Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/12/2014

Table of Contents

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

Market Wrap

Make Up Your Mind

by Jim Brown

Click here to email Jim Brown

The market can't seem to make up its mind whether it is going higher or lower.

Market Statistics

The Dow dropped -52 points at its low for the day along with declines in all the major indexes. The volume was very lackluster with the low for the day coming at 2:30 as a choppy session appeared destined to plunge as we neared the bell. A rebound began late in the afternoon but it was not enough to lift the indexes into the green. Most closed with minor losses after the lack of a downdraft at the close prompted some to cover their shorts.

There was a lack of material headlines to move stocks and the headlines we did get created conflicting emotions. Putin made a big show of sending 280 freshly painted army trucks towards Ukraine with what he called humanitarian aid. Ukrainian officials said they would not allow the trucks entry into the country. Officials fear they could be a modern day Trojan horse with weapons hidden inside the humanitarian supplies.

The convoy was loaded without the assistance of the Red Cross and they said it did not conform to rules established to prevent illegal shipments. Russia later said it would turn the trucks over to the Red Cross at the border but because they were not prescreened it is unclear how this would work.

The key event here is what Russia will do if the Red Cross insists on inventorying the contents before the trucks are allowed to cross the border. If Russia suddenly revokes its offer and turns the trucks around it would be a safe bet that military equipment was hidden in the relief supplies.

In Iraq there was a mix of headlines where the U.S. bombing succeeded in creating an exit path for the thousands of religious minorities that had been under siege on Mount Sinjar. Elsewhere ISIS made further inroads and captured a new town only 20 miles from Iran.

Prime Minister al-Maliki refuses to step down for the new appointee Haider al-Abadi. The various factions are choosing sides and there is a real danger of a Shia on Shia battle breaking out in Baghdad. Shiite militia and army commanders loyal to al-Maliki signaled their support for his refusal to step down. Al-Abadi has the support of the powerful Shiite clergy, a major force in Iraq. With all the problems Iraq has today they don't need a Shia civil war.

The German ZEW indicator of confidence among professional investment analysts fell to a 20-month low on worries over the events in the Ukraine. The headline number fell from 27.1 to 8.6 compared to expectations for a decline to 17.0. German economists fear the impact of the sanctions against Russia will knock Germany back into a recession. Germany sends about 30% of its exports to Russia. This drop in the ZEW was a wet blanket for all of Europe and created additional worries for U.S. companies doing business in Europe. This was a factor in the weak U.S. markets today.

In the U.S. the Job Openings & Labor Turnover Survey (JOLTS) for June showed job openings rose to the highest level in 13 years. The number of unfilled positions rose by +94,000 to 4.67 million and the most since February 2001. That was up from a revised 4.58 million in May. The growth rate of openings rose +3.3% and the highest since June 2007. Roughly 2.53 million people quit their jobs in June and the most since June 2008. This voluntary termination trend suggests the job market is improving and workers are more confident about getting a new job. This was a positive report but it was a lagging report for the June period. We have already had two Nonfarm Payroll releases since this period.

The weekly chain store sales declined -1.4% and the biggest drop in several months. Since this is the back to school shopping season this is really troubling. We should have seen increases but analysts pulled an excuse out of their hat saying "sales tax holidays occur in July and weaken the first week of spending in August." Did you hear about any sales tax holidays?

The NFIB Small Business Optimism Index rose slightly from 95.0 6o 95.7 for July. The number of respondents planning on increasing employment rose to 13% and a post recovery high. Those expecting the economy to improve rose from -10% to -6% but still in contraction territory. The earnings trends component was flat at -18% and well into contraction territory but still better than the -27% six months ago. A net of 23%, up +1%, planned on making capital expenditures. All the other components were basically flat. The report was mildly positive but was ignored.

The calendar for Wednesday is also bland. The retail sales for July will be the most important. Expectations are for a minor +0.3% rise. Apparently all those tax holidays the analysts were blaming for the decline in chain store sales for the first week of August did not really attract a flood of shoppers in July.


The biggest earnings on tap for Wednesday will be Cisco Systems after the bell. Macys (M), NetApp (NTAP) and ReMax (RMAX) will also be watched.

JC Penny (JCP) and Walmart (WMT) round out a full week of retail earnings on Thursday.


The retail disaster for today came from Kate Spade (KATE). The company said sales rose +50% in Q2 but that was the highlight of the earnings news. The company still lost $14 million or -11 cents and they lowered their gross margin projections for the rest of 2014 as a result an increased promotional environment. Excluding special items they earned +5 cents. The lowered guidance for KATE caused a -25% decline in the stock.


Michael Kors (KORS) found its shares declining as well as a result of the Kate Spade guidance. The "increasingly promotional" comments suggested there was a purse war brewing between the companies. I think Kors will win. I am waiting for KORS to find a bottom to recommend a new long entry.


King Digital (KING), producer of the game Candy Crush, reported earnings of 59 cents that met estimates but revenue of $594 million was well under estimates for $608 million. The company warned that full year revenue would be in the range of $2.25-$2.35 billion, down from May guidance of $2.55-$2.65 billion. In an effort to head off the expected crash in its shares the company declared a $150 million special dividend. This is an "all in" bet that failed.

The company is facing a lockup expiration of 93% of its shares on Sept 22nd. They tried to head this off as well by saying the officers, directors and founders had agreed to postpone the lockup expiration on their shares representing 80% of the total until after the company reports Q4 earnings. Because of the large number of shares in lockup the $150 million special dividend only amounts to 46.9 cents per share. With only 7% of the authorized shares actually in the market the dividend looks more like a bribe to the insider shareholders to postpone their lockup expiration. Otherwise why would a company that earned $161.7 million in the quarter and warn on future earnings declare a $150 million dividend? Turn out the lights, this game maker is done.


LED maker Cree Inc (CREE) reported earnings of 42 cents that beat estimates by a penny but warned on future guidance. The company sees revenue of $440-$465 million and earnings of 40-45 cents. This was below average expectations of $465 million and 45 cents. Shares declined about $3 in afterhours.


JDS-Uniphase (JDSU) reported earnings of 14 cents on revenue of $448.6 million. This beat estimates for 13 cents and $438 million. They claimed a 15-year record high gross margin at 50%. JDSU lowered earnings guidance to between 8-12 cents on revenue of $405-$425 million. This was well below the 14 cents and $441 million consensus estimates. Shares declined slightly after the report.


Are you picking up on the trend here? Lowered guidance is going to be the killer for Q3. More than 37% of the S&P guided below estimates for the current quarter or full year. This suggests business activity is declining rather than accelerating. With the impact of the Russian sanctions on Europe we are going to see a lot more guidance warnings in the future.

Today Schlumberger (SLB) warned the sanctions would impact earnings by 3 cents a share in Q3 even though the actual sanctions were narrow and specifically targeted. The sanctions focused on deepwater over 500 feet, arctic offshore, and shale exploration and development. Since most of Russia's onshore fields are not shale the impact of the sanctions will be minimal for Russia.

National Oilwell Varco (NOV), a major supplier of oilfield equipment, warned they had $160 million in sales to Russia through June and "some or all" of such sales may be restricted by the sanctions for the rest of 2014.

We are just scratching the surface for sanctions impact and we can expect dozens if not hundreds of warnings in the future. We don't have to worry just about sales to Russia but sales to any other company or country that does business with Russia. That is a very big list.

Brent crude prices collapsed to $103 today and could drop below $100 after the IEA lowered demand growth assumptions for the rest of the year. The IEA cut growth forecasts for 2014 by -180,000 bpd because of slowing demand. I could write an entire essay on why demand is slowing but that is not relative to this commentary. Suffice to say slowing economies consume less oil.

The IEA did not say demand was contracting. They still expect demand to grow by 1.0 million barrels per day in 2014 to 92.7 mbpd. However, that is down from the prior 1.18 mbpd forecast but still an increase. For 2015 they are expecting demand to rise 1.3 mbpd to 94.0 mbpd.

Demand growth this summer has been so slow that the increased production from Libya is going unsold. Libya had seen production decline from 1.4 mbpd to 213,000 bpd because of the civil strife. A month ago the rebels agreed to release control of the ports for a portion of the revenues from selling the oil. Production resumed and is up to nearly 600,000 bpd but they are having trouble finding buyers.

Production in Iraq has not been materially impacted and the security premium in oil due to the Ukraine and Iraqi fighting is now evaporating. If Brent declines under $100 we can expect to see OPEC, especially Saudi Arabia step in to slow production and maintain the price over $95. Brent under $100 suggests WTI will be $95 or less. It is trading at $97 tonight.

This is punishing energy stocks but it is a blessing for the U.S. economy. Lower gasoline and diesel prices will take less money out of the pockets of consumers and allow them to spend it on consumer goods instead of pouring it in the gas tank. Americans consumed roughly 394 million gallons of gasoline per day last week. A 10 cent decline in gasoline is worth $39 million a day in additional consumer spending power.


Intercept Pharmaceuticals (ICPT) continues to live up to its reputation for volatility. Shares posted a 16% gain today of $39 on news their liver drug did not raise cholesterol. However, the high for the day was $349 and the low $274 and right where it closed. Yesterday's close was $237 so at one point the stock was up +112 intraday. This is insane.


Revel, the bankrupt Atlantic City casino will close by September 10th after failing to find a qualified buyer. The casino is only 2 years old and cost $2.6 billion. It filed for bankruptcy March 2013 and was taken over by creditors. It filed a second time in June. This will be the fourth major casino to close this year in Atlantic City. The Atlantic Club closed in January. Caesar's Showboat will close on August 31st and Trump Plaza will close Sept 16th. Because gambling is now legal in 34 states instead of just a couple there has been a strong decline in the number of people traveling to a remote casino location. Caesar's CEO said "the drive-in business in Atlantic City has all but disappeared." Gambling was approved in Atlantic City in 1976 and revenue increased every year until 2007 when the recession began. Since then it has collapsed.


Volume was very low today at 4.87 billion shares. This is the lowest since July 11th and it is expected to slow even further as we head for Labor Day and the end of summer. Anyone still planning on a vacation is rapidly running out of days. This slowing volume suggests the market could continue to be choppy for the next couple of weeks. Historically this is the strongest week of the month and the week after expiration starts a slide that last the rest of the month. History is a guide not a guarantee so we can't count on that trend repeating but we should watch for it.

The S&P gave back another -3 points to close at 1933 but that was still off the low of 1928. The stall at resistance at 1945 on Monday is still in progress with intraday support at 1930 barely able to contain the decline. It is hard to make too much out of the market action today since there wasn't any. The markets opened weak and remained weak but the decline was minimal thanks to the low volume. Nobody is participating. Everyone is either watching for a buying opportunity or watching the waves on a beach.


The Dow chart shows another perfect pattern of a bounce from support and failure at resistance. The Dow didn't quite get to 16,600 with a high at 16,589 but it is close enough for this commentary. The Dow actually turned positive for about a minute late in the day but lost traction almost immediately.

We can't apply too much logic to this lackluster performance because of the lack of volume. It takes volume to defeat support and resistance levels and without it we could remain trapped in the current range.

No Dow components gained or lost more than 81 cents. It was a pretty boring day.



The Nasdaq lost -12 points and the most of the major indexes. However, it was able to remain over prior resistance, now support, at 4371 and mount a decent rebound at the close. Only six Nasdaq components gained more than $3 for the day. Only eight lost more than $3.

The Nasdaq can decline to 4344 without causing any material damage. However, a decline under 4344 could easily see a -100 point drop.



The Russell 2000 lost -9 points but remains above the congestion range from last week. The minimal decline kept it in a rebound posture from the prior Monday's lows with support at 1120 the level to watch. Unlike last week when the Russell was up and the big cap indexes were down, the Russell joined the decline today. This suggests last week's rebound was more month end contributions being put to work than fund managers aggressively buying small caps.


I don't think we can project market direction from the action we have seen this week. The path of least resistance appears to be down but sometimes appearances can be deceiving. I would continue to suggest taking only small positions with minimum risk until we get to Labor Day.

Beware the potential border crisis with Ukraine if the Russian army trucks, freshly painted white to look innocent, suddenly turn into a disaster if Russian weapons are discovered. They may not be 280 Trojan horses but they may not be exactly what they seem.


Enter passively, exit aggressively!

Jim Brown

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New Option Plays

A Strong Pipeline

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Isis Pharmaceuticals - ISIS - close: 34.40 change: -0.39

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.5 million
Entry on August -- at $---.--
Listed on August 12, 2014
Time Frame: 12 to 15 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Science has discovered that some diseases are caused by certain proteins. Some biotech firms are using RNA-targeted technology to focus on those proteins and find a treatment. ISIS is one such company.

According to their website, ISIS is "the leading company in antisense drug discovery and development, exploiting a novel drug discovery platform we created to generate a broad pipeline of first-in-class drugs. Antisense technology provides a direct route from genomics to drugs. With our highly efficient and prolific drug discovery platform we can expand our pipeline and our partners' pipelines with antisense drugs that address significant medical needs. Our strategy is to do what we do best—to discover unique antisense drugs and develop these drugs to key clinical value inflection points."

The company has a significant number of drugs in development. You can see a list of ISIS' pipeline on this webpage. They currently have over 30 drugs in progress. The depth and scale of their pipeline makes ISIS a potential takeover target from bigger drug or biotech firms. Gilead Sciences and Biogen Idec have been rumored as potential suitors.

Lately the headlines have been full of the world's worst Ebola outbreak in history. Biotech stocks are grabbing investor attention as companies search for a treatment. Whenever one biotech firm makes positive headlines it tends to create a halo effect that buoys the rest of the group.

The stock peaked back in February this year after ISIS reported positive results on a treatment for children with spinal muscular atrophy. After soaring from $8.00 in the prior 18 months traders sold this news near $60.00. A few days later in March all the high-growth and momentum names were crushed. The correction was exceptionally tough on ISIS. The stock plunged from $60 in February to $23 in May. Their Q1 results in early May didn't help. Results were in-line but revenues were down 35% from a year ago to $28.2 million. Their most recent earnings report on August 4th was much better. ISIS missed Wall Street's estimate for a loss of 10 cents a share by 1 cent. However, revenues soared +49.8% to $57.1 million, which was significantly above expectations.

ISIS explained that the big swings in their revenues are normal. According to their press release, "Isis' revenue fluctuates based on the nature and timing of payments under agreements with its partners and consists primarily of revenue from the amortization of upfront fees, milestone payments and license fees. Isis' revenue from the amortization of payments from its partners was $31.4 million in the first half of 2014, compared to $19.2 million for the same period in 2013." You can see they made significant improvement from 2013 to 2014.

ISIS is getting closer to several drugs completing their final Phase 3 clinical trials before being approved for market. The company said,

We have initiated the Phase 3 program for ISIS-SMNRx to treat patients with spinal muscular atrophy. Our Phase 3 clinical study of ISIS-TTRRx in patients with the polyneuropathy form of transthyretin amyloidosis is enrolling well and patients who have completed the controlled portion of the study can continue to receive treatment in our open-label extension study. Also this year, we plan to initiate the Phase 3 program for ISIS-APOCIIIRx to treat patients with severely elevated triglyceride levels with the first study starting very shortly," said B. Lynne Parshall, chief operating officer of Isis. "By the end of the year, we plan to be conducting Phase 3 programs on a number of different drugs to treat important genetically driven diseases for which antisense may offer a unique therapeutic approach."

It looks like the stock has made a bottom in July. Shares have pushed through several key moving averages in the last couple of weeks. If this continues ISIS could see some short covering. The most recent data listed short interest at 10% of the 117.9 million share float. The Point & Figure chart is bullish and forecasting at $46.00 target.

Tonight we are suggesting a trigger to open bullish positions at $35.25. If triggered we'll try and limit our risk with a stop loss at $31.85. I will point out that ISIS does have resistance in the $37.50 area including its simple 200-dma. We're expecting the stock to break through it. More conservative investors might want to wait for ISIS to close above $38.00 before considering new positions.

Trigger @ $35.25

- Suggested Positions -

Buy the 2015 Jan $40 call (ISIS150117C40) current ask $4.40

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Germany Leads Market Lower

by James Brown

Click here to email James Brown

Editor's Note:

The German DAX dragged global markets lower following disappointing investors sentiment numbers.

WDC has been removed.


Current Portfolio:


CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 64.41 change: -0.52

Stop Loss: 61.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.26 million
Entry on August -- at $---.--
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/12/14: Tuesday produced another quiet session for BMRN. The sideways consolidation seems to be narrowing. The stock should see a break one way or the other soon.

Earlier Comments: August 11, 2014:
BMRN is in the healthcare sector, specifically the biotech industry. According to the company's press release they "develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. The company's product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates."

The company's strategy is "providing first-in-class or best-in-class treatments for patients with serious unmet medical needs, optimizing powerful biology with demonstrated potential and development clarity, accelerating approval process, strategic pipeline development."

BMRN's current product portfolio looks like this: VIMIZIM™ for Morquio A syndrome (MPS IVA), Naglazyme® for MPS VI, Aldurazyme® for MPS I, Firdapse™ (currently approved in the EU only) for LEMS, KUVAN® Tablets for PKU.

BMRN lists their current clinical pipeline as follows: PEG PAL for PKU, BMN 673 for genetically defined cancers, BMN 701 for Pompe disease, BMN 111 for achondroplasia, BMN 190 for late-infantile neuronal ceroid lipofuscinosis (CLN2), a form of Batten Disease, BMN 270 for hemophilia A and BMN 250 for Sanfilippo Syndrome or MPS IIIB.

The company is developing a trend of beating Wall Street's earnings estimates. Back in February they reported results that bested analysts' estimates by a wide margin. They did it again in May. Wall Street was looking for a loss of 44 cents on revenues of $145.1 million. BMRN reported a loss of just 1 cent with revenues rising +18.5% to $151.6 million. Their most recent earnings report was July 30th. Analysts were expecting a loss of 41 cents on revenues of $159.2 million. BMRN announced a loss of 23 cents with revenues soaring +40.1% to $191.7 million. Furthermore BMRN management raised their 2014 guidance following the July 30th report.

The stock peaked back in February this year. When the market corrected in March most of the high-growth and momentum names were crushed. BMRN was in that group that saw their stock hammered lower. Shares fell from almost $85 to $55.00. Fortunately the $55.00 level has been solid support. Shares have been building a significant base in the $55-65 zone for over three months.

Currently the rebound from its July lows is pushing the stock up against major resistance in the $65.00-66.00 area. This is where BMRN has resistance with its simple 200-dma and its trend line of lower highs. If the stock breaks out it could spark a significant move higher.

Tonight we're suggesting a trigger to buy calls at $66.55. We're not listing an exit target tonight but I will share that the point & figure chart is bullish with a $77.00 target.

Trigger @ $66.55

- Suggested Positions -

buy the Oct $70 call (BMRN141018C70) current ask $2.45

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


Cummins Inc. - CMI - close: 141.04 change: -0.76

Stop Loss: 138.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on August -- at $---.--
Listed on August 09, 2014
Time Frame: 10 to 14 weeks
New Positions: Yes, see below

Comments:
08/12/14: CMI also drifted lower today. The stock underperformed the major indices with a -0.5% decline. We are still on the sidelines. I do not see any changes from our weekend newsletter's new play description below.

Earlier Comments: August 9, 2014:
Sometimes investors overreact to news and the stock reaction can generate an opportunity. That's what we are seeing in CMI today.

Cummins Inc. was founded back in 1919 by its namesake Clessie Lyle Cummins. The company has four businesses: engines, power generation, components, and distribution. They're headquartered in the state of Indiana with about 48,000 employees worldwide. They do business in 190 countries.

According to the company website CMI describes themselves as "a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems."

CMI reported Q1 earnings on April 29th. They crushed the earnings number and beat the revenue estimates with revenues up +12.3% for the quarter. CMI management raised their 2014 guidance by +6% to +10% (about $18.3-19.0 billion).

When CMI reported Q2 earnings on July 28th Wall Street was expecting a profit of $2.39 a share on revenues of $4.82 billion. CMI beat those numbers with a profit of $2.43 on revenues of $4.84 billion. Profits were up +10.5% from a year ago. Management raised their 2014 guidance again. This time they see revenues up +8% to +11% in 2014. That's about $18.7-19.2 billion.

CMI's Chairman and CEO Tom Linebarger said, "Demand is growing in on-highway markets in North America this year as the economy improves and we have gained market share in medium duty truck and bus markets." Their North American sales surged +14% last quarter versus a -1% pullback in international sales.

That's two quarters in a row that CMI has beat Wall Street's top and bottom line estimates and raised guidance. Yet the stock was crushed following the July earnings number. It appears the upgraded revenue guidance wasn't good enough and analysts were expecting more.

CMI reported sales of $17.3 billion in 2013. Now they're approaching $19 billion. They've already approved a $1 billion stock buyback program to replace their current $1 billion buyback program once it's complete. They have also raised their dividend this year.

The company has rising sales, rising market share, rising profits, and rising dividends. It has a trailing P/E of 17 and a forward P/E of 12.8. That sounds like a pretty good combination.

Technically the stock has fallen to its long-term trend line of support (see the weekly chart below). Last week shares have started to rebound from this trend. However, on a short-term basis the breakdown under its 200-dma looks pretty ugly. The bounce last week failed near $144.00 and its 10-dma. Therefore tonight we are suggesting a trigger to buy calls at $144.25.

FYI: Investors should note that Deere (DE) reports earnings on August 13th. While not exactly in the same business as CMI their results might influence CMI's performance.

Trigger @ $144.25

- Suggested Positions -

Buy the 2015 Jan $150 call (CMI150117C150)

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


Gilead Sciences, Inc. - GILD - close: 93.36 change: +0.44

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: - 2.7%
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:
08/12/14: Traders bought the dip in GILD around lunchtime at $92.51 and the stock rebounded to a +0.47% gain. I would be tempted to buy calls again above $93.50.

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


Transportation ETF - IYT - close: 145.98 change: -0.10

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: -10.8%
Average Daily Volume = 276 thousand
Entry on August 11 at $146.03
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/12/14: The IYT is another security that slowly drifted lower today. I don't see any changes from yesterday's comments. Readers might want to wait for the IYT to fill the gap and retest $145.00 before initiating new positions.

Earlier Comments: August 9, 2014:
In tonight's market commentary Jim pointed out the bounce in the Dow Jones Transportation Average ($TRAN). The transportation group has been leading the market higher for months with a series of new all-time highs. The group was hit with some profit taking in the last two and a half weeks. Even with a 500-point (about -6%) pullback in the $TRAN index it's still up +9.3% for the year. Now that group is bouncing.

One way to play the transports is the iShares transportation ETF (symbol: IYT). This ETF tries to mimic the performance of the Dow Jones Transportation Average. The top ten holdings in this ETF are:

(FDX) FedEx - delivery services
(KEX) Kirby Corp. - marine transportation
(KSU) Kansas City Southern - railroads
(UPS) United Parcel Service - delivery services
(NSC) Norfolk Southern - railroads
(UNP) Union Pacific Corp. - railroads
(CHRW) C.H. Robinson Worldwide - trucking
(R) Ryder System Inc. - transportation services
(CNW) CON-WAY Inc. - trucking
(JBHT) J.B. Hunt Transport Services - trucking

If the U.S. economy continues to improve as so many expect it will then the transports should be a major beneficiary. We should take advantage of this pullback in the transports and buy this bounce from support.

The IYT has been bouncing from technical support at its rising 100-dma for months. It bounced off the 100-dma in October 2013, February 2014, April 2014, and almost hit it again on Friday morning before bouncing.

Tonight we're suggesting traders buy calls now following Friday's bouncing with a stop loss at $141.90, just under the 100-dma. More conservative traders may want to consider an alternative entry point and wait for a rise past $146.25 instead.

- Suggested Positions -

Long 2015 Jan $150 call (IYT150117C150) entry $4.60

08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike


LyondellBasell Industries - LYB - close: 108.89 change: +0.61

Stop Loss: 105.99
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on August -- at $---.--
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/12/14: LYB displayed some relative strength today with a +0.5% gain. The stock remains under resistance near $110.00. Our trigger to buy calls is at $110.50.

Earlier Comments: August 4, 2014:
One way to play the shale-gas boom in the U.S. is plastics. The bloom of natural gas production has been a huge blessing for LYB. According to the company's website, "We participate in the entire petrochemical value chain, from refining to specialized petrochemical product end uses. We are the largest producer of polypropylene and polypropylene compounds; a leading producer of propylene oxide, polyethylene, ethylene and propylene; a global leader in polyolefins technology; and a producer of refined products, including biofuels. Additionally, LyondellBasell is a leading provider of technology licenses and a supplier of catalysts for polyolefin production."

The recent spike in LYB's stock price was a reaction to better than expected earnings results. Wall Street was looking for LYB to deliver a profit of $1.93 a share on revenues of $11.5 billion. LYB surpassed expectations with a profit of $2.22 a share with revenues rising +9.1% to $12.12 billion.

The stock has been an earnings machine with rising earnings the last four years in a row. Analysts are now estimating LYB will see earnings rise 11% in 2014 and 16% in 2015. Jefferies recently raised their price target on LYB from $120 to $125 as they upgraded their EPS estimates on the company.

After a strong rally from $100 to $110 in mid July the stock was short-term overbought and due for a pullback. Traders jumped in to buy the dip near LYB's simple 10-dma last week. Now LYB is rebounding higher.

More aggressive traders may want to buy the bounce today. We are suggesting a trigger to buy calls at $110.50 since the July high is $110.38.

FYI: For more background on the LYB story Forbes.com has a great article that you might find interest. You can read it here.

Trigger @ $110.50

- Suggested Positions -

Buy the DEC $115 call (LYB141220C115)

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


Palo Alto Networks, Inc. - PANW - close: 81.26 change: -0.66

Stop Loss: 76.75
Target(s): To Be Determined
Current Option Gain/Loss: -3.1%
Average Daily Volume = 1.3 million
Entry on August 04 at $80.50
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: see below

Comments:
08/12/14: PANW also followed a similar trend of slowly drifting lower on Tuesday. Look for a bounce near the $80.00 mark.

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.

- Suggested Positions -

Long SEP $85 (PANW140920C85) entry $3.20*

08/04/14 triggered @ 80.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
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




PUT Play Updates

Pall Corp. - PLL - close: 79.29 change: -0.06

Stop Loss: 80.35
Target(s): To Be Determined
Current Option Gain/Loss: -7.6%
Average Daily Volume = 437 thousand
Entry on July 30 at $79.45
Listed on July 29, 2014
Time Frame: Exit PRIOR to earnings on August 28th
New Positions: see below

Comments:
08/12/14: PLL's oversold bounce appears to be failing exactly where it should be - at resistance near $80.00 and its simple 300-dma. The intraday high today was $79.98.

More aggressive traders could launch bearish positions now. I'd prefer to see some follow through lower on today's intraday reversal.

Please note that our time frame has changed. PLL is scheduled to report earnings on August 28th. We do not want to hold over the announcement.

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*

08/09/14 updated time frame. PLL scheduled to report earnings on Aug 28
08/06/14 new stop @ 80.35
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



CLOSED BULLISH PLAYS

Western Digital Corp. - WDC - close: 99.51 change: -1.43

Stop Loss: 99.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on August -- at $---.--
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/12/14: WDC is not cooperating. Shares are down four days in a row and the weakness was accelerating today with a -1.4% decline. WDC is still inside its $98-103 trading range. However, we're not waiting around to see if WDC will bounce from $98.00. Our trade has not opened yet and we're removing WDC as an active candidate.

The bullish story on WDC has not changed but after a seven-week rally the stock might need a rest. I would keep WDC on your watch list. We will play it again.

Trade did not open.

08/12/14 removed from the newsletter. suggested trigger was $103.05

chart: