Option Investor
Newsletter

Daily Newsletter, Monday, 8/18/2014

Table of Contents

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

Market Wrap

Tensions Ease, Markets Rise

by Thomas Hughes

Click here to email Thomas Hughes
Easing tensions in the world's geopolitical hot spots allowed the market to move higher and the NASDAQ to set a new high.

Introduction

New reports reveal that the stand off between the Ukraine and pr-Russian separatists is as yet unresolved but there has been some easing of tensions. The lack of escalation from either side following the convoy attack last Friday, along with news there has been some progress made in terms of the humanitarian effort, provided enough relief for global markets to shift focus back to fundamentals.

Asian markets started the global rally today but were only barely able to hold any of the gains. European markets were more firmly optimistic about the outcome and rose more than 1% on average with the German DAX leading at 1.68%. The US equity market was firmly higher with futures indicated up from the start of early pre-open trading. The futures trade gained some strength during the morning and carried it into the opening. The SPX was indicated about 11 points higher at the opening bell and quickly extended that gain to +15. Once at the daily high the market stayed within two points of that level until mid afternoon and into the close.

Market Statistics

Early focus was on the Ukraine but it's importance seems to be waning, again. The market response to each new even is waning as well. The risk of something else happening in the region is still present but today at least it did not provide a hindrance to trading. Rising to the forefront is a string of expected economic data topped off by minutes from the latest FOMC meeting. This week we will get CPI, building permits and housing starts on Tuesday followed by FOMC minutes on Wednesday. Thursday the weekly jobless claims are followed up by existing home sales, Philly Fed and the index of leading indicators. Also in focus this week is the annual conference of central bankers in Jackson Hole, Wyoming. There are a number of speeches expected from top bankers such as Janet Yellen, Mario Draghi (ECB) and Haruhiko Kuroda (BOJ).

Each event will be important but I think it will be the week as a whole and not any one data point that proves most important. There is a chance, maybe even a likelihood, that some of the data will be less than expected. That's OK so long as the data as a whole, including Fed outlook, are not too strong and not too weak. Too strong could lead the market to think that interest rates will rise sooner, too weak could lead the market to think the recovery is stalling.

Economic Calendar

The Economy

There was one bit of economic data released today in addition to Moody's weekly Survey of Business Confidence. The National Association Of Home Builders released their monthly report of home builder confidence. The index rose, unexpectedly, by two points to 55 from last months reading of 53. This is above the consensus estimates for the index to hold flat. All three components of the index gained this month, in all regions. This is the third month of gains in the index and the highest reading since January. While not overly strong the reading is expansionary and gaining strength. Tomorrow housing permits and housing starts are both expected to rise modestly but remain below the “critical” 1 million level.

Mr. Zandi is exuberant in his summary of the Survey Of Business Confidence. He says that “business confidence is rock solid”, in line with an economy “expanding above its potential. According to his report businesses are especially optimistic about prospects going into the end of the year and the beginning of next year. In addition, as in past weeks, he notes that hiring intent is strong across the board and supportive of +200K job growth per month. The one area of caution that keeps poking up is that South American and European companies are less upbeat.

The Oil Index

Oil prices took another big dip today, shedding more than a -$1.25 on an intraday basis. Rising storage levels, the end of the summer driving season, increasing supply from areas like Libya and a reduction in fear for areas like Iraq have all combined to bring WTI back below $96 and near the 6 month low set last week. It is possible that prices will remain low in the near to short term unless geopolitical risk or prospect for global demand growth provides catalyst. The good thing is that oil is now cheap for businesses to buy and will likely work its way through to the bottom lines of industries that rely on black gold.

The Oil Index traded flat today. The declining price of oil tugging it lower, the rising tide of stocks pulling it higher. The index has been trading in a tight range for several weeks and is caught inside two long term support/resistance lines based on previous all time closing and intraday highs. The indicators are consistent with support along this level and are in the early stages of a trend following buy signal but one that I think deserves some caution. In the end low oil prices are not good for oil producers but could lead to increased sales volume if not increased revenue. It also means that operating costs for oil services companies will be lower as well. How this will play out in the oil sector is a complicated question and one I think the market has yet to answer. A break outside of the current range between 1625 and 1660 could be the tell. A break below could take the index down to the long term trend line in the 1575-1600 region.


The Gold Index

Gold prices deflated today in response to the news of reduced tensions between Russia and the Ukraine. The move down was not as pronounced as it has been in the past on similar news and could be reflecting a lack of trust in Putin. He's backed down before, sending the price of gold down and the price of stocks up, only to reverse himself and drive gold up and stocks down. It's almost enough to suspect him of rigging the markets. The long term trend is still down although the flight to safety driven by geopolitical tensions have established a potential support zone. Today gold lost about $7 in the early part of the day, dropping below $1300, only to regain it by the close of the session.

The Gold Index opened lower today but rose during the afternoon, posting a small gain by the close. Despite today's rise this is the second day the index is trading below my resistance line and potential reversal point. The indicators remain weak and in line with range bound trading in the short term. Near term support is just below the current level along the short term 30 day moving average with a potential long term support below that along the 150 day EMA. AS it stands it appears as if the index is caught between long term resistance growing long term support. The support is questionable as the index is tied to gold prices and gold prices are elevated on flight to safety, not valuation. Until there is clear direction in gold prices this index may remain trapped between these levels with the possibility of a squeeze forming as long term pressures build from both sides of the trade.


In The News, Story Stocks and Earnings

The dollar store wars heated up today with a bid for Family Dollar from Dollar General. This is on top of the already binding merger agreement Family Dollar has with Dollar Tree which hit the news last month. The deal values outstanding shares of Family Dollar at $78.50 each, a premium over the previous offer. The news sent shares of FDO up more than 5%, surpassing the $78.50 offer. Dollar Tree reports earnings on Thursday.


Earnings season is mostly behind us but there are still a few companies left to report. Out of the 500 S&P companies there were 31 left as of the start of the week this morning. Out of those that have reported so far 73% have beaten earnings estimates while 64% have beaten sales estimates. The average earnings growth rate is 7.6%, well ahead of the expected range of 5-6% going into the season.

This week there are not a whole lot of reports but it is a big week for retail in general and teen retail/home improvement in particular. There are at least 10 big name retailers on the list this week including Home Depot and Lowes on the home improvement front and Cato, American Eagle, Aeropostale, TJ Maxx, Dicks, Target and Petsmart rounding it out. The retail Spyder XRT traded to the upside today in line with the general market. The ETF is still trading near the middle of the long term range but is at a one week high. The indicators are bullish and there is support just below the current level along the short and long term moving averages.


The Consumer Discretionary Spyder XLY also traded up, gaining just shy of 0.90% in today's session. This ETF is trading just below long term resistance and a all time high levels. This ETF is in the process of moving higher following a long term moving average bounce and accompanied by rising indicators. Although indicated higher, it is just below resistance so a break out is needed in order to confirm another move higher. This week could do it provided the retailers give us good news. There are spots of weakness in the sector, some retailers are hitting the nail on the head while others are struggling to keep up.


Urban Outfitters reported today, after the bell. The teen clothing retailer reported earnings that were basically in line with expectations. EPS of $0.49 per share was in line with estimates while revenues were a little better than expected. Forward outlook was not quite as expected and helped to send the stock down in the after hours session. The culprit is declining margins which is hurting bottom line results. The stock had been up during the regular session but fell more than 1% after the bell.


The Indices

The markets made a nice rebound today. The rally started even before the bell and carried through right into the close of trading. Although the Transports led the market today it was the NASDAQ which was the real winner. The tech heavy NASDAQ composite index only gained 0.97%, weak compared to the Dow Transports 1.71%, but managed to set a new 14 year high. This is the first new high for the index since the summer correction began at the beginning of July. The index broke above the 4,500 level and closed at the top of today's range. The indicators are bullish and indicate higher prices are likely on the way. This move is a continuation of the trend following signal that appeared last Thursday and could carry the index another 100 points higher in the short term.


The Dow Jones Transportation Average was today's points leader with a 1.71% gain. The Trannies moved more than 141 points higher and created a long white candle. Today's candle is noticeable larger than any candles dating back for several months and similar to candles that have formed at the start of other trend following movements. Lending weight to the bullish argument today's candle formed above the short term moving average and above the previous all time high. The indicators are also strongly bullish with today's action creating a sharp move up in momentum. Support is currently at 8,250 with resistance just above at 8,500 near the current all time high. The long term trend is up and this move looks good to at least test the all time high if not set a new one in the near term.


The Dow Jones Industrial Average was also one of today's big movers. The blue chip index gained 1.06% in today's session, creating a long white candle and breaking above the short term moving average which is just above the all time high set by the index this spring. The indicators are bullish and showing a strong movement upwards in line with the underlying trends. Previous trend following bounces originating at the long term 150 day EMA have been worth up to 1000 points or more over a short term basis of 2 to 3 months. There is still near term resistance ahead at the 17,000-17,100 level on a technical basis.


The S&P 500 brought up the rear in today's action, posting a modest 0.85% gain. The broad market index gained 16.68 points and closed at the top of today's range. The candle formed was a white one and bullish, just not one that I would call overly large. The index is moving higher and in mid bounce, similar to the other indices. The SPX is approaching resistance with bullish indicators confirming a long term trend line bounce. There could be some consolidation as the index moves up to test resistance but previous bounces of this nature have not lingered long once the movement began. The bounce has already produced about 60 points of movement with that as a potential upside target provided the index can break above resistance. The long term trend is up, the prevailing signal is up and there as of yet there has been no sign of that ending.


It looks like the long term trend has taken control of the market. The Russia/Ukraine stand off will hang over our heads for some time to come I expect but at least for now the technical picture remains undamaged. The July correction found support at long term levels and has now reversed in favor of the long term trend. Today new data showed us that home builder sentiment is on the rise which is a good sign that other areas of the housing sector may be improving as well.

Without the threat of geopolitical risk the market was able to move up on the data in anticipation of what is to come this week. Tomorrow there are two key pieces of forward looking housing data, starts and building permits, with existing home sales later, FOMC minutes and Leading Indicators later in the week. So long as the data supports the steady improvement in the economy we have been experiencing I think the rally will go on. The FOMC minutes may give us some sign of when interest rates will rise but I am not really expecting much out of it except the same old data dependent song.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Don't Buy It

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

United Rentals, Inc. - URI - close: 114.29 change: +2.58

Stop Loss: 109.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on August -- at $---.--
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
URI is a company that is gaining market share. Traditionally equipment rental has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. URI's most recent earnings report was July 16th. Wall Street was looking for a profit of $1.50 a share on revenues of $1.36 billion. URI delivered $1.65 a share with revenues hitting $1.399 billion. URI's earnings results were up +47% from a year ago. Margins hit a second quarter record at 47.4%. URI management then raised their 2014 guidance.

In URI's earnings press release their CEO offered a bullish outlook:

Michael Kneeland, chief executive officer of United Rentals, said, "Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high water mark for second quarter EBITDA margin. The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we're seeing, and the benefit of secular penetration, we've raised our full year outlook - and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014."

URI said their rental revenue was up +16.8% for the quarter. They're also see super growth in their specialty segment. Their trench safety rentals were up +21%. Their power and HVAC rentals were up +54%. URI purchased National Pump on April 1st this year. Now they've renamed it United Rentals Pump Solutions and they're using it as an opportunity to cross sell pumps to their broader customer base.

URI is also on track with their stock buyback program. In October 2013 they announced at $500 million repurchase program that's expected to be completed by April 2015. Thus far URI has bought back $228 million in common stock this year ($185 million of that was in the second quarter).

Technically the post-earnings depression for URI is over. Traders bought the dip near its long-term up trend of higher lows. Now URI is testing resistance at its all-time highs and resistance at the $115.00 level.

We are suggesting a trigger to buy calls at $115.25.

Trigger @ $115.25

- Suggested Positions -

Buy the DEC $120 call (URI141220C120) current ask $5.30

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

A Risk On Day

by James Brown

Click here to email James Brown

Editor's Note:

Lack of new headlines on the Ukraine-Russian conflict left traders in a bullish mood on Monday.

EXPE hit our entry trigger.


Current Portfolio:


CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 67.99 change: +0.75

Stop Loss: 61.95
Target(s): To Be Determined
Current Option Gain/Loss: + 9.8%
Average Daily Volume = 1.26 million
Entry on August 14 at $66.55
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/18/14: Biotech stocks continued to rally on Monday and BMRN added +1.1%. I don't see any changes from my earlier comments. Patient traders may want to wait for a dip near $66.00 as an alternative entry point.

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.

- Suggested Positions -

Long Oct $70 call (BMRN141018C70) entry $2.55*

08/14/14 triggered @ 66.55
*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


Concur Technologies - CNQR - close: 99.99 change: +1.48

Stop Loss: 96.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 576 thousand
Entry on August -- at $---.--
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/18/14: CNQR displayed some relative strength today with a +1.5% gain but shares did struggle with round-number resistance at the $100.00 mark. Our suggested entry point is $100.50.

Earlier Comments: August 16, 2014:
CNQR is in the technology sector. The company provides travel and expensive management solutions. The company was founded back in 1993. Their focus is helping companies control travel costs. The business has been growing over 23,000 customers and over 25 million users.

The company press release describes Concur as "the leading provider of spend management solutions and services in the world, helping companies of all sizes transform the way they manage spend so they can focus on what matters most. Through Concur's open platform, the entire travel and expense ecosystem of customers, suppliers, and developers can access and extend Concur's T&E cloud. Concur's systems adapt to individual employee preferences and scale to meet the needs of companies from small to large."

There is no denying that it has been a rocky year for CNQR investors. The stock struggled with resistance near $130.00 for over a month earlier this year. When the momentum names corrected lower in March shares of CNQR were crushed. The stock produced a two-month retreat down to $75.00.

Meanwhile earnings continued to improve. When CNQR reported earnings on April 29th they beat estimates by six cents and guided higher for the second quarter. Their most recent earnings report was August 4th. Wall Street expected a profit of $0.16 on revenues of $175.1 million. CNQR delivered a profit of $0.25 with revenues rising +28.6% to $178.4 million. Management also raised their 2014 guidance.

Stocks analysts are starting to notice and a few of them have upgraded their price targets on CNQR into the $110-115 region. If shares of CNQR can breakout past resistance near $100 and its 200-dma then it might sprint towards $110. That's because the stock has a significant chunk of short interest.

The most recent data listed short interest at 12.2% of the relatively small 55.5 million share float. Since the $100 mark is significant resistance a breakout could definitely spark some short covering. The point & figure chart is already bullish and projecting at $108 target.

Tonight we are suggesting a trigger to buy calls at $100.50.

Trigger @ $100.50

- Suggested Positions -

Buy the NOV $105 call (CNQR141122C105) current ask $5.00

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


Expedia Inc. - EXPE - close: 86.04 change: +0.67

Stop Loss: 81.80
Target(s): To Be Determined
Current Option Gain/Loss: - 9.0%
Average Daily Volume = 2.3 million
Entry on August 18 at $86.25
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/18/14: EXPE spiked past resistance near $86.00 this morning. Our suggested entry point to buy calls was hit at $86.25. The intraday pullback from its highs is a bit troubling so readers might want to wait for a new rally past $86.50 before initiating new positions.

Earlier Comments: August 16, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a serious trend of beating analysts' estimates with strong profit and revenue growth. EXPE last reported earnings on July 31st. Analysts were expecting a profit of $0.75 a share on revenues of $1.44 billion. EXPE blew those numbers away with a profit of $1.03 a share. Revenues soared +24.0% to $1.49 billion. That's up from $1.2 billion the prior quarter. EXPE has now delivered double-digit year over year revenue growth for six quarters in a row.

EXPE's bookings continue to soar. Gross bookings were up +29%. Domestic gross bookings were up +35% and international gross bookings rose +21%. Both hotel revenues and air travel revenues were up more than +20% each.

Last time we traded EXPE we noted that Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014. In the second quarter Appaloosa added another 201,000 shares of EXPE.

The stock popped on its earnings results but have since spent the last two weeks digesting gains in a sideways consolidation. Now it looks like EXPE is poised to breakout and could make a run towards the $95-$100 area. The point & figure chart is bullish and forecasting at $105 target.

Tonight we are suggesting a trigger to buy calls at $86.25.

- Suggested Positions -

Long NOV $90 call (EXPE141122C90) entry $4.40

08/18/14 triggered @ 86.25
Option Format: symbol-year-month-day-call-strike


Gilead Sciences, Inc. - GILD - close: 100.72 change: +1.23

Stop Loss: 93.45
Target(s): To Be Determined
Current Option Gain/Loss: +110.8%
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:
08/18/14: Biotech stocks continued to show leadership on Monday and GILD managed to close above potential resistance at the $100 mark.

Shares remain short-term overbought and could be due for a dip.

I am not suggesting new positions at this time.

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*

08/16/14 new stop @ 93.45
Investors will want to seriously consider taking profits now with GILD testing potential resistance at the $100.00 mark.
08/14/14 new stop @ 89.95
Investors may want to consider taking money off the table as GILD nears the $99-100 zone.
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


Isis Pharmaceuticals - ISIS - close: 35.96 change: -0.17

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Average Daily Volume = 1.5 million
Entry on August 13 at $35.25
Listed on August 12, 2014
Time Frame: 12 to 15 weeks
New Positions: see below

Comments:
08/18/14: ISIS underperformed both its peers and the broader market with a -0.4% decline Monday. I don't see any headlines to account for the relative weakness. Shares do remain just below potential resistance in the $37-38 zone.

Earlier Comments: August 12, 2014:
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.

- Suggested Positions -

Long 2015 Jan $40 call (ISIS150117C40) entry $4.10

08/13/14 triggered @ 35.25
Option Format: symbol-year-month-day-call-strike


Transportation ETF - IYT - close: 150.63 change: +2.49

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: +30.4%
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:
08/18/14: Plunging oil prices continue to buoy the transportation stocks. The IYT shot higher at the open and closed up +1.68%. This ETF is nearing what could be resistance at its July highs near $152.35.

I am not suggesting new positions at this time.

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: 111.16 change: +0.56

Stop Loss: 107.40
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Average Daily Volume = 2.5 million
Entry on August 15 at $110.50
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
08/18/14: LYB spiked to a new all-time high this morning. Shares pulled back midday to fill the morning gap. Watch for broken resistance near $110.00 to act as new support.

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.

- Suggested Positions -

Long DEC $115 call (LYB141220C115) entry $2.50*

08/15/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 adjust the stop loss to $107.40 (trade not open yet)
08/14/14 LYB almost hit our trigger but failed at $110.49
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 85.58 change: +0.95

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +43.7%
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:
08/18/14: PANW did not see any follow through on Friday's bearish reversal candlestick. The stock popped this morning and closed up +1.1%. I would hesitate to launch new positions at the moment.

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*

08/13/14 new stop @ 79.90
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


U.S. Silica Holdings, Inc. - SLCA - close: 61.24 change: +0.68

Stop Loss: 57.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.42 million
Entry on August -- at $---.--
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/18/14: SLCA managed to outpace the major indices with a +1.1% gain. Yet shares remain under short-term resistance near $62.00.

We are suggesting a trigger to buy calls at $62.05.

Earlier Comments: August 13, 2014:
We are bringing SLCA back after some post-earnings volatility.

There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

SLCA's most recent earnings report was July 29th. Wall Street expected a profit of $0.47 a shares on revenues of $189.7 million. SLCA beat estimates with a profit of $0.55 and revenues soaring +58.5% from a year ago to $205.8 million.

The company said sales were up sharply both from a year ago and from the first quarter. Management raised its 2014 earnings guidance.

Currently shares of SLCA are hovering just below resistance in the $61.75 area. Tonight we're suggesting a trigger to buy calls at $62.05. We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

Trigger @ 62.05

- Suggested Positions -

Buy the DEC $65 call (SLCA141220C65)

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




PUT Play Updates


Currently we do not have any active put trades.