarter's sales were up +13.8% UNFI is only expecting full-year revenues to grow 11.0%-11.6% this year.

You can see on the chart where UNFI plunged in early June on its earnings report. The oversold bounce failed near $67.00 and the stock has gone almost straight down since then. Today UNFI is flirting with a breakdown near support in the $60.00 area. Last week the stock bounced at $59.25 and $59.30. We are suggesting a trigger to buy put options at $59.00.

Please note that Whole Foods (WFM) is scheduled to report earnings Wednesday, July 30th, after the closing bell. WFM's results and their guidance will have an influence on shares of UNFI. More conservative investors may want to wait until after we see how the market reacts to WFM's results before initiating positions on UNFI.

- Suggested Positions -

Long NOV $55 PUT (UNFI141122P55) entry $2.07

07/28/14 triggered @ 59.00
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Harman Intl. Industries - HAR - close: 112.90 change: +0.31

Stop Loss: 111.90
Target(s): To Be Determined
Current Option Gain/Loss: -50.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: HAR didn't just break support near $112.00 it leapt past it with a gap down at $111.63. Our stop was $111.90. Shares plunged to a -3.8% loss and settled under the 50-dma.

- Suggested Positions -

OCT $120 call (HAR141018c120) entry $6.00* exit $2.95** (-50.8%)

07/31/14 stopped out on gap down at $111.63
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/26/14 new stop @ 111.90
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

chart:

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


JB Hunt Transport - JBHT - close: 78.50 change: +0.44

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: The market weakness pushed JBHT to a -1.5% decline. We've been waiting for a breakout past resistance at $80.00 but that seems unlikely any time soon. Tonight we're removing JBHT as an active candidate.

Trade did not open.

07/31/14 removed from the newsletter, suggested entry point was $80.25

chart:


Energy SPDR ETF - XLE - close: 96.63 change: -2.13

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: -59.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
07/31/14: I cautioned investors yesterday that the XLE was breaking down below the bottom of its bullish channel. Yet it still had what looked like support near $98 and the 50-dma. Well the XLE vaulted past the 50-dma this morning and rushed past the $98.00 level as stocks sold off today. Our stop loss was hit at $97.95.

- Suggested Positions -

Oct $105 call (XLE141018C105) entry $0.84 exit $0.34** (-59.5%)

07/31/14 stopped out
07/24/14 triggered @ 100.75
Option Format: symbol-year-month-day-call-strike

chart:

Entry on July 24 at $100.75
Average Daily Volume = 8.8 million
Listed on July 05, 2014