Option Investor
Newsletter

Daily Newsletter, Saturday, 8/2/2014

Table of Contents

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

Market Wrap

Headline Overload

by Jim Brown

Click here to email Jim Brown

Headlines from geopolitical events, economics and earnings finally overloaded the market as we moved into the seasonally weak period in August.

Market Statistics

Ask 20 analysts why the market declined last week and you will get 20 different answers. Some will say economics were the culprit because the economy is starting to accelerate and the Fed will be forced to raise interest rates sooner than expected.

Some will say it was the numerous geopolitical events. Russia is increasing its cross border attacks on Ukraine and moving additional troops, tanks and heavy weapons systems back to the border. Apparently Putin is not going to back away and does not care what U.S. and EU sanctions are put in place.

Russian jets have been probing air defense zones all around Russia. NATO jets were scrambled to "identify" approaching Russian fighters on the border with Estonia. Fighters also encroached on Polish airspace and Ukraine airspace. A Russian drone was shot down near Kiev in the Ukraine. Putin said the sanctions had caused "serious damage" to international relations but he continued to deny all of the above events plus any involvement with the Ukrainian rebels.

Corporate earnings warnings as a result of the sanctions on Russia are already beginning to appear. Adidas cut growth targets as a result of the sanctions and the growing weakness in the European economy. Anheuser-Busch InBev said beer sales in Russia and the Ukraine had fallen off sharply. Lufthansa said the conflict had dramatically impacted air traffic in Russia and Europe. The Siemens CEO said it was clear the sanctions would have a serious impact in the German economy in the second half of the year. Germany is the strongest economy in the EU but it is also the most heavily dependent on commerce with Russia. Germany's VDMA machine makers association cut its growth forecast by 3% saying the conflict is "impairing demand in important export markets" because of the uncertain impact on the EU.

The 72 hour truce between Israel and Hamas was broken by Hamas within 90 minutes of it being put into place. The odds of a new truce are nearly zero.

ISIS is reportedly preparing an attack on Baghdad and increasing their reign of terror in the areas they have already captured.

The fighting in Libya is increasing. The Greek navy evacuated 186 people from Libya using helicopters and the frigate Salamis. Greece suspended operations at its embassy due to rising security issues. The U.S., France, the Netherlands and the U.K. have also suspended operations and evacuated personnel.

Iran announced on Wednesday it now had ballistic missiles with multiple warheads able to hit U.S. military installations all over the Middle East. The missiles are supposedly significantly more accurate than existing models and have much greater destructive power. The warhead(s) have a total weight of 746 Kg (1,650 lbs) of conventional explosive. Many of Iran's claims are not verifiable but they have been working toward this goal for several years. This is a prerequisite technology to being able to launch a nuclear warhead and nuclear payloads would weigh less than 746 Kg.

Banco Espirito Santo has failed after losing 3.6 billion euros in the first half of 2014. Several other entities related to the Espirito Santo ownership family have filed for bankruptcy. The Bank of Portugal is trying to arrange some emergency financing for the bank but there are growing concerns it may be allowed to fail because the problems are too large for a bailout.

Argentina defaulted on its debts for the second time in 14 years. The International Swaps and Derivatives Association (ISDA) ruled Argentina's default was a "credit event" and holders of those credit default swaps will be able to collect up to $1.5 billion in insurance. The country defaulted on a $534 million interest payment on Wednesday. U.S. banks may be on the hook for some of the defaulted loans or for selling the credit default swaps. Citigroup has already warned it will incur some losses. JP Morgan said there were some $682 million in contracts tied to global emerging market Credit Default Swap Index that will also need to be settled.

If those headlines were not enough to crater the market the realization of interest rates rising sooner rather than later definitely helped to grease the skids. Richard Fisher, president of the Dallas Fed, said the timing of the first rate hike has definitely moved "significantly" closer as a result of the strengthening economy and higher inflation. Charles Plosser believes the beginning of rate hikes should be moved closer as the result of "considerable economic progress." Also, "The funds rate setting remains well behind what I consider to be appropriate given our goals."

Various members of the Fed expressed concern that inflation was increasing too rapidly and the Fed no longer had the option of leaving rates at zero for a "considerable period" after QE ends. That phrase may disappear at the FOMC meeting in Mid September.

Everyone has known for several years the markets would react negatively when QE ends and when we are approaching the first hike in rates. With QE slated to end in October and the first rate hike likely to be in Q1-2015 the market is simply anticipating these facts in light of the considerable headline events overseas.

Art Cashin said the markets are "pricing in prosperity" and he was right. The economy is improving and everyone can see the future from here. That future is a Fed that is faced with rapidly rising inflation and the need to raise rates to combat that problem.

You can pick a reason out of the list above and blame it for the market decline. One analyst said "This market was a Titanic in search of an iceberg." In reality I believe it was an "all of the above" event coupled with overbought conditions and a high number of guidance warnings for Q3.

Friday had the biggest economic report for the week in the Nonfarm Payrolls. The headline number dropped from the upwardly revised 298,000 in June to 209,000 for July. This was below the consensus estimate of 235,000. The May number was revised up by +5,000 jobs and the June number by +10,000 jobs. The unemployment rate rose from 6.1% to 6.2% as a result of 329,000 people joining the labor force. The broader U6 unemployment rate rose to 12.2%. The labor force participation rate rose from 62.8% to 62.9% and a four month high.

The average workweek remained at 34.5 hours and the average hourly earnings were also unchanged. Year over year wage growth is around 2% and consistent with the last 24 months. The number of workers involuntary employed part time declined from 7.54 million to 7.51 million.

The lowest paying jobs in leisure, hospitality, retail and temporary help accounted for 25% of the new jobs. The lack of material wage growth is keeping millions of workers on the sidelines. It is more profitable to remain outside the system and collect welfare and supplemental benefits than go to work and earn a minimal wage. Obviously until they actually do go to work and gain experience and seniority they will continue to be faced with minimum income potential.

The economy has added more than 200,000 jobs per month for the last six months and that has not happened since 1997. However, July's gains were the lowest in four months. The economy is improving but it is not really accelerating. In the long run this is the best outcome because it will keep wage inflation at bay and keep the Fed on hold for a while longer.


The final revision of the July Consumer Sentiment improved slightly from the initial 81.3 reading to 81.8 at month end. The present conditions component rose from 96.6 to 97.4 and the expectations component declined from 73.5 to 71.8. This is really strange because in the separate Consumer Confidence report last week the expectations component soared from 86.4 to 92.7. Both surveys do ask different questions but you would have thought the general trends would be the same.


The ISM Manufacturing Index rose nearly 2 points from 55.3 to 57.1 in July. That is the highest level since December. It suggests the late winter weakness has passed and plants are moving back into full production. The new orders component would seem to substantiate that with a rise from 58.9 to 63.4. However, order backlogs barely improved from contraction territory at 48.0 up to 49.5. Export orders declined from 54.5 to 53.0 and inventories fell from 53.0 into contraction at 48.5. Employment rose from 52.8 to 58.2.

The only components to really post solid gains were the new orders and employment. Since the rest of the components are either production or delivery related it may be too early in this cycle for them to show the impact from the surge in new orders.

Of the 18 industries surveyed by the report 17 were reporting new order growth. The only sector not reporting order growth was wood products. Customer inventories declined -3 points to 43.5 and well into contraction territory. This suggests the customers are not confident the rebound in the economy will continue.

A coincident indicator of manufacturing activity is a reported shortage of wood pallets. All other manufacturing commodities were reported to be available in sufficient supplies. If there is a shortage of pallets it means goods are being shipped in decent quantities.

Conflicting with the ISM the Markit Economics index of U.S. manufacturing declined from 57.3 in June to 55.8 in July. The employment component declined to 51.2 and the lowest level since June 2013, down from 54.0 in June. Markit surveys 600 American manufacturers for this report.


Construction spending for June declined -1.8% and the biggest decline since January 2013. Private non-residential spending fell -1.6% and residential dropped -0.3%. Public spending fell -4.0%. Overall private spending is up +9.2% since June 2013. Overall public spending is down -2.9% for the same period. Spending on highways and street construction fell -10.9% for the month and -8.5% since the prior June. Much of this is related to the expiration of the Federal Highway Trust Fund. Congress approved a temporary bill to supply additional funding late in the week and they will take up the issue again in early 2015.

Moody's Construction Spending Chart

Vehicle sales for July declined from an annualized pace of 17.0 million in June to 16.5 million in July. Auto sales fell from 8.3 million to 8.0 million. Trucks declined from 8.6 to 8.5 million. Ford and GM sales rose in the low single digits but Chrysler sales rose +15%. Nissan sales rose +7%, Toyota +7% and Honda declined -8%. The market share held by U.S. brands fell below 45% and the lowest level this year.

The average age of a vehicle in the U.S. is over 9 years. The average incentive package on a new car has risen +10% to $6,000. Pent up demand is expected to continue into 2015 and then slow to a pace of 15.5 million vehicles.

The economic calendar for next week is very sparse. Compared to the high profile reports last week there is nothing that should rock the market. The ISM Nonmanufacturing on Tuesday is the most important and given the recent trend in reports it should post a slight gain and be ignored.


The quantity of earnings on the calendar for next week is beginning to fade. The number of stocks I could find to highlight declined significantly. The most watched are probably going to be AIG, KORS, DIS, FSLR, GMCR and MNST. After this week the number of companies reporting declines significantly.

Earnings for Q2 have now averaged 7.6% earnings growth and +4.0% revenue growth. These numbers have been very volatile. Two weeks ago analysts were predicting 5.9% earnings and last week they were predicting 8.3% to 9.0% when the reporting cycle is over. Those estimates faded somewhat over the week after some earnings misses by numerous companies. Earnings for Q3 are still being forecasted at 9-10% despite the 37% of the S&P-500 that has given negative guidance for the quarter.


Stocks reporting on Friday were headlined by Berkshire Hathaway (BRK.B). Earnings jumped +41% thanks to a stock swap deal completed earlier this year. Earnings rose to $6.4 billion or $3,889 per Class A share. Revenue rose +11% to $49.76 billion.

The stock swap was a deal to acquire a Miami-based TV station from Graham Holdings in exchange for most of its shares in the company that once owned the Washington Post. Berkshire and Graham exchanged assets worth roughly $1.1 billion. Berkshire claimed that $1.1 billion in Q2 because that is when the deal completed. Without the stock swap the adjusted operating earnings rose +11% to $4.3 billion or $2,634 per share. Analysts were expecting $2,485.21 per share. Berkshire had $55 billion in cash at the end of the quarter so they have plenty of capital for that next acquisition. One analyst said Buffett is piling up cash so he must not see anything of value in the market.

BNSF railroad added $916 million in profits. The utility division added $375 million thanks to the acquisition of Nevada's NV Energy and the insurance division produced $411 million in profits. Berkshire shares fluctuated significantly at the open with a dip to $122.72 but they closed fractionally positive at $125.87.


The CBOE (CBOE) reported earnings of 50 cents that were in line with expectations. Revenue of $143.9 million was a decline from $150.8 million but beat estimates by about $200,000. The company said trading volumes had declined significantly and they were going to slash expenses from a median range of $193.5 million to $188 million for the rest of the year. Average daily volume declined -3% to 4.83 million contracts and revenue per contract declined -4% to 32.2 cents due to higher volume based incentives for some multiple listed options. On July 30th the CBOE board approved the purchase of an additional $100 million in stock. This comes after a similar approval in December. In Q2 the CBOE repurchased $51.1 million in shares. Shares declined -$2 on the earnings news but rallied in the afternoon to gain $1.24 and close at the high for the day.


Probably the biggest surprise of the day came from Procter & Gamble (PG). Adjusted earnings were 95 cents compared to estimates for 91 cents. Revenue declined to $20.16 billion and missed estimates for $20.47 billion.

The surprise did not come from earnings but in the commentary that came with the earnings. The company is going to drop up to 100 of its current brands leaving it with just the 70-80 top performers. The well known maker of consumer products everyone uses did not disclose which brands they are going to drop but noted that collectively they account for less than 10% of revenue. They recently sold off Jif peanut butter, Folgers coffee, Pringles chips and Iams pet food. PG started selling Ivory soap in 1879 and helped coin the term "soap opera." The company has 22 individual brands that produce more than $1 billion in annual revenue each. Another 19 brands bring in more than $500 million each. Brands like Pampers, Tide and Crest will not be on the chopping block. Shares rallied $2 on the news.


Chevron (CVX) reported earnings of $2.98 or $5.67 billion compared to estimates of $2.66. However, production declined -1.4% to 2.55 million barrels of oil equivalent per day (mboepd), down from 2.58 mboepd in the year ago period. The company is spending more than $20 billion on five new projects to significantly boost production by 2017.

Earnings were boosted by $750 million in asset sales and removing those onetime items would bring earnings below estimates but no specifics were given.

Chevron said production increases in the Permian Basin and Marcellus Shale were offset by declines in older fields elsewhere. The legacy oil companies like Chevron and Exxon have billions of barrels of reserves but most of their reserves are in older fields that have been producing for decades and the 5-7% annual declines in those fields are very tough to make up elsewhere. For instance Chevron produced 2.55 mboepd. Using the median decline rate of 6% per year that is a loss of 153,000 boe every day, every year. That means they have to discover, develop and produce another 153,000 boepd every year just to stay even. Since Chevron and Exxon are both reporting production declines the task is proving to be very formidable. For Chevron this is the equivalent of adding the entire production of Continental Resources (CLR @ 152,400 Bpd) every year.

Exxon (XOM) reported a 5.7% decline in production to 3.84 mboepd and the lowest level since 2009. That is almost the same level of production from 10 years ago. Exxon is spending tens of billions per year on exploration and development and they can't keep up with the decline rate. Exxon has to discover, develop and produce an extra 218,800 mboepd every year just to maintain its existing production rate. Actually boosting production to new levels is nearly impossible.

Chevron shares lost -$1.34 on the earnings news.


The market finally gave in to the headlines last week. You can take your pick of headlines from which to assign blame. The key is that the market support finally failed. However, even with all the anguish over the big red candles the major averages only lost about 3% for the week. It is not the end of the world. So far it is just a pause in the trend BUT it has the potential to become something worse.

Nobody should be surprised the decline appeared. For the last two weeks I have been cautioning about reducing position sizes and tightening stop losses because I expected the market to pause after earnings. August and September are the worst months for the year and they are even worse in midterm election years. The market will always find an excuse when it is ready to take profits.

I pointed out last weekend that the Industrial ETF (XLI) had crossed below the S&P and appeared to be a warning signal of an impending market decline. That divergence accelerated early in the week and the Dow followed the XLI down.


I pointed out that the high yield junk bonds were collapsing and appeared to be indicating a risk off mode and a decline in equities could be near. That decline in junk bonds turned into a crash last week.


On Tuesday night I pointed out the Dow Transports were signaling the potential for a sharp decline in the Dow. The Transports has declined -400 points in the last seven days. The chart suggests we should see the Transports retest the 100-day average or at least the support at 8,000.


Complicating the life of U.S. investors is the breakdown of the markets in Europe. There are multiple problems in Europe. The region already has very slow growth and almost zero inflation bordering on deflation. Now that several rounds of sanctions have been enacted it is only going to get worse.

There is almost no scenario that Europe does not fall back into a recession as a result of the sanctions and the uncertainty surrounding the Russian incursion into the Ukraine. Since Putin shows no indications of backing down the odds are very good the sanctions will have to be increased and that will choke out any remaining growth in Europe and especially in Germany.

If Russia decides to really fight back and cut off oil and gas supplies to Europe the damage will be severe. Of course he would be hurting himself since Russia depends on that energy revenue. One alternative would be to hike the prices he charges to inflict even more pain on Europe. More than 30% of the natural gas used in Europe comes from Russia.


The Euro is imploding on the outlook for the European economy. The dollar has risen to a ten month high on relative economic strength and the potential for the Fed to raise rates in the future.

International companies are going to suffer significantly from the fluctuations in the currencies as well as the shrinking European outlook.



All of these factors are going to impact the U.S. equity markets. When external forces impact our markets the first impulse is to take profits. As those forces intensify the profit taking turns into defensive selling. Traders go to cash and wait for the smoke to clear. The U.S. retail investor lives in a fog. They worry about making a buck at their job, spending some time with their kids when they get home, catching a little TV and going to bed. They are not involved in the complex world of geopolitics, currency fluctuations, European recessions and debt default. When these events are thrust upon them they are like a deer caught in the headlights and unsure what to do next.

They are going to turn on CNBC, Fox Business News or Bloomberg and see what is going on. If you have been watching stock TV over the last several days the analytical coverage has been negative. People are suggesting we could see a 5-10% decline or worse. Whenever the market takes a dive the perma bears come out of the forest and find their way to a TV microphone. Are they right this time? Even a broken watch is right twice a day.

I don't profess to be a global macroeconomic guru. I don't even know one. I can't tell you what is going to happen in Europe other than it appears very likely they are going to at least fall back into a recession and one that could be deep. If Putin continues pressing his neighbors by sending fighter jets over their borders the potential for an escalation of the current conflict and/or the eruption of a new one in some other country is very possible.

If the European markets continue to decline you can bet the U.S. markets will follow suit. However, rather than worry about what might happen I would rather make plans for the worst and when it happens make lemonade out of the market lemons. I suggest investors do some research and pick out some stocks they would like to own at specific levels and then keep your fingers crossed they dip to those levels. I have found it is a lot more fun to hope for great entry points than worry about a major market dip. It is simply a matter of perspective. You can view the glass as half empty or half full.

On Tuesday I showed a chart of the Russell 3000 broad market index and pointed out that it returned to the 100-day average about once every three months. It had been 2.5 months since the last test. Friday was a retest of that average. Since December 2012 the index has retested the 100-day average 7 times, including Friday. The longest period under the 100-day was 4 days. Obviously I can't guarantee you the pattern will repeat but I think it is worth watching.


You can't play the Russell 3000 ETF (IWV) with options because the market maker has priced the spreads too wide. However, the S&P has almost exactly the same pattern so we can play calls on the SPY instead.

I am not advising anyone to rush into the SPY calls at the open on Monday. There is far too much uncertainty over Europe and a lot can happen over the weekend. I would rather see the markets chop around in the 1900-1920 range for a couple days and then buy some short term calls for an oversold bounce.

Here is my long term problem. The U.S. economy may be recovering but if Europe does appear headed for a recession then the U.S. economy is going to soften as a result. We sell things to Europe. The falling Euro and rising dollar is beneficial for anything we want to buy but Europe will not be buying as much from us.

We can take all the points I have discussed in this commentary and put them in a big witches caldron and stir them up. The market that appears from that mess is what we have to trade. We don't know how long the ingredients will have to cook before the uncertainty boils away but it is probably not just a day or two.

Remember, August is a weak month. Why rush back into the market at the first sign of green candles? The market is oversold and some of the worries will fade over the weekend but as long as Putin continues shelling the Ukraine and flying jets into the sovereign airspace of other countries we have the potential for events to worsen.

I would use the 100-day average on the Russell 3000 as our line in the sand. If we dip below it and then rebound that might be good for a short term trade. If we decline below it a second time I would consider that a warning of a deeper decline ahead and then we start watching the 200-day average at 1115.

Trade what you see and not what you want to see.

The S&P-500 broke through considerable support at 1950 and again at 1930 to close at 1925. The 100-day average is 1911 and it came within 5 points at the low on Friday. The S&P declined -50 points in two days and it is due for a short term oversold bounce. However, after sharp late week declines Mondays tend to be negative. It is not always true but quite often true.

Multiple analysts were talking about the 1920 level as decent support. While that may be true I think the round number at 1900 may be calling our name at least for an intraday low. That would look like the last two penetrations of the 100-day on the chart below. A brief punch through and then a rebound once sellers run out of stock. Short term resistance is now 1930 followed by 1950.



The rising wedge pattern on the Dow finally broke to the downside. We have been watching it for the last couple of weeks and a breakout/breakdown was imminent. The breakdown pushed the Dow well below its 100-day average at 16,541 and very close to the 200-day at 16,322. This is the third time the Dow has fallen below the 100-day in 2014. Normally the Dow is not reactive to moving averages because any one or two stocks can push the index around on any given day.

The Dow climb had slowed over the last couple of weeks and it has been 11 trading days since it set a new intraday high. The index has gone from overbought to oversold in about five days. There is light support at 16,450 and again at 16,350. The next material stopping point would be 16,000 if the selling continues. Initial resistance is well above at 16,725.



The Nasdaq Composite managed to close right in the middle of its recent support range. The intraday low of 4324 was well below the stronger support at 4344 but the afternoon rebound rescued it from a messy close. A move and close under that 4344 level would probably test the uptrend and the 100-day average around 4257.

The Nasdaq chart looks better than the Dow even though they both lost about the same percentage for the week. The Nasdaq rally is still intact above 4257. A break under that level would target 4000.



The Russell 2000 lost -2.6% for the week and is about to see the 100-day cross below the 200-day average. This would be negative for fund managers. The Russell is below all the major support points above 1096 making that sub-1100 level the next target.

I was actually encouraged that the Russell did not sell off a lot worse than the big cap averages. This suggests there was no panic and it was simply orderly profit taking and building up a cash reserve.

Resistance is 1150 and 1162 with support at 1096.


I view the Thursday decline as a confusion drop. Everyone was selling but everyone was selling for a different reason. There was not one big reason but a bunch of little ones that had been in the market already but each was finally starting to ripen into something that would stink up the place. To put it another way, there was a bearish reason for everyone.

Historically Mondays after a late week sell off are negative. Obviously not every time but more often than not. This happens to be a new month but not a new quarter so the retirement contributions will be light and should not impact the market to any great extent. I scanned the news late Saturday and did not see anything that was earth shaking but Sunday is normally the day the big headlines appear.

The breadth in the market has turned severely bearish. The number of stocks in the S&P that are trading above their 50-day average has fallen from 85% at the beginning of July to only 30.2% today. That has happened only four other times in the last two years.


I would continue to be cautious about adding new long positions until the market finds a bottom. It could be Monday or a month from Monday but it will eventually give us a pattern that will allow us to buy the dip. August has been down four of the last five years.

Random Thoughts

You can't make this stuff up.

The UN condemned Israel for possibly committing war crimes against Hamas. The crime was -- drum roll please -- not sharing their Iron Dome defensive technology with Hamas. The UN High Commissioner for Human Rights Navi Pillay told the media at an "emergency" meeting of the UN Human Rights Council that "Israel was falling short in its duty to protect the citizens in the Gaza Strip from getting killed by Israeli rockets and bombs." Also, "There is a strong possibility that international law has been violated in a manner that could amount to war crimes." The UN group said Israel outright refused to share its Iron Dome technology with Hamas. The UN also condemned the U.S. for helping fund the Iron Dome for Israel but not granting any such funds for those in Gaza. "No protection has been given to Gazans against the shelling."

IRS strikes a deal with atheists to monitor church sermons. The IRS settled a complaint by atheists by promising to monitor sermons for mentions of the right to life and traditional marriage. The Wisconsin-based Freedom from Religion Foundation (FFRF) sued the IRS claiming churches were violating their tax-exempt status by routinely promoting political issues, legislation and candidates from the pulpit.

The FFRF has temporarily withdrawn its suit in return for the IRS agreement to monitor sermons and homilies for proscribed speech that the FFRF believes includes things like the condemnation of gay marriage and criticism of Obamacare because of its contraceptive mandate. This monitoring is supposed to be done by the same IRS unit that was headed by Lois Lerner. This unit openly targeted conservatives and tea party groups so they should have experience that will help them in targeting churches. The IRS already asked the people in those conservative groups what they prayed about. I guess monitoring churches, which is a clear violation of the first amendment, is another way to suppress the exchange of ideas that are contrary to the current administration.

The FFRF claims the 1954 Johnson Amendment states that tax exempt groups cannot endorse candidates. A 2009 court ruling mandated that the IRS must provide staff to monitor church politicking. The FFRF claims the IRS has not adhered to the ruling and must immediately ramp up enforcement ahead of the coming elections. The FFRF says things like the Catholic Church's "Fortnight for Freedom" dedicated to opposing Obamacare's contraceptive mandate and Protestant and Evangelical churches holding a "Pulpit Freedom Sunday" are both politicking. The FFRF says such events at "rogue churches" have "become an annual occasion for churches to violate the law with impunity."

I am speechless. What has happened to America? Why does everything have to be controlled by the government? Our country was founded by people fleeing this kind of government-monitored and mandated theology. When will it stop?

The CIA has been busted for spying. Apparently they were spying on a Senate committee that was investigating the CIA. The CIA chief John Brennan initially said it did not happen but once he investigated he realized he was wrong. An inspector general report has now concluded the CIA did spy on the Senate. The Senate committee has produced a 6,300 page classified report claiming the CIA used enhanced interrogation methods - also known as torture - on terrorism suspects.

Monster bearish bet: On Thursday with the Volatility Index ($VIX) at 14.50 a trader bought 90,000 November 21/30 call spreads for about 70 cents each at a cost of about $6.3 million. The trade will only make money if the VIX continues to rise significantly from the Friday close at 17. Just to breakeven the VIX has to reach 22 and the levels where it topped in Dec 2012, Jun 2013, Oct 2013, Feb 2014. This very bearish bet is not one somebody would put on just to speculate on coming volatility. You would have to be pretty sure something dreadful was coming in order to risk $6 million that far out of the money. Do they expect another terrorist attack? What do they know that we do not?

Seadrill (SDRL) signed a $4.5 billion contract with Russia's energy giant Rosneft on July 29th, one day before the sanctions were to take effect. The contract for six high technology deepwater rigs is valid because it was signed before the sanctions took effect. Fadel Gheit, an energy analyst with Oppenheimer said "Putin knows these sanctions are all bark and no bite" and the Rosneft deal is just a way to get around any potential impact.

The day after the U.S. and EU announced more sanctions on Russia the country's deputy prime minister tweeted out the picture below in a jab at Obama's masculinity. The caption in the tweet said "We have different values and allies."


The Federal Reserve implemented the largest monetary policy experiment on record when they took interest rates to zero and began buying treasuries to lift us out of the last recession. The Fed balance sheet went from $800 billion to $4.5 trillion. The Fed has never successfully unwound a stimulus program without a market correction. Will the largest stimulus on record produce the largest correction on record when the Fed ends QE and begins to raise interest rates and unwind their balance sheet? Most analysts don't believe it will be a market disaster because the Fed does not have to sell the treasuries and mortgage backed securities back into the market. They can let them mature and roll off naturally. However, all the prior stimulus programs that ended badly did not have a QE component so even if the QE remains on the Fed's books the end of QE purchases and the hike in interest rates is definitely going to tank the market.

Thursday's market decline was in part due to the sharp +0.7% increase in the Employment Cost Index. That is the largest increase in six years and one more reason for the Fed to accelerate its stimulus removal process. Be prepared for some serious volatility over the next six months.

Banks could lose more than $1 trillion in deposits when the Fed starts raising rates. JP Morgan predicted it could lose $100 billion (7.8%) next year as rates rise and money flows to accounts that pay higher interest. Citigroup, Bank of New York and PNC Financial all said they were trying to determine their risk for outflows and the impact on the banks.

Banks are going to have to pay higher interest on deposits to keep those deposits at the bank. This will shrink margins at the banks and impact earnings. SNL Financial estimates that banks have seen deposits increase 23% over the last four years as a result of the Fed's stimulus programs. The cost of funding by those banks dropped to a ten year low because of the excess deposits. The Fed has talked about using a "reverse repo facility" as part of its exit. This will allow non-banks like money funds to have reserve accounts at the Fed and drain bank reserves.

NYSE margin debt reached a new high in early 2014 and remains near those highs today. If the expected "minor correction" turns into something more drastic we could see a real acceleration to the downside as stocks bought on margin are dumped when the margin calls appear.

"It's a Goldilocks report for an economy that is steadily expanding but not lifting off. It will reinforce the Fed's commitment to a gradualist policy approach" said Mohamed El-Erian of PIMCO in reference to the Nonfarm Payroll gain of +209,000 jobs. We will see how Goldilocks it was if the number declines under 200,000 for August.

August has been down four of the last five years. August is the worst performing month for the Dow, S&P, Russell 2000 and Nasdaq 100 since 1988.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"If the Arabs put down their weapons today, there would be no more violence in Israel. If the Jews put down their weapons today, there would be no more Israel."

Anonymous

 


Index Wrap

They Slide Faster Than They Glide

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Old Trader's saying about markets is "that they 'slide' faster than they 'glide'" and go down faster than they go up. Buying in stocks tends to be incremental, in bits and bites, selling can be all at once, an avalanche! We see this from time to time in bull moves and is typically a result of valuations going beyond the prior consensus of where earnings and the economy will be 6-9 months.

If you believe that the negative influences were Argentina default, some key disappointments on earnings, mid-east turmoil and these kind of things, then I've got a bridge to sell you! Naw, it's the Fed dread. It's always, well so often, the fear that the Federal reserve will start jacking up rates.

However, I'm a technically oriented trader and I'll mostly stick to technical events and projections.

A, if not 'the', difficult thing about 'rotational' corrections in a bull market cycle is that different sectors and markets get to potential technical support sooner than other sectors and markets. It looks to me like the S&P 500 (SPX) AND the Dow 30 has already fallen to pivotal trendline support, whereas the big cap S&P 100 would have to fall a bit further to test key support trendlines.

The Nasdaq has only had a relatively shallow correction to date. It's then hard to know if we can 'trust' buying SPX, if the Nasdaq is going to get pulled down some more.

Trader sentiment got 'fully' oversold/bearish in my model on the Friday rout (what took traders so long to decide that there's RISK in stocks again!) and the RSI got 'fully' oversold in SPX. All together it looks like a buy already.

I'll lay out where I think (relatively) major support lies in each of the major indexes and you can decide for yourself. And, take a look at what I'm talking about with SPX, by perusing its weekly chart after these numbers:

SPX: key intermediate support reached already at 1920, with support extending to 1913 to 1900.

OEX: key intermediate support seen at 842, with a possible further dip to the 832-830 area.

DOW: key intermediate support comes in at 16500, which has been reached; support extends to 16450. Major support at 15265 if the aforementioned levels get pierced in a sizable further slide.

COMP: key intermediate support seen at 4200, but support starts around 4275.

NDX: 3750 to 3675 looks like pivotal intermediate support, but starts in the 3850 area.

QQQ: key intermediate support starts at 92, but extends to 90.

RUT: 1100-1080 is key chart support.

The S&P weekly chart will demonstrate a major index that has already fallen to what has PREVIOUSLY been technical/chart support implied by its longer-term up trendline. Support is at 1920, extending to 1900. A weekly close below 1900 suggest that this trendline is no longer 'valid'; and, that the rate of SPX upside momentum we've had for close to 2 years has slipped.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500 (SPX) Index is bearish in its pattern. Important to note also, is that SPX has now retraced a 'minimal' 38% of its prior advance. In a still-strong bull trend, that might be all the pullback that we see. Support implied by the 50% retracement is at 1900. I've noted potential trendline support at 1913.

A dip to a key trendline, per the weekly chart seen above (at 1920) and that subsequently 'acts as' support and where buyers come in, PLUS and oversold Relative Strength Index (RSI), PLUS an extreme in bearishness in my CPRATIO model (even on a 1-day basis) often is a buy 'signal'; or, at least suggests that a bottoming process is starting. We have the aforementioned 'big-3' technical events occurring in the S&P 500, so I'm watching and waiting to see if an when I might re-establish some bullish positions.

Resistance is highlighted at 1953, at the current intersection of the 50-day moving average and extends to 1960. Two back to back Closes above 1960 would suggest that the S&P has regained some bullish footing.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart turned bearish when the Index pierced trendline support in the 875 area and then pierced its 50-day moving average in the 865, also now highlighted as resistance. The fall on Thursday was severe per the Close at the intraday Low after a steep decline; but, bearishness got much more extreme on Friday without buyers leaping in again given the employment report as was already 'priced' in the market.

To keep doom-saying at a minimum, OEX has to date only retraced a kind of 'minimal' Fibonacci 38 percent relative to the February to July advance. OEX could get to 850-845 next, but perhaps after an early week rebound. Some will bargain hunt. I've note support at 850, with intermediate support at its up trendline currently intersecting in the 830-832 area.

Near resistance as I said, 865, then 875. OEX is another of the S&P family to fall to an oversold extreme in terms of what the historical picture is. Is an oversold reading a signal to buy the Index calls? Not in and of itself, but rallies ALWAYS come after an oversold extreme, we just don't WHEN; oh, and how high will be the initial rally!

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) is the most bearish of the sort of traditional group that centers on the NYSE. You know those with 3-letter symbols instead of 4! How do we measure this? The Average's closeness to touching its 200-day moving average, which is big or at least 'noticeable' deal in the investment world.

Important in the chart is the touch to INDU's up trendline at the 38% retracement level. If support is found in the 16400-16450 zone, that continues a relatively 'mild' correction.

If support implied by the 200-day average in the 16350 area gives way it started to look like a more severe correction. I noted at the top of my piece that Dow intermediate support was suggested at 16500, which has been reached; support extends broadly to 16450-16250.

The Dow is oversold like the S&P indices, suggesting some kind of rally will be coming. I'm wanting to see the 'quality' of the next rally (how strong, how prolonged) as I suspect the first rally will not be one to buy into. Rather that will come later.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite Index (COMP) formed a bearish 'double top' and it was downhill after that, at least as seen so far in the downside price 'gap' that preceded this past week's fall below key chart support at 4350. COMP did of course recover intraday and closed Friday at 4352 just a hair's breath back into its prior trading range.

I wrote above in my initial 'bottom line' comments that key intermediate support is at 4200, but near-term support starts at 4300-4275. Actually, I'm overlooking 4350 as it might be possible for the Composite to have such a shallow correction that COMP keeps within its prior 4350-4485 narrow trading range.

Bearishness, as suggested by sizable JUMP in equities put volume on Friday created a sharp drop in my call to put ratio, which is my favored 'sentiment' indicator. COMP is nearing an oversold level in the 13-day Relative Strength Index (RSI). COMP rarely gets all the way down into oversold territory in the RSI but when it does, especially when there are a couple of dips into that area, it's previously been associated with a tradable bottom.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is now short-term bearish after NDX fell under chart support at 3950. The Index on Friday got near, but not to, support suggested at 3850, the low end of its prior recent trading range and the level of NDX's current 50-day moving average. Next potential support comes in at 3800; technically important chart support is highlighted in the 3750 area, at the intersection of the NDX's up trendline.

As I wrote above, in my 'bottom line' comments, 3750 to 3675 looks like pivotal intermediate support in the big cap Nas 100, but starts in the 3850 area. Would I like to buy NDX calls? Yes, if the index tested and held its up trendline. Bullishness in tech might not allow, what I think would be a 'low-risk' opportunity there, unless bearishness finally spills over into tech magical thinking.

Resistance is suggested at 3950 and back in the 4000 area. I made a note about the VXN volatility index and that the recent very low VXN readings suggested to me 'complacency' as has the long-standing bullish sentiment readings seen with the CPRATIO indicator on the COMP chart above, at least until Friday when the bulls knees finally trembled! This IS the stock market we're talking about here! Complacency has been the kiss of death for me and for many.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) turned bearish in its chart pattern on the Wed-Thursday downside chart gap and break below 96. The QQQ volume pattern may be an example of bullish complacency also. What I have seen in almost ALL significant corrections/pullbacks is big spikes in daily trading volume when perceived support levels give way. Not so this time! It seems unlikely.

Trader sentiment still seem 'overly' bullish given the bearish trendline break and other downside risk factors that the bulls may not be paying much attention too, at least now.

Key near support starts at 94, at the 50-day moving average and a decisive downside penetration of this average may set off some further selling. Intermediate support starts at 92, but extends to 90 on a big-picture basis.

Near support is at 96, extending to 96.5. A move back INTO its long-standing uptrend price channel, which is back above the lower up trendline, would be bullish if it persisted. Speaking of volume considerations, the On Balance Volume (OBV) line is trending lower, which is a 'confirming' bearish aspect to the recent price break.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart continues bearish as the Index trades below the important 200-day moving average. RUT now looks like it may retrace 100 percent of its entire prior decline and retest prior support in the 1100 to 1083 area.

The Russell is again 'fully' oversold in terms of its 13-day Relative Strength Index and such a low RSI reading has previously been telling for a rebound.

In the 1080 area, RUT would fulfill a measured move objective, whereby its two down legs would be equal. RUT is probably a low risk buy on a successful retest of its prior low.

Resistance is highlighted in the 1140 area, with resistance extending to 1160.


GOOD TRADING SUCCESS!




New Option Plays

Luxury Goods & Apparel

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Coach, Inc. - COH - close: 33.70 change: -0.86

Stop Loss: TBD
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.8 million
Entry on August 04 at $---.--
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Coach started in a Manhattan loft back in 1941. Their focus on high-quality leather goods has expanded to handbags, men's bags, women's and men's small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry and related accessories. As of last year COH had almost 1,000 stores with more than 500 in North America and more than 400 in Asia.

It used to be that COH was the big brand in luxury items. It seemed like they could do no wrong with strong growth. It appears they out grew their exclusivity. It did not help that rival Michael Kors (KORS) was beginning to hits its stride and steal the spotlight from Coach.

It has been a tough year for retail companies. 2014 started with a very harsh winter that kept consumers indoors. COH was not immune to this effect. However, normal retailers could lay blame at the rising cost of gasoline or food items. That shouldn't apply to COH, which was always seen as a retailer to the higher-end consumer.

Desperate to stop the slide in sales COH resorted to promotions and discounts. This seemed to backfire. While the promotions may have increased foot traffic in their stores it helped sully their appearance as a luxury brand. Today COH is trying to turn things around. They're going to revamp their stores and go back to full luxury pricing. This could be expensive and pressure their margins as they try to turn things around.

COH held an investor day on June 19th. They told analysts that Coach would close 70 underperforming stores in North America as part of the turnaround plan. Most analysts leaving the meeting with COH turned bearish. In the three weeks following the analyst day shares of COH were downgraded six times.

If you look at chart of COH you'll see big drops in January and April. Both of those declines were sparked by disappointing earnings news and guidance. The recent plunge in mid June was a reaction to the investor day mentioned above. Today COH is poised to hit multi-year lows.

COH's rival Michael Kors (KORS) reports earnings on Monday morning, August 4th. COH will report earnings on August 5th. We suspect that COH will disappoint yet again. However, there is a risk that expectations are so bad that COH could rally on earnings that are bad but not as bad as expected. I would consider this a more aggressive trade.

The idea here is to hold over COH's earnings report on Tuesday morning. That means if you can stomach the risk for this trade our entry point is Monday. It's up to you if you want to jump in on Monday morning or Monday at the close.

Aggressive traders may want to buy August puts, which expire in two weeks. We're listing the September puts below.

NOTE: I am not listing a stop loss tonight but as an aggressive trade I would use a wide stop. COH could be volatile this week.

*Buy puts on Monday morning*

- Suggested Positions -

Buy the Sep $33 put (COH140920C33) current ask $1.45

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

Annotated Chart:

Weekly Chart:


PVH Corp. - PVH - close: 107.99 change: -2.19

Stop Loss: 112.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 821 thousand
Entry on August -- at $---.--
Listed on August 02, 2014
Time Frame: 4 to 6 weeks, exit ahead of earnings in mid September
New Positions: Yes, see below

Company Description

Why We Like It:
PVH is one of the largest apparel companies in the world. They purchased the Calvin Klein brand in 2003. In 2010 they added Tommy Hilfiger to their portfolio. Last year they purchased the Warnaco Group. PVH is also know for its Van Heusen, IZOD, ARROW, Speedo, Warner's and Olga brands. PVH started in 1881 and has grow into clothing powerhouse with sales topping $8 billion a year across North America, Europe, Asia and Latin America.

The stock has delivered an amazing performance from its 2009 lows near $15.00 to January 2014 high of $137.00 a share. Unfortunately for investors the momentum has reversed. Technically shares have formed a massive head-and-shoulders bearish top over the last several months (see weekly chart below).

Consumer spending patterns have changed this year. Consumers seem to be saving up and purchasing big ticket items like cars and spending less on apparel. PVH has been working hard to overcome the tough environment. During the previous quarter PVH managed to show revenue growth but profits are getting squeezed. That's like due to the increasingly promotional retail environment. The big drop in early June was a reaction to PVH's earnings where they missed the bottom line estimate by two cents and management guided lower.

The stock's recent bounce just failed at resistance near $115 and its 20 & 30-dma. Now PVH is breaking support near $110. The Point & Figure chart looks pretty ugly and currently projects an $82 target.

I am suggesting bearish positions now at current levels. We are not setting an exit target tonight but we'll most likely exit prior to PVH's next earnings report in mid September.

*buy puts now at current levels*

- Suggested Positions -

Buy the Sep $105 PUT (PVH140920P105) current ask $3.20

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

Annotated Chart:

Weekly Chart:

Point & Figure Chart:



In Play Updates and Reviews

Profit Taking Slowed On Friday

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market continued to sink on Friday but the profit taking did slowdown in the major indices.


Current Portfolio:


CALL Play Updates

Gilead Sciences, Inc. - GILD - close: 91.50 change: -0.05

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:
08/02/14: GILD held up well on Friday. Shares dipped to $90.69 before paring its losses. The stock almost closed unchanged on the session. More conservative investors may want to move their stop loss close to the simple 20-dma currently near $89.50.

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

chart:


Golar LNG Ltd. - GLNG - close: 62.04 change: +0.43

Stop Loss: 59.65
Target(s): To Be Determined
Current Option Gain/Loss: -14.1%
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:
08/02/14: Traders bought the dip in GLNG about midday and the stock outperformed the market with a +0.69% gain on Friday's session. Readers may want to look for a rise past $62.50 before considering new bullish positions.

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

chart:


Palo Alto Networks, Inc. - PANW - close: 78.67 change: -2.19

Stop Loss: 76.75
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:
08/02/14: The two-day sell-off in PANW has been a little rough with a $5 drop. The stock was actually down more than $7.00 from Wednesday's close to Friday's intraday low. PANW is a high-growth, momentum stock and traders just rushed to lock in profits during the market decline last week. The bullish story hasn't changed.

Friday's intraday high was $80.39. We are adjusting our entry point to $80.50 and we're moving the stop loss to $76.75.

Please note we're also moving the option strike down from September $90 calls to September $85 calls.

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 @ $80.50

- Suggested Positions -

Buy the SEP $85 (PANW140920C85) current ask $3.20

08/02/14 Strategy update: Move the entry trigger from $84.55 to $80.50 and move the stop loss from $79.65 to $76.75.
Adjust the option strike from Sep $90 call to Sep $85 call
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Pall Corp. - PLL - close: 77.57 change: +0.10

Stop Loss: 81.05
Target(s): To Be Determined
Current Option Gain/Loss: +30.7%
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:
08/02/14: It was definitely a bearish week for PLL. Shares broke down below support near $80.00, near its 300-dma, and below its January 2014 lows. Shares did manage a bit of an oversold bounce on Friday with a 10-cent gain.

We're not suggesting new bearish positions at this time.

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

chart:


United Natural Foods, Inc. - UNFI - close: 58.71 change: +0.09

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: -3.5%
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:
08/02/14: UNFI spent Friday's session drifting sideways and closed with a meager gain. The path of least resistance is down but we might want to see a new failed rally at the $60.00 mark or the 10-dma before initiating new positions.

On Friday Oppenheimer noted the same issue we did, mainly Whole Food's bearish guidance. WFM is UNFI's biggest customer so bearish sales guidance for WFM is bad news for UNFI.

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

chart: