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Daily Newsletter, Tuesday, 11/4/2014

Table of Contents

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

Market Wrap

Oil Rout

by Jim Brown

Click here to email Jim Brown

Crude prices imploded again this week to crash below two-week support at $80 and dip to $75.84. This crushed the energy sector and weighed on the markets.

Market Statistics



(Be sure to check the bottom of this commentary for a special offer.)


The price of crude began falling on Monday after Saudi Arabia lowered prices for crude exported to the USA. Since Saudi Arabia produced 9.65 mbpd in October and they only exported 609,000 bpd to the U.S. there is a signal in this move. This is Saudi telling the world they are willing to sell oil at a lower price in order to maintain their market share.

It is also a warning to U.S. producers that Saudi can force them out of the business if they really wanted to slow U.S. production increases. Since the U.S. still imports 7.2 mbpd on average we are far from energy sufficient. You have to wonder about Saudi Arabia's thought process here. If we continue at the present rate of drilling our production is expected to rise from the current 8.97 mbpd to close to 10 mbpd by 2017 but that is the peak according to the EIA.

Production is rising today because we are drilling about 9,500 new wells per quarter. Unfortunately those shale wells decline in production by about 65% in the first year alone. The pace of well growth has to stay over that 9,500 per quarter level in order to stay ahead of the decline rate for production to increase. Once the prime areas in the various shale fields are drilled the pace of new wells is going to slow significantly. The wells outside the prime areas cost the same $8-$12 million per well but they produce a lot less. That means less wells will be drilled and there will be smaller rates of initial production. There are more than 1.1 million active producing wells in the U.S. and EVERY one of them declines in production capacity every year. If we don't keep drilling 9,500 wells a quarter the declines in the existing wells will overpower new production.

The EIA predicts shale production will peak in late 2016, early 2017 and then began a terminal decline. Saudi Arabia knows this so why are they causing market ripples today? One analyst said they could easily offset the decline in prices by pumping more oil. If they boost production from 9.6 mbpd to 10.0 mbpd their budget numbers are met and everyone continues life with slightly cheaper oil prices.

There are multiple reasons why Saudi Arabia could be taking this aggressive action. One is Iran. There is a rumor circulating that the six western nations are close to a deal on Iran's nuclear future that will be favorable to Iran. Saudi does not want Iran to have nuclear capabilities and they have expressed displeasure about the process. By crushing the oil sector they are sending a message to the U.S. and at the same time pressuring Iran with lower oil prices. The Iranian negotiations have a November 24th deadline. If Iran does get a new deal they could immediately ramp up production and that will also hurt oil prices. They are currently exporting 1.25 mbpd under the current sanctions but they could ramp up to 3.0 mbpd if the sanctions were lifted.

Secondly Russia is the second largest exporter of crude and some theorize President Obama has asked Saudi Arabia to force oil prices lower to punish Russia for the Ukraine invasion. Unfortunately U.S. relations with Saudi Arabia are at multi-decade lows and it is unlikely Saudi Arabia would take this kind of revenue hit just to please the USA.

This leaves a lot of analysts scratching their heads on why Saudi Arabia has undertaken this price crusade. The consensus opinion is that Saudi Arabia wants to slow production in the USA. If they can slow the U.S. drilling rate they slow the increase in production and may actually force a decline in production within 6-9 months.


Oil in the U.S. costs a lot to produce. Some of the shale areas have production costs up to $80 per barrel but that is not the real number. The oil from these shale areas is heavily discounted because of the lack of pipelines and cost of rail transport to get it to market. For instance Bakken crude hit $69 today and Permian crude dipped to $73 and those prices will decline further in the days ahead. Both areas would like to sell their oil for WTI prices but they can't. That means a lot of those wells are already losing money on every barrel. If prices remain low the pace of new wells will decline significantly.


While the energy sector is getting crushed the drop in gasoline prices will benefit retailers this holiday season. The national average declined to $2.97 per gallon and is expected to continue falling to something in the $2.85 range. With U.S. consumers buying 2.6 billion gallons of gasoline a week a 10 cent drop in gas prices saves consumers and businesses $260 million a week in fuel expenses. The national average was $3.64 per gallon back on June 23rd. That -67 cent decline is saving consumers a whopping $1.74 billion a week compared to June prices. The drop in stock prices is painful but the benefit to the economy is huge because every penny of that savings is going right into the pockets of retailers. Very little of that is going into a savings account.

In economic news the Intuit Small Business Employment Index rose +0.07% and the strongest gain in four months. Companies with less than 20 workers added about 15,000 net positions in October. Average worker compensation rose +0.08% to $2,774 or about $33,300 a year. The report was ignored since the ADP Employment report is due out on Wednesday morning.

The ISM - NY headline number rose slightly from 654.8 to 657.2 and the slowest pace in six months. The quantity of purchase component fell from 60.5 to 53.1. The current conditions component fell from 63.7 to 54.8. This was not a good report even though it showed that business activity in New York City was still improving.

The International Trade deficit declined from -$40.1 billion to -$43.0 billion in September. Exports fell -1.5% to $195.6 billion, a decline of $3 billion from August. Imports were flat at $238.6 billion.

Factory Orders fell -0.6% in September after -10.1% decline in August. Analysts had expected a +0.5% increase. Durable goods orders fell -1.1% while capital goods orders fell -4.1%. Core capital goods fell -1.6%. If it were not for a spike of +7.4% in defense orders it would have been a very ugly report.

The big report for Wednesday is the ADP Employment with expectations for +220,000 new jobs. After listening to all the big retailers and shippers talking about how many temp workers they are hiring I would not be surprised with an upside surprise in both the ADP report and the Nonfarm Payrolls on Friday. It seems like nearly every news item has the retailers hiring more this year than last. The nonfarm numbers contain seasonal adjustments based on the long term averages but a surge in seasonal hiring over those adjustments could give us a big gain. However, these reports are for October and the majority of hiring is not done until November so any real surprise could still be a month away. The Nonfarm payroll forecast is for a gain of +233,000 jobs, down from +248,000 in September.

The ISM Nonmanufacturing report is expected to decline slightly but after the upside surprise in the manufacturing report on Monday we could see strength in services as well.

A challenge on Thursday is the ECB rate decision. There are some rumblings about Mario Draghi's management style and whether he is trying to do too much with the new QE process. If the ECB/Draghi says something the market does not like on Thursday we could see some market volatility.


The big stock news for the day was Alibaba earnings. BABA reported revenues that rose +53.7% and far better than Amazon's 20% growth rate. However, margins declined from 54.4% to 50.5% and still a number any retailer would kill to have. Revenue rose to $2.74 billion to beat estimates slightly. Gross merchandise volume rose +48.7% to $90.5 billion. Active users rose +53% to 307 million. Mobile revenue was 10 times higher than the year ago period and accounted for 22% of revenues. Adjusted earnings of 45 cents were in line with estimates.

The gross merchandize volume number is one you won't see on Amazon. Alibaba does not own the merchandise it sells. Amazon inventories merchandise and then sells it so the revenue number includes the sales price. Alibaba puts buyers and sellers together and takes a commission so they don't have the costs associated with the inventory model. The company said it was in acquisition mode to expand its customer base and to expect margins to shrink while they added to the business model. This brought back fears of an Amazon like model of perpetual shrinking margins and the stock opened down after the earnings. After investors had time to think about the strong growth the buyers appeared and shares rose to gain +$4.27 for the day.


Softbank (SFTBY), which owns 34% of Alibaba, fell -6% today despite the rise in BABA shares. The Softbank ownership in BABA is worth roughly $90 billion at today's closing price and SFTBY only has an $83 billion market cap and they own more than 1,500 companies. Unfortunately one of those companies is Sprint (S) and that is what dragged them lower today. Softbank had to lower annual profit estimates by -$879 million to $7.9 billion because of problems at Sprint. That was its first profit decline in 9 years. They acquired Sprint for $22 billion in 2013.

Sprint shares declined -16.4% to $5.17 after reporting an earnings miss on Monday and saying it was cutting 2,000 jobs. The carrier lost subscribers for the 11th straight quarter. Sprint warned it was slashing profit estimates by $1 billion to $5.9 billion for 2014. Mobile phone customers declined by -272,000 in during the quarter and worse than the -203,000 analysts expected. Sprint is going to slash $1.5 billion in annual costs. The company posted a loss of -$765 million.



Priceline (PCLN) was the biggest disappointment of the day with a -$100 drop after reporting earnings that fell short of estimates. The company reported adjusted earnings of $22.16 compared to estimates for $21.08. Revenue of $2.84 billion also beat. However, they guided to earnings of $9.40 to $10.10 for Q4 and analysts were expecting $10.91. Bookings in Q3 slowed from 34% growth to 28% growth. U.S. bookings collapsed from 20.6% to 9.9% growth. Shares were crushed.


After the bell today Activision (ATVI) reported adjusted earnings of 23 cents compared to estimates of 12 cents. Revenue rose +78%. They raised estimates for Q4 from $1.29 to $1.35 on $4.8 billion in revenue. They gained 7.4 million subscribers to World of Warcraft during the quarter. The latest installment of "Call of Duty" was released on Monday.


FireEye (FEYE) reported an adjusted loss of 51 cents for the quarter compared to estimates for a loss of 56 cents. They raised estimates for a Q4 loss in the range of 46-50 cents and analysts were expecting 56 cents. They revised the full year outlook to a loss of $2.05-$2.15 and analysts were expecting -$2.13. Q3 revenue more than doubled from $42.7 million to $114.2 million compared to estimates for $116 million. So they doubled revenue but still missed analyst estimates. Shares declined -$7 in afterhours to $27.


Potbelly (PBPB) reported earnings of 9 cents compared to estimates of 7 cents. Revenue rose +8.6% to $84.7 million and beating estimates slightly. They reaffirmed guidance for the full year at 18-21 cents compared to estimates for 19 cents. They plan on opening 40-48 new stores and see flat to low single digit same store sales. The lackluster forecast kept shares flat after the close.


TripAdvisor (TRIP) reported adjusted earnings of 48 cents that was well short of estimates of 60 cents. Revenue of $354 million did beat estimates of $347.7 million. Shares crashed -12% on the news.


Zulily (ZU) reported earnings of 2 cents compared to expectations for a loss of 4 cents. Revenues rose +71.5% to $285.8 million. Active customers rose +72% to 4.5 million. Orders increased +62% to 5.9 million. Nearly 50% of orders were placed from a mobile device, up from 45% in Q3-2013. Guidance was in line with estimates. Shares declined -$6 in afterhours.


Earnings out on Wednesday include Qualcomm, Tesla, Whole Foods Market, NuSkin, SolarCity and Symantec. The rest of the week is rather light since this is the last material week in the Q3 earnings cycle. Berkshire on Friday will be the highpoint.


Markets

The markets are performing a lot better than I thought they would when I wrote the weekend commentary. I was almost sure the Nasdaq would retreat from the Friday close and suffer several days of consolidation after a major run to a new high. The Nasdaq did decline but not nearly as much as I expected. However, the week is not over.

I chalked up the market strength on Monday to month end retirement funds being put to work. Today the tech sector had every opportunity to collapse with the big losses in PCLN, NFLX, WYNN, etc. A -15 point loss is not a collapse. Even with some of the big losses after the close the Nasdaq futures are only down -2 points. I would say that was pretty good relative strength.

We now have three bearish candles at the 4,625 level but the Nasdaq is still clinging to its highs. The intraday low was -30 points under the close so a decent rebound did occur. The Nasdaq dipped to 4,594 and well below Monday's high of 4,654. Is that enough for a consolidation event? It could be but we won't really know until the end of the week.

Round number support at 4,600 is the level to watch followed by 4,525. Resistance is Friday's high of 4,641.



The Dow is doing amazingly well. The index closed at 17,380 and only -10 points below Friday's closing high. The dip on Monday to 17,366 was minimal and today's intraday dip to 17,278 was quickly bought once it became apparent it was not going any lower. The biggest problem for the Dow was the drop in oil prices. That caused declined in Chevron, Exxon and Caterpillar. IBM continues to bleed points and led the losers list. JP Morgan came under fire from another regulatory issue on currency trading and the bank took another monster charge.

The relative strength in the Dow after the big two week gain is impressive. If it can hold it another couple days the buyers should gain confidence and come off the sidelines.

Initial support is 17,335 followed by today's low at 17,278. Any decline under those levels would probably test 17,000.



The S&P showed a little more weakness than the Dow simply because there are a lot more energy stocks in the S&P. That was the major drag and kept the index was recovering the 2,020 level from Monday. The drop in crude is overdone and we could expect to see at least a dead cat bounce in some energy names on Wednesday.

Like the other indexes nothing has really changed since Friday. We are poised on the cliff face and can either step off and sink or catch a bid and fly from here.

Support is 2003 and resistance the Friday close at 2,018.


Wednesday could be interesting depending on the election outcome and the worry over the ECB news due out on Thursday. Add in the ADP Employment numbers and we still have the potential for profit taking or for a breakout to the upside. The negative earnings on Tuesday have failed to depress the markets with the damage inflicted on single stocks rather than the market.

I would keep some cash in reserve in case we do see some profit taking. I believe the market will eventually move higher so I am in buy the dip mode until proven wrong.

Important Limited Time Offer

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 17 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with $50 off for anyone that subscribes this week. Once the special actually begins on Black Friday the price will revert to the normal price.

CLICK HERE FOR $50 OFF EOY SPECIAL

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Option Plays

Relative Strength In Restaurants

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

DineEquity, Inc. - DIN - close: 91.38 change: +1.55

Stop Loss: 87.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 154 thousand
Entry on November -- at $---.--
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Restaurant stocks were showing relative strength today. Better than expected earnings results from the likes of Red Robin (RRGB) and Bloomin Brands (BLMN) helped buoy the group. Additional stocks in this industry showing relative strength on Tuesday are: BWLD, PNRA, JACK, EAT, SONC, TXRH, KKD, DNKN, CAKE, DRI, and PBP. The one we like tonight is DIN.

According to a company press release, "Based in Glendale, California, DineEquity, Inc., through its subsidiaries, franchises and operates restaurants under the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,600 restaurants combined in 19 countries, over 400 franchisees and approximately 200,000 team members (including franchisee- and company-operated restaurant employees), DineEquity is one of the largest full-service restaurant companies in the world."

The company has seen success with a steady improvement in earnings. DIN has beaten Wall Street's estimates on both the top and bottom line three quarters in a row. Their most recent report was October 28th. Analysts were looking for a profit of $1.05 a share on revenues of $157.2 million. DIN served up $1.14 per share with revenues climbing to $162.85 million.

The company saw domestic system-wide same-store sales up +2.4% at IHOP and +1.7% at Applebee's. Management then raised their sales guidance on both Applebee's and IHOP. DIN also raised its dividend by 17% to $0.875 per share and they boosted their stock buyback program from $40 million to $100 million.

The restaurant industry should be a major beneficiary of the drop in oil prices. Lower gasoline prices at the pump mean consumers have more spending money and will likely burn a lot of that cash eating at restaurants.

Shares broke out to new highs on this earnings report and bullish guidance. Today the stock is at all-time highs. The point & figure chart is bullish and forecasting a long-term target at $118.00.

Tonight we are suggesting a trigger to launch bullish positions at $91.55.

Trigger @ $91.55

- Suggested Positions -

Buy the DEC $95 call (DIN141220c95) current ask $1.05

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Slip As Oil Sinks Again

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market is still digesting last week's big gains. The major indices drifted lower while crude oil accelerated its decline.

ULTA hit our stop loss. FMC hit our entry trigger.


Current Portfolio:


CALL Play Updates

Acuity Brands, Inc. - AYI - close: 138.29 change: +0.02

Stop Loss: 135.25
Target(s): To Be Determined
Current Option Gain/Loss: + 7.8%
Average Daily Volume = 485 thousand
Entry on October 28 at $136.25
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: AYI is still consolidating sideways and closed virtually unchanged on the session. I am not suggesting new positions at this time.

Earlier Comments: October 27, 2014:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

- Suggested Positions -

Long DEC $140 call (AYI141220c140) entry $3.80

11/01/14 new stop @ 135.25
10/28/14 triggered @ $136.25
Option Format: symbol-year-month-day-call-strike


Costco Wholesale - COST - close: 136.55 change: +2.28

Stop Loss: 130.75
Target(s): To Be Determined
Current Option Gain/Loss: +140.2%
Average Daily Volume = 1.9 million
Entry on October 30 at $132.25
Listed on October 29, 2014
Time Frame: Exit prior to earnings in December
New Positions: see below

Comments:
11/04/14: Positive analyst comments from Deutsche Bank regarding COST's October sales helped drive shares of COST higher today. The stock soared to a +1.69% gain and a new record close.

Our option has more than doubled in value. Investors may want to take some money off the table.

I am not suggesting new positions at the moment.

Earlier Comments: October 29, 2014
COST is part of the services sector. The company runs a discount, membership sales warehouse. The company's latest earnings report said Costco currently operates 664 warehouses, including 469 in the United States and Puerto Rico, 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, six in Australia and one in Spain.

The company has struggled to hit Wall Street's bottom line estimates for over a year but steady improvement in their same-store sales have helped drive the stock higher. A strong back to school shopping season and higher membership fees fueled a better than expected quarterly report.

COST reported their Q4 numbers on October 8th. After missing estimates for five quarters in a row the company finally beat estimates. Analysts were expecting a profit of $1.52 a share on revenues of $35.3 billion. COST delivered $1.58 a share with revenues up +9.3% to $35.52 billion. The net profit number was up +13% and gross margins improved 15 basis points.

COST also reported that their e-commerce sales continue to grow at a brisk pace and their online sales rose +18% in their fourth quarter. Same-store (comparable store) sales remain a key metric to watch. COST's Q4 same-store sales were up +4% yet if you back out falling gasoline prices and currency effects their comparable store sales were up +6% for the quarter versus +4.5% a year ago. Membership renewal rates remain very strong at 91% in the U.S. and 87% globally. COST plans to open up to eight more locations before the end of the 2014 calendar year.

The company also recently announced their first foray into China. COST has entered the Chinese market with an online store through Alibaba Group's (BABA) Tmall Global platform.

The holiday shopping season is almost upon us with less than 60 days before Christmas. COST is poised to do well since the company caters to the higher-end more affluent customer.

Shares are hovering just below the $132.00 level. Tonight we are suggesting at trigger to buy calls at $132.25. We will plan on exiting positions prior to their December earnings report.

- Suggested Positions -

Long DEC $135 call (COST141220c135) entry $1.54

11/01/14 new stop @ 130.75
10/30/14 triggered @ 132.25
Option Format: symbol-year-month-day-call-strike


FedEx Corp. - FDX - close: 166.96 change: -0.24

Stop Loss: 163.45
Target(s): To Be Determined
Current Option Gain/Loss: + 94.3%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: Another big drop in crude oil today failed to do much for shares of FDX. The stock's early morning gains faded. FDX seems to have found some resistance in the $168.50-169.00 zone.

I am not suggesting new positions at this time.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30*

11/01/14 new stop @ 163.45
10/28/14 new stop @ 162.65, traders may want to take profits now!
10/25/14 new stop @ 157.85
10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
Option Format: symbol-year-month-day-call-strike


Gilead Sciences Inc. - GILD - close: 109.72 change: -0.26

Stop Loss: 107.65
Target(s): To Be Determined
Current Option Gain/Loss: -44.5%
Average Daily Volume = 13.8 million
Entry on October 31 at $115.90
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: Biotech stocks as a group have retreated lower the last two days and they quietly churned sideways today. GILD is no exception and the stock hovered near the $110 level on Tuesday.

I'd prefer to see a bounce from current levels before considering new bullish positions.

Earlier Comments: October 30, 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. Their Q2 report on July 23rd was a blowout. 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.

After the Q2 earnings surprise the market's expectations for GILD were a lot higher this time around. GILD reported earnings on October 28th. They missed Wall Street's EPS number by 6 cents with a profit of $1.84 per share. Quarterly revenues soared +117% to $6.04 billion, which did surpass expectations. Sovaldi sales were a disappointment at $2.80 billion against the street's estimates for $3.1 billion. The EPS number was also negatively impacted by the Obamacare's Branded Prescription Drug Fee.

Most of the analyst commentary on GILD following the third quarter results remain positive. The market is looking forward to GILD's next treatment, Harvoni, which is another drug for chronic hepatitis C infection in adults. Harvoni appears to be off to a strong start, which won FDA approval on October 10th.

Technically shares of GILD have seen a huge rebound from the market-induced October sell-off. A few days ago the stock broke out past resistance near $110 and traders bought the dip. The stock was showing relative strength today with a +3.1% gain. The Point & Figure chart is very bullish and forecasting at long-term target of $159.00.

Tonight we are suggesting a trigger to open bullish positions at $114.45. We'll start this trade with a stop loss at $107.65.

- Suggested Positions -

Long 2015 Jan $120 call (GILD150117c120) entry $5.50

10/31/14 triggered on gap higher at $115.90, suggested trigger was $114.45
Option Format: symbol-year-month-day-call-strike


Keurig Green Mountain, Inc. - GMCR - close: 152.11 change: +0.21

Stop Loss: 143.25
Target(s): To Be Determined
Current Option Gain/Loss: +46.6%
Current Option/Gain loss if you sold the NOV $160 call: +673.5%
Average Daily Volume = 1.68 million
Entry on October 28 at $145.75
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: see below

Comments:
11/04/14: Tuesday looked a lot like Monday for GMCR. Shares quietly drifted sideways in a narrow range.

I am not suggesting new positions at this time.

Earlier Comments: October 25, 2014:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

- Suggested Positions -

Long NOV $150 call (GMCR141122C150) entry $6.17

- plus -

(On November 3rd, 2014, Sell the November $160 call)
Short NOV $160 call (GMCR141122C160) sold short @ $5.00

11/03/14 Sold short the NOV $160 call
11/01/14 Strategy Update: Sell the Nov $160 call on Monday morning, November 3rd
10/30/14 new stop @ 143.25
10/28/14 triggered @ $145.75
Option Format: symbol-year-month-day-call-strike


iShares Transportation ETF - IYT - close: 157.54 change: +0.55

Stop Loss: 151.85
Target(s): To Be Determined
Current Option Gain/Loss: +302.9%
Current Option/Gain loss if you sold the NOV $159 call: +756.2%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/04/14: Crude oil plunged to new four-year lows on Tuesday. The IYT briefly spiked to a new record high before paring its gains. This ETF remains short-term overbought.

We have less than three weeks left on our November options.

I'm not suggesting new positions at this time.

Earlier Comments: October 11, 2014:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40

- plus -

(sell short the Nov $159 call on October 29th)
Short NOV $159 call (IYT141122c159) entry $1.80

10/29/14 IYT gapped open higher at $157.44 (+56 cents)
10/28/14 Strategy Update: new stop @ 151.85, Plus, we want to sell the November $159.00 call (current bid is $1.75).
10/25/14 new stop @ 148.65, traders may want to take some money off the table now
10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
Option Format: symbol-year-month-day-call-strike


ServiceNow, Inc. - NOW - close: 66.88 change: +0.67

Stop Loss: 63.45
Target(s): To Be Determined
Current Option Gain/Loss: -19.2%
Average Daily Volume = 1.4 million
Entry on October 31 at $67.46
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: NOW found support near $66.00 midday. Shares managed an afternoon rebound to close up +1.0%.

Earlier Comments: October 30, 2014:
NOW is in the technology sector. The company provides cloud-based IT solutions across most of the world. According to the company website, "ServiceNow is the enterprise IT cloud company. We transform IT by automating and managing IT service relationships across the global enterprise. Organizations deploy our service to create a single system of record for IT and automate manual tasks, standardize processes, and consolidate legacy systems. Using our extensible platform, our customers create custom applications and evolve the IT service model to service domains inside and outside the enterprise."

NOW is less than three years old as a public company. Their IPO price was $18.00 and they opened at $23.75 back June 2012. It's been a roller coaster ride for investors but the trend is higher. NOW is one of the fastest-growing enterprise software companies. They're stealing market share from older, larger firms like CA Technologies, Hewlett-Packard, and BMC Software.

NOW is developing a very bullish pattern of strong revenues and raising guidance. The last four quarterly reports in a row have seen NOW meet or beat Wall Street's earnings estimate, beat the revenue estimate, and raise guidance every time.

Their most recent quarterly report was October 22nd. Wall Street expected a profit of $0.01 per share on revenues of $174.4 million. NOW delivered $0.03 with revenues rising +60% to $178.7 million. They added 150 new customers in the quarter, which puts their total at 2,514 clients. Their renewal rate is 98%. NOW raised their Q4 guidance above Wall Street's estimates.

NOW's President and CEO Frank Slootman said, "We had a solid third quarter as we continued to help our customers extend service management across the enterprise. The opportunities for us to expand within IT, as well as deliver value throughout the business, significantly broaden our addressable market and growth potential." Michael Scarpelli, their CFO, said, "Our strong third quarter performance included a record 11 deals greater than $1 million in annual contract value. We also achieved our first quarter of billings greater than $200 million."

Technically shares of NOW have broken out past resistance in the $65.00 area. The Point & Figure chart is bullish and forecasting at $74 target. The highs this past week have been near $67.00. Tonight I am suggesting a trigger to buy calls at $67.25.

- Suggested Positions -

Long DEC $70 call (NOW141220c70) entry $2.85

10/31/14 triggered on gap higher at $67.46, suggested entry was $67.25
Option Format: symbol-year-month-day-call-strike


NetEase, Inc. - NTES - close: 94.07 change: +0.24

Stop Loss: 91.45
Target(s): To Be Determined
Current Option Gain/Loss: + 2.0%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: NTES tested short-term technical support at its 10-dma and bounced.

The company has earnings coming up on November 12th. We will plan on exiting the 11th. That means we have five trading days left.

Earlier Comments: October 20, 2014:
NTES is in the technology sector. They are part of the Chinese Internet space. The company operates online video games, an Internet portal and email services in China. Technically the stock has been outperforming most of its peers in the Chinese Internet industry (compare to the performance of the KWEB ETF of which NTES is a component).

Their most recent earnings report was healthy. NTES' quarterly profit was in-line but revenues were up +21% to $475.8 million, beating Wall Street's estimates. NTES' Chief Executive Officer Mr. Ding said, "This quarter we have achieved in three business areas MoM and YoY increase revenue total revenue growth of 17.2%, an increase of 22.3 percent compared with the same period last year, gaming revenues grew 13.1%, advertising services revenue grew 42.9%, mailboxes, electricity suppliers and other business income increased 201.5 percent."

After an initial rally on these results NTES share price stalled out at resistance near $90-91. Here we are more than two months later and NTES is testing resistance near $90-91 again. This time the point & figure chart is suggesting at $102 price target.

We are suggesting a trigger to buy calls at $91.15.

- Suggested Positions -

Long NOV $95 call (NTES141122C95) entry $2.45

11/01/14 new stop @ 91.45
10/23/14 new stop @ 89.40
10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike


The Sherwin-Williams Co. - SHW - close: 228.27 change: -1.01

Stop Loss: 224.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 526 thousand
Entry on November -- at $---.--
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
11/04/14: SHW briefly traded at a new high but failed to hit our suggested entry point at $231.00. We're still on the sidelines.

Earlier Comments: November 1, 2014:
It's not very often you see a company about to celebrate its 150th birthday. For SHW that will be the year 2016. The company has been in business since 1866. The Company's core business is the manufacture, distribution and sale of coatings and related products. SHW is headquartered in Cleveland, Ohio. They sell through over 4,100 company-operated stores. Their global group has sales in more than 115 countries. Sherwin-Williams is also a very well known dividend payer and has annually increased dividends since 1979.

The slow and steady economic improvement in the U.S. has been beneficial. The real estate market has also helped SHW. New homes need new paint. The pace of new home sales in the U.S. hit six-year highs last month. While home sales do tend to slow down a bit in the winter months SHW should benefit from lower input costs. Crude oil and natural gas are big components in the paint and coatings industry. The severe drop in oil the last few months is a blessing for SHW.

The company raised their earnings guidance back in July. They issued bullish guidance again in their latest quarterly report. SHW announced earnings on October 28th. Wall Street was expecting a profit of $3.22 per share on revenues of $3.18 billion. SHW said their earnings rose +31.4% to a record-setting $3.35 per share. Revenues were up +10.6% at $3.15 billion, which missed the estimate.

SHW's remodeling business saw growth. The real driver was paint sales. Their paint stores account for the lion's share of sales, which saw revenues up +20%. SHW also purchased 2.0 million shares of their stock last quarter and still have 6.8 million yet to buy in their stock buy back program.

Management was optimistic. SHW's Chairman and CEO MR. Christopher Connor, said,

"We are pleased to report record sales and earnings per share in the third quarter and first nine months of 2014 on the continued positive sales volume and strong operating results of our Paint Stores Group. The Paint Stores Group architectural volume growth was positive across all end market segments. The Comex acquisition continues to perform better than expected in the year. Our Consumer Group improved its operating results through higher volume sales and operating efficiencies. Our Global Finishes Group continues to improve its operating margins through improved operating efficiencies."

Management raised their 2014 EPS guidance above Wall Street's estimates. They also raised their revenue guidance but this was only in-line with consensus. SHW now expects Q4 sales in the +6% to +8% range. They expect earnings to be in the $1.30-1.40 range versus $1.14 in the fourth quarter of 2013.

The stock's relative strength has driven shares to new all-time highs and a +25% gain in 2014. The point & figure chart is bullish and forecasting at long-term target at $286.

Tonight we are suggesting a trigger to buy calls at $231.00.

Trigger @ $231.00

- Suggested Positions -

Buy the 2015 Jan $240 call (SHW150117c240)

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


Semiconductor ETF - SMH - close: 51.69 change: -0.02

Stop Loss: 48.85
Target(s): To Be Determined
Current Option Gain/Loss: +145.4%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: The rally in the semiconductor stocks paused on Tuesday. The SMH drifted sideways in a relatively narrow range.

I am not suggesting new positions.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

11/01/14 new stop @ 48.85
10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike


United Rentals, Inc. - URI - close: 109.60 change: -2.21

Stop Loss: 104.90
Target(s): To Be Determined
Current Option Gain/Loss: -13.3%
Average Daily Volume = 1.6 million
Entry on November 03 at $110.55
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: Tuesday proved to be a rocky session for shares of URI. The stock gapped open lower and then dropped toward short-term support near its 10-dma. URI hit an intraday low of $107.63 before paring its losses.

I don't see any news behind today's relative weakness. Investors may want to wait for a new rally above $110.50 before considering new bullish positions.

Earlier Comments: November 1, 2014:
URI is a company that is gaining market share. Traditionally the equipment rental business 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. The last couple of quarterly reports have been strong. In the July 16th report URI beat Wall Street estimates with a profit of $1.65 per share on revenues of $1.399 billion. That was a +47% improvement from a year ago and management raised their guidance.

The most recent report was October 15th. Again URI beat estimates. Analysts were looking for a profit of $2.12 per share on revenues of $1.51 billion. URI delivered $2.20 per share with revenues up +17.8% to $1.54 billion. This was a +34% jump in URI's earnings from a year ago. Margins hit a record +49.3% in the third quarter. They reaffirmed their guidance.

URI's CEO Mr. Michael Kneeland commented on his company's report and said,

"The third quarter provided further confirmation that our strategy and the North American construction recovery are both solidly on track. Our end markets are continuing to rally, creating numerous opportunities for well-managed, profitable growth. We reported a robust 16% increase in rental revenue for the quarter— and more importantly, the discipline behind that growth is evident in our record EBITDA margin and gains in volume, utilization and rates."

Technically the stock experienced a painful correction from $120 to $90 during the market's pullback in September-October. The bounce back stalled at resistance near $110 and its 100-dma and 50-dma. However, after a two-week consolidation in the $105-110 zone, shares of URI now look poised to breakout. Shares were showing relative strength on Friday with a +3.7% gain.

The 50-dma is directly overhead at $110.17 and the intraday high on Friday was $110.39. Tonight we are suggesting a trigger to buy calls at $110.55.

- Suggested Positions -

Long 2015 Jan $115 call (URI150117c115) entry $4.50

11/03/14 triggered @ 110.55
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

FMC Corp. - FMC - close: 55.78 change: -0.48

Stop Loss: 58.85
Target(s): To Be Determined
Current Option Gain/Loss: -7.6%
Average Daily Volume = 1.42 million
Entry on November 04 at $55.85
Listed on November 03, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/04/14: Our new bearish play on FMC has been triggered. The stock continued to sink and hit our suggested entry point at $55.85. I would still consider new positions now. More conservative traders might want to wait for a breakdown under $55.00 instead.

Earlier Comments: November 3, 2014:
FMC is in the basic materials sector. They are a diversified chemical company with agricultural chemicals, minerals, and health and nutrition businesses.

It has been a rough year for shareholders as FMC peaked in March this year and has been sliding lower every since. That's because the earnings picture has been deteriorating. You can see on the daily chart below where FMC issued an earnings warning in June. Then when they reported earnings in late July they missed estimates. It's not great when you warn about earnings and still miss Wall Street's lowered estimates.

FMC's most recent earnings report was October 29th. The company missed on both the top and bottom line. Analysts were expecting a profit of 96 cents a share on revenues of $1.06 billion. FMC only delivered 95 cents with revenues of $1.02 billion. The biggest part of their business, the Agricultural Solutions, which represents nearly half of FMC's sales, reported a small +2% revenue growth from a year ago.

In the company press release, Pierre Brondeau, FMC president, CEO and chairman, said: "In the third quarter, market dynamics continued to affect our portfolio. Agricultural markets were impacted by multiple factors around the world, a softening of demand in China affected parts of our Health and Nutrition portfolio, and Argentina continued to weigh on Lithium's results." Brondeau also noted they are concerned over some beverage products in China that have seen two quarters in a row of declining demand.

The weakness in shares of FMC have produced a -24% decline in 2014 versus the S&P 500's +10% gain. Meanwhile FMC's point & figure chart is suggesting the selling will continue and is pointing to a $25.00 target.

Tonight we are suggesting a trigger to buy puts at $55.85. More conservative investors might want to wait for a breakdown under $55.00 instead.

- Suggested Positions -

Long 2015 Jan $55 PUT (FMC150117P55) entry $1.95

11/04/14 triggered @ $55.85
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

ULTA Salon - ULTA - close: 120.11 change: +0.20

Stop Loss: 117.85
Target(s): To Be Determined
Current Option Gain/Loss: -36.2%
Average Daily Volume = 925 thousand
Entry on October 29 at $121.75
Listed on October 28, 2014
Time Frame: Exit PRIOR to earnings on December 4th
New Positions: see below

Comments:
11/04/14: ULTA ended the day with a gain but shares were weak this morning. The stock was showing relative weakness this morning and dipped toward its 20-dma and 30-dma near $117.00. Our stop loss was hit at $117.85.

- Suggested Positions -

DEC $125 call (ULTA141220C125) entry $6.20 exit $3.95 (-36.2%)

11/04/14 stopped out
11/01/14 new stop @ 117.85
10/29/14 triggered @ 121.75
Option Format: symbol-year-month-day-call-strike

chart: