Option Investor

Daily Newsletter, Saturday, 5/31/2014

Table of Contents

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

Market Wrap

Sell In May, No Way

by Jim Brown

Click here to email Jim Brown

They tried to sell them off three times in early May but the bulls won the tug of war.

Market Statistics

The first three weeks of May were really choppy for the Dow, S&P and Nasdaq and really ugly for the Russell 2000. The Russell dipped to -10% from the highs while the S&P only managed about a -3% dip. Once it became apparent the Russell was not going lower the big cap averages began to recover and grind higher. The S&P added +55 points since the low on May 20th to close at another new high on Friday at 1,924.

The S&P managed to end May with a +2.1% gain while the Dow gained only +0.8%. The Nasdaq 100 ($NDX) was the big winner with a +4.3% gain thanks to Apple while the Nasdaq Composite gained +3%. The Russell 2000 actually ended the month with a gain of +0.6% to close at 1,134 after dipping to 1,082 on the 15th.

If you sold in May and went away you would have missed a lot of stomach turning whipsaw events in the first two weeks and you would have missed a minor gain at the end depending on which market you bought.

Just because May is behind us does not mean the worst is over. In midterm election years June is the worst month of the year for the Dow and S&P and 10th worst month for the Nasdaq and Russell according to the Stock Trader's Almanac. Heading into June the Dow and S&P closed at new highs and the Nasdaq 100 is at a 14 year high. Do you buy the new highs or do you take some chips off the table?


The economics were light on Friday with only the final revision to Consumer Sentiment. The headline number dropped sharply from 84.1 in April to 81.9 in May. The present conditions component declined from 98.7 to 94.5, the weakest reading since November, and the expectations component slipped from 74.7 to 73.7.

Inflation is weighing on consumers with food prices up +4.5% annualized since February. That is the strongest acceleration in prices since July 2011. With producer prices still rising this will continue to flow through to consumers in the months ahead. Sentiment should begin to decline in the summer as gasoline prices rise and the mudslinging begins in the midterm elections.

The coming week is a very heavy calendar for economic events. This is payroll week along with the ISM reports and a key ECB rate meeting.

In terms of importance the Nonfarm Payrolls on Friday will be the most watched report. The current consensus estimate is for a gain of +215,000 jobs, down from +288,000 in April. This is based on the theory that the April gains were a snap back from the weather depressed January/February levels. A downside miss here could be negative for the market. Investors are bullish on the market because of the forecasts for economic growth. A weak jobs number will suggest the economy is not as bullish as investors are hoping. The estimate range is from 110,000 to 240,000.

The ADP Employment report on Wednesday will give us some insight on what to expect on Friday. Expectations are for +210,000 jobs and a decline of -10,000 from April. The estimate range is from 120,000 to 235,000.

The Manufacturing ISM is expected to show only minimal improvement from 54.9 to 55.2 according to Moody's. The nonmanufacturing ISM is only expected to rise a miniscule amount from 55.2 to 55.3. If those numbers are accurate it is hard to build a solid case for economic growth.

The Beige Book on Wednesday is a report from all 12 Federal Reserve districts on economic strength. In the early April release 10 of the 12 districts reported an increase in activity. Auto sales were up and manufacturing had improved slightly as a result of the better weather. Several districts made a point of saying the weather had improved since February. (We really do pay people to tell us spring has arrived.)

A key event for the week will be the ECB rate decision on Thursday. Mario Draghi has finally run out of rope and he is widely expected to announce some kind of stimulus after the ECB meeting. He is expected to announce a cut in interest rates and possibly a negative rate for funds on deposit at the ECB. The ECB can't do a QE program like the U.S. Fed because every EU country sells it own bonds. There is no common treasury where the ECB could buy Euro bonds and no viable method of buying treasuries from all the individual countries. This means Draghi has to use some other method to apply stimulus to the European economy.

I believe the implied ECB rate cut is already priced into the market. However, Draghi has been promising to "do whatever it takes" for the last two years without ever taking action. If his pledge for this meeting is just a new effort to try and talk the market down and nothing happens the market is not going to like it. I see this as a sell the news event for the bond market regardless of what happens. Seriously, is another 0.15% decline in rates really going to make a difference?

You can tell summer has arrived. The amount of stock news out on Friday was microscopic. Late in the afternoon Valeant (VRX) raised its bid again for Allergan (AGN) only two days since they raised it the last time. Allergan had not even had time to respond to the prior raise.

Valeant said it would pay $72 in cash, up from $58.30 in the prior bid, along with a 0.83 fractional share of VRX stock and a $25 contingent right based on future sales of a potential eye treatment. Analysts said the value of the new deal was roughly $182 per share for Allergan or more than $53 billion. Wells Fargo Securities said this price would be almost impossible for Allergan's board to ignore. Shares of AGN spiked to $168 on the news.

As an additional sweetener Pershing Square said it would agree to receive no cash from the transaction. This means they would give up about $600 million and that cash would sweeten the deal for everyone else. Bill Ackman and Pershing Square are pursuing Allergan together. He owns about 9.7% of Allergan with a basis close to $116. He said he would only take stock which would reduce his price for shares by -$20.75 compared to other shareholders.

Originally Valeant offered $46 billion and was turned down. On Wednesday they offered $50 billion and Allergan had not yet responded. The Friday bid of just over $53 billion may still need to be adjusted slightly higher just because the board is going to want Valeant to pay a premium.

If Valeant is successful it would double the size of the company and protect the 11,600 Allergan employees from broad restructuring and layoffs already announced by Allergan.

Shares of Infoblox (BLOX) fell -37% to a new historic low after the company reported a -26% decline in earnings to 7 cents on revenue of $61 million. Analysts were expecting 3 cents and $61.65 million so it would appear on the surface to be a win. However, they lowered their guidance on earnings to a range of zero to 2 cents compared to estimates for 6 cents. Revenue was forecast in a range of $60-$61 million and analysts were looking for $66.6 million. Full year guidance also fell below analyst estimates. If that was not bad enough the CEO for the last ten years resigned unexpectedly to "pursue other personal and professional goals." He did say he would stay on until the board appointed a replacement. I believe investors should look elsewhere to pursue their financial goals.

Sanderson Farms (SAFM) reported blowout earnings of $2.21 compared to estimates for $1.68 thanks to higher demand for poultry products and lower grain costs. With beef prices soaring, consumers are switching to chicken as their staple protein. Revenues rose +6.4% to $660.7 million and well over estimates of $630 million. Cash on hand rose +43% to $84 million. Long term debt decreased from $29 million to $10 million. Shares rose on the news but I suspect they were also up thanks to the food fight over Hillshire Brands, Pinnacle Foods, Tyson and Pilgrim's Pride. It never hurts to be profitable in a sector where the top dogs are fighting over meat.

Lions Gate (LGF) is going to milk the Hunger Games series for all its worth. They announced on Friday "The Hunger Games: The Exhibition" tour for summer 2015. The state-of-the-art exhibition will include interactive displays of authentic costumes, props and other elements of the world of Hunger Games. The first two films grossed more than $1.5 billion with Catching Fire was the highest grossing domestic release of 2013. The Exhibition will launch several months before the November 20th opening of the next installment "Mockingjay - Part 2" and will include artifacts from the first three films.

Want more Hunger Games? Lions Gate said it was exploring theme park attractions around the world for the Hunger Games franchise and other branded properties in the portfolio. The Divergent series has two more movies planned.

Unfortunately Lions Gate shares diverged from the rally with a -11.5% decline on crummy earnings. The CEO described it as a quarter without any movies. The company surges when a block buster movie is released but once those move into video on demand the revenue stream evaporates. I did not know this but Lions Gate has over 40 TV shows on more than 20 networks including Madmen, Nurse Jackie, Anger Management, Nashville, Wendy Williams Show and Orange is the New Black to name a few. They also have a library of 15,000 movies and TV shows that provide revenue to support the production business.

Cheniere Energy (LNG) spiked +$10 over the last two days after the U.S. Energy Dept (DOE) proposed an overhaul of the LNG export application process. Under the proposal the department would no longer issue conditional approvals of projects. Instead the department would decide whether an LNG export project was in the national interest only after the Federal Energy Regulatory Commission (FERC) had issued a final environment review. This would take the pressure off the DOE by reducing the time, paperwork and money involved in getting an export approval.

Companies pay up to $100 million to complete the FERC process, an investment that only serious projects with valid financial backing, can complete. LNG facilities cost billions to build. The DOE export application only costs $20,000 to file.

Previously companies could file the DOE application and then shop for funding with many applications never completed. Now only those applications approved by FERC will be considered by the DOE. That means any company with a real project and real funding can jump right to the top of the heap at the DOE once FERC approves their environmental application.

For companies like Cheniere Energy with two major LNG projects and projected output of 40 million tons per annum (MTPA) they will go straight to the top. Cheniere has already received FERC approval for the Sabine Pass facility and the Corpus Christi facility is nearing approval. If the DOE proposal is adopted the Corpus Christi project would probably be the first to be approved. Construction is well underway at Sabine Pass with first exports in late 2015.

Here is the key point. With 26-30 applications pending at the DOE there is a very good chance only 4-6 would eventually be approved for export. If all were approved and built the export capacity would be more than 25% of our current production capability. Our gas prices would soar. For this reason the DOE is not going to find it is in the "national interest" to approve them all. The DOE also said it was going to undertake additional studies of the economic impact of exporting 12-20 Bcf per day. That is the next hurdle because they are likely to find out it is "not in the national interest."

By changing the application process to force approval by FERC with the $100 million fee it will weed out all the questionable applicants. Only those completing the FERC path will eventually be approved by the DOE. Essentially the DOE decision has eliminated a significant number of potential applicants and projects.

Since Cheniere Energy already has export approval for the initial trains at Sabine Pass and Corpus Christi they are now on the fast track to be the first and possibly the only major LNG facility in the country. The Sabine Pass facility is the only project in the country that has received the FERC and DOE approvals.

At the Sabine Pass facility they are building six trains each with annual production of 4.5 million tons per annum.(MTPA). Trains 1&2 began construction in August 2012 and are 63% complete. First production is expected in late 2015. Trains 3&4 began construction in May 2013 and are 27% complete. First production is expected in late 2016, early 2017. Trains 5&6 are still in permit mode with 503 Bcf of annual exports already being approved to Free Trade Agreement (FTA) countries and the non FTA authorization is pending. Trains 1-4 already have that authorization.

The three trains to be constructed in Corpus Christi for 13.5 MTPA are nearing the end of the permit approval process. Full approvals are expected not later than January 6th 2015. Purchase agreements for 3.8 MTPA have already been signed and the DOE has approved 767 Bcf per year for export to FTA countries with the authorization for non FTA countries still pending. They signed a 20 year export deal with Iberdola, a Spanish energy company, for 800,000 tpa on Thursday.

A MTPA = roughly 50 Bcf. When complete both Cheniere facilities could export a total of 40.5 MTPA or 2,025 Bcf per year or roughly 5.6 Bcf per day or more than 8% of our current production. Our current gas in storage hit decade lows last winter and we are expected to have a shortage in storage going into the fall. This is without any exports.

Energy XXI (EXXI) and EPL Oil & Gas (EPL) shareholders both voted to accept the proposed merger. EXXI is acquiring EPL and the acquisition is expected to be completed on Monday. EXXI is a rapidly growing E&P company with a large inventory of shallow water properties in the Gulf. EXXI is a buy and exploit company. They do little pure exploration and favor buying existing properties, reworking existing wells and drilling new ones into proven reserves. The CEO claims "We don't discover oil, we produce it." The acquisition of EPL gives them dozens of new properties and enhances their ownership of some existing leases where EPL was a fractional leaseholder.

EXXI has had a tough 9 months. In 2012 they bought a huge portfolio of properties from Exxon that offered them a large increase in production capability. However, when they started to pump the new oil through the infrastructure they found it was too old and worn out to accept higher volumes and they had to replace a lot of it. This cost them time, production and money. In 2013 they joint ventured with Apache on 12 Gulf leases that involved two new wells to secure the venture.

EXXI has a bright future but right now I think they have too many projects underway that are not currently producing so their earnings suffer. Once these projects are brought online their production volume should spike significantly. I think EXXI is a bargain at $20 and a fair acquisition target themselves. The combined company is currently producing 65,000 Boepd of which 70% is oil. Earnings are expected to increase +25% in 2015. Insiders have bought $1.5 million in stock in May with smaller amounts in January, April and March.

Gold attracted a lot of attention last week with a loss of $42 to $1251. With inflation low, the equity market high and the bond markets around the world in rally mode nobody seems to be interested in gold. However, multiple analysts came out on Friday saying the return to $1200-$1225 was a significant buying opportunity. None of them were Peter Schiff who always has a buy on gold no matter what.

A problem with gold is the 20% decline in demand from China. The current credit crisis inside China is restricting the availability of cash. India put a tax on gold that slowed demand in that country in order to reduce the outflow of dollars. I don't know what would put gold back into rally mode other than a sharp increase in inflation and that may not happen until 2015. I might be a buyer of the GLD with gold at $1200 for a trade but I would want to see a resumption of a rebound before going long for an extended period. I don't want to catch this falling knife.

I think the real trade for the next 18 months is shorting treasuries. Yields on the 10-year fell to 2.4% intraday on Thursday and rebounded only slightly on Friday. This bond rally is unsustainable in the long term. While we could see further decline in yields in the short term the long term outlook is very bearish. The Fed is talking about raising rates in Q2-2015 and any rebound in the economy in the months ahead should produce a selloff in bonds.

Obviously traders have been talking about this trade ever since Bernanke first floated the taper topic in May 2013. The early adopters made money but anyone short bonds since December is in serious pain. We could see a further decline in yields next week if the ECB brings out the bazookas as Draghi promised. However, a stronger than expected Nonfarm Payrolls on Friday and some improvement in the ISM reports and we could see some selling in the treasury market.

The great rotation from bonds into stocks will eventually occur. When it will occur is the $64 question. If the Fed gets its wish for 2% inflation not only will these treasuries barely be keeping pace with that inflation but owners will suffer loss of principal as interest rates rise. This is a horrible investment at this level unless the economy is about to fall off a cliff.

You can short bonds with ETFs like the TBF but even if you are right about direction they move at a snail's pace. Do NOT try to use the leveraged 2X and 3X ETFs. The drag from the futures and options they use to create that leverage is a major drag on the ETF performance long term. They are ok to use for a 2-3 day trade but never for a long term position. Larry Fink at Blackrock said last week the leveraged ETFs should be banned because the average investor does not understand the negative drag of leverage on a long term position.

International Data Corp (IDC) reported by 2018 Android powered smartphones would control 77.6% of the market with Apple's iPhone at 13.7%. Windows powered phones should increase share from 3.5% in 2014 to 6.4% in 2018. Blackberry only controls 0.8% share today and expected to drop to 0.3% by 2018.

Windows phone partners are expanding rapidly and now include HTC, Samsung, Lenovo, LG, Foxconn, Gionee, Xolo, Longcheer, JSR, Karbonn, ZTE, Micromax and Prestigio. Before now almost all Windows phones were manufactured by Nokia, with a few by HTC and Samsung. More partners, means sales in more countries since most of those brands listed above are country specific. IDC said smartphone shipments are expected to double to key emerging markets including India, Indonesia and Russia.

IDC also predicted tablet sales growth would shrink from 51.8% in 2013 to 12% in 2014. The reason is the rapid growth of phablets or large screen smartphones. IDC defines phablets as phones with screens from 5.5 to 7.0 inches. Apple is expected to announce an iPhone 6 with a 5.5 inch screen later this year.

IDC also said traditional PC sales rose only 3.9% in Q1 over Q1-2013. That was down -35.7% from Q4. Dell garnered 23.1% share with HP at 20.4%, Lenovo at 14.0% and Acer at 10.9%.

Summer Fridays are typically low volume days. That was not the case last week because of the rebalance of the MSCI indexes. Morgan Stanley announced on May 14th the rebalance of the various indexes to be completed on May 30th. In the MSCI Global Small Cap Indexes there were 417 additions and 312 deletions. In the MSCI Global All Cap Indexes there were 485 additions and 194 deletions. The MSCI US Large Cap 300 Index had five additions and nine deletions. The three largest additions by market cap were WDC, FRX and SNDK. The numbers were similar for all the other various MSCI indexes. Click here for the full details

The volume on Friday was the heaviest day of the week but it was still anemic at 5.94 billion shares. Thursday was the lowest at 5.062 billion and just barely over that 5 billion level. If you are looking to volume to confirm the market gains it was not there. Without the index rebalance we could have seen the lowest day of the year on Friday.

The S&P added +23 points for the week to close at 1,923 and a new record high. With the Ukraine situation fading from the headlines, the ECB poised to launch new stimulus and analysts predicting a strong snapback from the Q1 contraction the index is poised to grind higher. It appears that investors are more worried about missing out on a big move higher than they are afraid of a big move lower. If they were worried about a possible decline they would be buying puts and the VIX would be higher and not at a 7 year low.

After the big market gain in 2013 investors have forgotten about the inevitably of market corrections. This reminds me of 2000 when everyone kept buying new highs expecting stocks to continue doubling and tripling.

The market does not need a shock to force a correction. Markets can correct without a reason. Typically when markets do begin to decline the market reporters will find a reason or reasons to blame for the drop. It makes a better sound bite than saying "I don't know why the market is falling."

The S&P move over 1,900 is a powerful lure for investors in cash on the sidelines. I have reported here multiple times over the last month about the rising amount of cash in funds, the growing short positions and the expectations for a correction. All of those money managers not currently long the market are getting very nervous. When the Dow and Nasdaq 100 both closed at a new highs on Friday to confirm the S&P breakout you can bet the anxiety level spiked even more for anyone short or under invested.

New highs tend to attract new money faster than flies at a picnic and that produces higher highs.

The uptrend resistance at 1,923-1,925 level is critical. Any continued move higher by the S&P and the other major indexes could accelerate as fund managers and individual investors begin to chase stocks to avoid being left behind.

Initial support is in the 1,908-1,910 range but real support is well back at the 50-day at 1,875.

The Dow edged out a new high close at 16,717 by 2 points. Most of the gains came at the close as shorts gave up and bailed out to avoid another short squeeze Monday. The index appears to be setting up for a test of the next uptrend resistance at 16,800. The Dow components were mostly positive but only fractionally.

Initial support is 16,635 followed by the 50-day at 16,457.

Two weeks ago I showed this chart before the breakout with the caption "The Nasdaq 100 will provide market direction." That appears true again for next week. The Nasdaq big caps stalled exactly at resistance and gained only +1 point on Friday. That is better than a loss because it means there were not a lot of sellers waiting at that level or maybe those sellers had taken off early for a long weekend.

This week is going to be critical for the Nasdaq 100 because Apple's World Wide Developer's Conference begins on Monday. Historically the stock declines after the opening of the conference after a sprint into the event. Apple shares have gained +108 points since April 23rd when they announced earnings, dividends and the 7:1 stock split. The stage is set for a big decline if the opening announcements don't excite investors.

On Friday Apple set a new 52-week high at $644 just before noon and then crashed back to $629 by 1:30. This looks a lot like an exhaustion top. However, anyone long over the prior week's gains had a lot of profit to protect and bailing out before the weekend is a valid strategy.

It is entirely possible we could see $600-$610 again next week. The wild card is the 7:1 split that occurs the following Monday. This could incite investors to continue buying in hopes of a continued pre-split run.

Apple is 12% of the Nasdaq 100 weighting, MSFT 9%, GOOG 7%, AMZN 4% and CSCO 4%. This means a material decline in Apple shares will impact the NDX. I believe the majority of the NDX gains over the last week were the result of Apple gains.

Likewise the intraday decline on the Nasdaq Composite on Friday exactly mirrored the decline in Apple shares.

The Nasdaq Composite rebound slowed to a crawl over the last three days. The Nasdaq closed at 4,237 on Tuesday and 4,241 on Friday for only a +4 point gain the last three days. Are traders losing interest in the tech rally?

I believe this emphasizes my point on Apple and the Nasdaq gains. The rest of the Nasdaq stocks were mostly positive but relatively dormant. Nasdaq market breadth was lousy on Friday with 1,546 decliners to 949 advancers with 87 unchanged.

If the Nasdaq indexes are going to fail this is where it should happen. Apple will remain the wild card for next week.

However, most traders don't understand the relationship between the individual big cap stocks and the indexes so all they are seeing today is a new 14 year high close on the NDX and they are thinking a breakout is about to appear.

Support on the Composite is about 4,217-4,220. Resistance is 4,252.

The Russell 2000 peaked at 1,144 at the open on Tuesday and never recovered that level. The rest of the week was choppy with the index losing -5.57 points on Friday. Is the rebound over? That is tough to say but the Russell appears to be weakening again.

In any significant market decline there are repeated rebounds. The more oversold the bigger the rebound but it does not necessarily mean the decline is over. I would watch the Russell carefully this week for a decline back below the 200-day at 1,120. That could mean we are going back to retest the lows.

Resistance at 1,146 could also be a challenge on any continued move higher.

The Dow Transports have also been setting new daily highs but resistance held on Friday for a minor loss. If the transports begin to roll over this could damage sentiment for the Dow industrials. This has been a strong rally in the transports and it is time to rest.

There are a high number of critical events next week that could impact the market. The two ISM reports, China PMI, ECB rate decision, ADP and Nonfarm payrolls, etc. The markets exceeded expectations in May and now we are heading into the summer doldrums. There is nothing to prevent further gains if investors are willing to buy the new highs. However, volume is going to continue to decline in the weeks ahead and we could see some investors going to cash for the summer. Nobody wants to be worried about their brokerage accounts while they are sitting on the beach with the grandkids.

Random Thoughts

QE is not over. The Fed is still buying $45 billion a month in treasuries and mortgage backed securities. The Fed is still supporting the market. Peter Boockvar reminded everyone last week that once that QE crutch is removed the patient is going to stagger if not fall.

According to the Stock Trader's Almanac 2014 (page 84), the first trading day of each month combined produce more than double the gains of all other days. However, based on the Dow, June's first trading day is the worst performing first trading day of all twelve months.

Citigroup CFO John Gerspach said second quarter trading revenue could fall as much as 25%. JP Morgan estimated a -20% drop earlier in May. Goldman Sachs said trading activity was "abnormal" and the environment was "quite difficult" right now. Goldman said volatility drives trading and the lack of volatility meant customers did not need to trade.

Goldman said the lack of volatility in bonds was probably "economic in nature. We don't have a clear vision of economic growth or lack of growth." The yield on the ten-year treasury over the last three months has traded in the narrowest band in the last 35 years.

On Thursday the government reported the Q1 GDP actually contracted -0.98% rather than the minor gain of +0.11% previously reported. Analysts tell us not to worry it was all weather related and it will snap back to 4% or even 5% growth in Q2. I will believe it when I see it. Even though I know there was some harsh weather in Q1 if my memory is correct there is always harsh weather in Q1. It will be interesting to see what excuse they use if Q2 fails to rebound as expected.

None other than Campbell Soup (CPB) reported a Q1 miss saying "We believe the miss is in part a reflection of the persistence of an exceptionally challenging consumer environment. As many others have noted, consumers are suffering from continuing underemployment, reductions in the SNAP program (food stamps), rising home, fuel and healthcare costs. In combination, these factors are significantly affecting purchasing behavior, pressuring the performance of a number of our key customers (Walmart, Target) and constraining growth across the industry, particularly in center store categories." (My comments added)

Walmart posted lower sales for the fifth consecutive quarter.

CEO Confidence from the Bloomberg Orange Book has returned to 52-week lows.

Real consumer spending in April declined -0.3%, the largest monthly decline since 2009. Durable goods spending declined -0.5%. There was no harsh winter weather in April. Analysts claim among other things, higher healthcare costs under the Affordable Care Act are pressuring consumer spending.

Global GDP, the blue line, continues to drop while the MSCI World Equity Index, red line, continues to rise. This is not going to end well.

Chart from Zero-Hedge

I told you last week that Italy was going to put prostitution and illegal drug sales into its GDP calculations. That will boost the GDP and allow them to borrow more money under the EU debt to GDP limits.

This week the UK has decided to do the same thing. They believe by including illegal prostitution and drug sales the GDP will increase $16.7 billion. They said they had to include these activities to "harmonize economic reporting across the EU." Prostitution and some drugs are legal in the Netherlands and the Dutch include those activities in official government statistics. Now that Italy is going to include the numbers the UK is doing it in self defense. Estonia, Austria, Slovenia, Finland, Sweden and Norway already do it. It won't be long before all the rest of the EU countries join in the illicit activities. You have to wonder how they are going to "estimate" the amount of money flowing through these activities. It would seem there is a lot of room for the bean counters to fudge the numbers to make the GDP look better.

How do you know when a person has too much money? It is when they pay 100% more than they have to just to make sure they are the winning bidder. Microsoft ex-CEO Steve Ballmer agreed to buy the California Clippers for $2 billion when the other four bidders were in the $1 billion range. I guess if you have $18 billion in the bank you can buy whatever you want and not worry about paying too much.

Reportedly Ballmer is a basketball fanatic. He bid on two prior teams and did not win either one. I guess he decided this time he was not going to lose out again. Sterling only paid $12.5 million for the Clippers in the early 1980s. Ballmer is paying $2 billion, which is 15 times annual revenue, not profits. Also, the Clippers don't own their stadium so they lose out on all the extra revenue most major NBA teams get from owning their venue. With Ballmer's cash he can buy them a venue without having to ask the city for money.

The people most happy with Ballmer's bid are the owners of all the other NBA and NFL teams. Their valuations just rocketed higher. They should send a thank you card to Ballmer.

The S&P's current bull market streak of 970 days is nearly twice the average number of days without a correction. Ice Cap Asset Management says it has been 1,284 days since a -20% correction. Since 1950 there have been 200 trading days where the S&P rose or fell 3% in a single day. Since 1950 there have been 16,202 trading days, which means we average a 3% day every 81 days. It has been 623 days since we have had a 3% day on the S&P. That is the 6th longest streak in 65 years. A 3% move on the Dow would be roughly 500 points.

The energy sector has been leading the market. Click the advertisement below for a free trial to the OilSlick.com newsletter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Most people have no idea of the giant capacity we can immediately command when we focus all of our resources on mastering a single area of our lives."

Anthony Robbins


Index Wrap

Select Big Cap Stocks Continue to Lead the Way Higher

by Leigh Stevens

Click here to email Leigh Stevens

The S&P and the Nasdaq have bullish patterns. In Nasdaq, strength is concentrated in the big cap Nasdaq 100 (NDX) which is already testing, not yet exceeding, its prior (early-March) highs in the 3737 area. The Dow Average (INDU) is lagging here but INDU is also NOT a capitalization-weighted Index; unlike the S&P & Nasdaq indices.

Plenty of comments by the Market talking heads on low volume aspects to this recent rally as bullish 'sentiment' and participation is increasing only slowly. I would point out that Volume is NOT a primary forecasting technical indicator but is an ancillary one. You anticipate seeing stocks rising on rising or strongly rising volume but this isn't always the case. A check of your trading account P&L statements, is proof that PRICE alone determines whether you have gains or losses!

I wrote a sort of 'companion' piece to this one in my Friday, 5/30 Trader's Corner study. The principle subject was on overnight price gaps as forecasting events. You'll see that some of my charts below have the gaps sorted as to representing the early stages or start of a renewed upswing (upside breakaway gaps) or the further upside gaps that develop sometimes around the mid-point of a move (measuring gaps); at least such gaps are assumed to 'measure' the approximate middle of an overall price swing. From a trading perspective, what's important is that further advances are suggested from such gap events.

My companion Trader's Corner piece can be seen HERE. In it I go more into the theory of gaps more than I would in this, my Market forecast and prognostications piece. Including in my Trader's Corner piece, are examples of so-called 'exhaustion' gaps that sometimes alert us to an upcoming END of the move in progress.

Moreover, I want here to 'balance' my month-end review and monthly chart comments in the aforementioned linked article as, on a monthly chart basis, the major uptrend looks vulnerable to a correction or at least appears to not have much further upside and/or that 2014 upside progress will slow to a crawl, which has happened to date.

A 'balance' to this view is the more bullish current picture provided by the weekly S&P 500 (SPX) and Nasdaq Composite charts and comments seen further on.

The strongest movers in the current advance are the big cap stocks as seen with the S&P 100 (OEX), breaking out to new highs and the big cap Nasdaq 100 (NDX) which reached its prior high unlike the much lagging Nas Composite. Very much lagging the stronger sectors are the Dow 30 (INDU), the Nasdaq Composite (COMP) and the small to medium cap stocks of the Russell 2000 (RUT). Small is definitely not beautiful recently!


While the past week's advance (in a shortened 4-days) is not huge in SPX, the move bullishly STARTED with a move above a line of resistance at 1900 and the Index was up from there. The weekly chart uptrend channel suggests substantial upside potential before SPX would hit the resistance top end of its broad bullish channel. I'm not saying SPX is going all the way to that implied resistance but there's a good shot for the Index to reach 2000.


COMP got to the LOW end of its weekly uptrend channel on the dip to the up trendline just under 4000 and then started slowly rising, albeit slowly. Nevertheless and speaking of price GAPS, there is a bullish upside price gap seen. Even a move to the middle of COMP's broad uptrend channel would carry to the 4300 area and if COMP makes it there the Index would have a shot at least of retesting its prior highs in the 4370 area. Of course for COMP to get on such a roll implies that the big cap Nas 100 would achieve a decisive upside penetration of its Friday Highs in the 3740 area.



The S&P 500 (SPX) Index is bullish in its pattern. The Tuesday Open of this past week saw the Index gap higher from the prior week's High. Since this is a second bullish upside price gap, such a gap event may represent an approximate mid-point in the current advance and suggests that my upside objective to 1980-1985 could be realized.

To maintain a bullish chart, I would expect to see SPX hold above the 1897-1900 support level. Next lower support is seen around 1870.

I've calculated resistance/selling interest as coming in next around 1940, with a next resistance in the 1980 area, at the top end of SPX's bullish uptrend price channel.

Bullish sentiment has been rising but slowly and trader bullishness has not jumped. In a contrary opinion sense this factor suggests that higher prices may be seen.


The S&P 100 (OEX) chart is bullish and this past week's advance in OEX was close to that achieved by the S&P 500. To MAINTAIN a bullish chart, I'd now expect a support floor to be found on any pullbacks to the area of prior resistance around 840. OEX has found support on recent dips to its 50-day moving average, which implies that 830 is a second or next lower support.

I've projected a first area of resistance around 860, extending to 870. Whether OEX can or will get to the 900 level isn't clear to me. The Index could reach that milestone over the coming month. OEX is more than half way there (between 800 and 900) with its climb above 850. I'd note that it took a few weeks for OEX to climb the last 50 points higher.

A drawback to a steady uninterrupted further climb is that OEX is getting into overbought territory in terms of the 13-day RSI. A pullback would not be surprising in the near-term.


The Dow 30 Average (INDU) chart is bullish. Its rate of ascent has been relatively slow but INDU did manage to go to yet another monthly Closing high; by a modest 137 points, but a new high is a new high. The month just ended marks the last 4 months of higher Closing monthly highs in the Dow.

I've highlighted resistance as coming in next around 16720; next resistance then is projected at 16950. Immediate near-term support is at 16600; I've then highlighted trendline support on the chart at 16500, with a next support area at 16400.

Dow components AXP, BA, CSCO, DD, DIS, GE, INTC, JNJ, KO, MMM, MSFT, TRV and VZ look capable of some further gains but the other charts look mostly mixed. And most of the aforementioned stocks are not on a bullish rampage. INDU looks like it will continue to lag gains in the capitalization-weighted S&P.

INDU isn't far over the middle of its typical range from oversold to overbought levels so can't be said to be overbought like the broader S&P 100 Index.


The Nasdaq Composite Index (COMP) is bullish in its pattern and COMP has now retraced over 2/3rds of its prior (early-March to mid-May) decline, which is the sort of 'milestone' retracement point at which I assume an Index or stock could retrace fully 100% of its previous decline; and thereby retest the prior 4370 top.

4250 is immediate overhead resistance, with next resistance suggested in the 4275 area. If COMP was at an approximate mid-point move at its last upside price gap ('measuring' gap), it would reach the 4350-4370 area, suggesting the Index could re-test its prior peak.

Near support, at the bottom of the aforementioned upside price gap (where the gap would get 'filled in'), is at 4186; next support then is highlighted in the 4150 area.

There's nothing remarkable to say about my (technical) indicators except that, as I noted with the S&P, bullish sentiment has been slow to climb. I take this factor as an indication that this current rally may continue longer, perhaps after a pullback such as to the 4200 area.


The Nasdaq 100 (NDX) is bullish and NDX gains have outstripped the broad Nasdaq Composite in that the big cap Nas 100 has already reached the area of its prior top. In the case of NDX, if the most recent bullish upside gap were one that was 'measuring' an approximate midpoint in a move, NDX could reach 3800 or higher.

I've noted initial resistance in the 3738 area at the early-March top, then at 3800. Longer range resistance implied by the weekly chart seen above (as part of my 'bottom line' comments), comes in around 3900 by mid-June and then closer to 4000, such as by late-July. I'm getting way ahead of myself. Those in bullish positions will be watching what happens at recent highs relative to the prior top and concerned about the possibility of a double top. I anticipate NDX going to new highs above its prior price peak.

Near support comes in around 3678, at the LOW end of NDX's most recent upside price gap. Below the gap area, I've highlighted (green up arrow) 3650 as support, with next support at 3600.

NDX is now nearing an overbought extreme in terms of the Relative Strength Index. I don't think this 'derails' a rally but volatility could increase if a near-term correction sets in. Implied volatility for the Nasdaq 100 (VXN) in the 13.4-13.7 area is about as low as we typically see it, at least since last summer when VXN dipped briefly to 12.5.


The Nasdaq 100 tracking stock (QQQ) has made a strong bullish recovery off its double bottom low and is back at resistance implied by the prior 91.3 top. I envision QQQ going to a new high as I wrote regarding the underlying NDX. I've noted recent resistance around 91.3, then at 92 even. Long-term resistance comes in at 95.

Near support, at the low end of the recent bullish upside price gap, is at 89.9-90.0. Next chart/technical support is at 88. A Close below 90, lasting more than a day, is bearish in terms of arresting near-term upside momentum.

As is so common with the Q's, the recent advance didn't occur with a corresponding jump in daily trading volume. The important indicator of On Balance Volume (OBV) has climbed with prices. If there's a pullback, such as back to the 90 area, look for a jump in trading activity but I'm not suggesting shorting the stock, taking out puts, etc. to play a potential decline. It would look tempting to some in an assumption of a double top having formed.


The Russell 2000 (RUT) chart remains intermediate-term bearish as RUT hasn't yet traded consistently above its 50-day moving average and has yet to cross above key resistance at its down trendline, currently intersecting around 1157.

Key near support is suggested at 1126, at the low end of the recent upside price gap. Next support begins at 1100, extending to 1095.

I don't have any recommendations regarding bullish or bearish plays as the Index continues to chop around. If the Nasdaq 100 breaks out to a new high, RUT could follow suit and at least test trendline resistance at near 1160. Next resistance then is suggested at 1180


New Option Plays

Aerospace & Apparel

by James Brown

Click here to email James Brown


The Boeing Company - BA - close: 135.25 change: +0.11

Stop Loss: 129.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BA is in the industrial goods sector. The company is a major manufacturer for aerospace, aviation, and a defense contractor. The company last reported earnings on April 23rd and held an analyst day in mid May. Earnings results were strong. Wall Street expected a profit of $1.56 per share on revenues of $20.21 billion. BA delivered $1.76 per share with revenues rising to $20.46 billion for the quarter.

BA said their total company backlog had ended the first quarter at $440 billion. That's up from $390 billion a year ago. About $374 billion is for commercial airplanes and the rest is defense and space related. This represents about 5,100 aircraft orders and several years worth of production. BA recently reaffirmed their 2014 guidance and their airplane delivery scheduled.

Analysts have been positive and raising their price targets and earnings estimates thanks to BA's strong Q1 results, their improving margins, and BA's stock buyback program. Margins are a big deal. BA has been slowly growing its margins over the last couple of years and suggested they will continue to see margin improvement in 2014.

There has been some concern that the U.S. defense budget might be cut again and that could impact BA's defense sales. Yet the New York Times recently reported that BA is close to signing another multi-billion deal with the U.S. Navy for 47 more fighter jets. This deal is expected to close over the summer.

BA has also seen strong growth overseas with international sales accounting for 30% of its backlog. China is expected to grow into the largest aircraft market by 2032. BA is strengthening its position in China with another big sale of fifty 737 jets to a new Chinese budget airline. The retail price on this deal is estimated to be in the $3.8 to $5.5 billion. BA's China president said the company will deliver 140 aircraft to China this year following 143 deliveries in 2013.

Asia will also be a growing market for BA's defense and security business. A recent Bloomberg article mentions how territorial disputes in Asia are getting worse and there will be rising demand for maritime and aerial surveillance systems. BA's defense business chief believes aerial surveillance equipment and machines will continue to grow steadily for the "foreseeable future."

Technically shares of BA are on the up swing after spending more than three months consolidating in the $120-132 area. The recent strength has pushed BA through resistance and the stock closed at new four-month highs.

We are suggesting a trigger to buy calls at $135.55 with a stop loss at $129.90. More conservative investors might want to wait for BA to close above $136.50 as an alternative entry point since the top of the January 2014 gap down could be resistance (near $136.00-136.50).

We are not setting a bullish target yet but the point & figure chart is bullish and forecasting at $160 target. I do expect BA to see some resistance at its 2014 high near $145.00.

Trigger @ $135.55

- Suggested Positions -

Buy the Aug $140 call (BA140816C140) current ask $2.18

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

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 2.95 million
Listed on May 31, 2014

Hanesbrands Inc. - HBI - close: 84.83 change: +0.93

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HBI is in the consumer goods sector. The company designs and manufacturers apparel. You wouldn't normally think of basic apparel maker as a momentum stock but HBI has been outperforming. Shares just ended the week at a new all-time high.

The company has delivered on its earnings results. When HBI last reported in January and April this year the company beat Wall Street's estimates both times and raised their guidance both times.

Think about that. HBI is not a retailer but their products are sold through retailers. Most of retail got hammered in the first quarter due to lousy winter weather. Yet HBI managed to beat estimates and then raised its guidance.

Jim Cramer has pointed out what many analysts are saying on the company. HBI has strong brand names like Hanes, Champion, Playtex, and Bali. HBI owns most of their supply chain, which allows them to keep and improve their strong margins. Their first quarter saw margins increase 180 points. Most of Wall Street is bullish on HBI's recent acquisition of Maidenform. HBI believes they can generate significant margin improvement in the Maidenform brand by 2016.

Technically the stock has been strong and traders quickly bought the dip last week. Currently HBI sits just below round-number resistance at $85.00. We are suggesting a trigger to buy calls at $85.25.

The Point & Figure chart for HBI is bullish with a $92 target.

Trigger @ $85.25

- Suggested Positions -

Buy the Oct $90 call (HBI141018C90) current ask $2.90

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

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 690 thousand
Listed on May 31, 2014

In Play Updates and Reviews

Stocks Are Still Drifting Higher

by James Brown

Click here to email James Brown

Editor's Note:

The broader market continues to slowly drift higher as investors worry about missing out on the rally.

Our new PPG trade was triggered on Friday.

Current Portfolio:

CALL Play Updates

Biotech ETF - BBH - close: 90.14 chang6: -0.15

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: -18.3%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: The BBH managed its third weekly gain in a row but the rally stalled a bit midweek. This ETF has been consolidating sideways just above resistance at the $90.00 level. Traders might want to wait for a new rise past $91.25 before initiating new positions.

Earlier Comments:
Last year the biotech industry doubled the market's growth with +60% gains in the BBH. The rally continued into January and February with almost another +20%. Then sentiment reversed. Suddenly traders did not want to own the momentum names or the high-growth names. News articles and debates about the extremely high costs of some biotech treatments like Sovaldi helped feed the sell-off. Biotech experienced 20 percent correction (actually -22.6%) in less than two months.

Now it appears that investors are losing their fear over the growth names again. The BBH has been consolidating sideways the last several weeks. Many believe the correction in biotech is providing a great entry point. There are plenty of high-profile biotech firms with low multiples. A lot of the big names have high-quality pipelines. The group could see more M&A activity as older firms seek to buy up younger rivals.

We want to be ready to buy calls if the BBH can breakout from this consolidation phase. Currently shares of this ETF are testing resistance near $90.00 and its 50-dma and 150-dma. I am suggesting a trigger to buy calls at $90.25.

Bear in mind that biotech stocks can be volatile. The BBH does not see a lot of volume and the option spreads are wide. Add it all up and I would label this a more aggressive, high-risk/high-reward trade. Investors may want to start with small positions.

- Suggested Positions -

Long Sep $95 call (BBH140920C95) entry $3.55*

05/27/14 triggered @ 90.25
*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


Entry on May 27 at $90.25
Average Daily Volume = 119 thousand
Listed on May 22, 2014

Capital One Financial - COF - close: 78.89 change: +0.17

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: COF broke out to new multi-year highs last week. Shares are up six out of the last seven days. It might be time for a little dip. Nimble traders might want to buy calls on a dip near $78.00.

Earlier Comments:
COF is in the financial sector. The company provides financial services and products in the United States, United Kingdom and Canada. They're probably best known for the Capital One credit cards.

The financial sector took a leadership role in today's widespread market rally. The group has been lagging the big cap indices the last few weeks. If financials resume their up trend it's going to be a rising tide that helps lift shares of COF to new highs.

Financials should also benefit from the big picture view that interest rates will rise. Some of the federal reserve governors have been hinting that the Fed may have to raise rates sooner than expected. If rates do start rising then investors could start buying financials ahead of this trend.

Credit card companies are also showing strength in their loan quality. COF said their charge off rates have been dropping (losses from unpaid loans).

Technically shares of COF have a long-term bullish trend of higher lows and it's about to breakout past resistance and hit new multi-year highs. The point & figure chart is already bullish and suggesting an $83 target.

- Suggested Positions -

Long Sep $80 call (COF140920C80) entry $2.30*

05/28/14 triggered @ 78.75
*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


Entry on May 28 at $78.75
Average Daily Volume = 3.0 million
Listed on May 27, 2014

CVS Caremark Corp. - CVS - close: 78.32 change: +0.66

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: +27.8%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: After consolidating sideways near $77 for a few days shares of CVS have surged to new all-time highs. The stock was showing relative strength on Friday with a +0.8% gain.

FYI: Another stock in this industry is Walgreens (WAG) and it's looking bullish as well.

Earlier Comments:
CVS is in the services sector. The company provides integrated pharmacy healthcare services in addition to running a drug store chain with over 7,600 locations. CVS' largest rival is Walgreen's with 8,650 locations.

The company's most recent earnings report was mixed. CVS delivered a profit of $1.02 per share. That missed estimates by a penny. Revenues came in above expectations at $32.69 billion in the first quarter. Wall Street appears to have accepted CVS's "blame it on the weather" excuse. Last month CVS also disclosed they had finalized a settlement with the SEC over events dating back to 2009 that stemmed from its acquisition of Longs Drug Stores in 2008. In the settlement CVS did not have to admit any wrongdoing and does not have to restate any earnings reports. They're happy to put the ordeal behind them and for investors it's old news.

More importantly the company is seeing strong growth in its PBM business. Its pharmacy services segment saw revenues climb +10.3% to $20.2 billion in the second quarter. Management said CVS is "beginning to develop integrated products for both hospitals and health plans."

They're also growing into a broader healthcare provider with the retail-based clinic subsidiary MinuteClinic. According to CVS' website, "MinuteClinic launched the first retail medical clinics in the United States in 2000 and now has more than 800 locations in 28 states. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to provide treatment for common family illnesses, skin conditions and injuries, administer vaccinations, conduct physicals and wellness screenings, and offer monitoring for chronic conditions seven days a week without an appointment, including evenings and holidays."

American's growing acceptance of the MinuteClinic for quick healthcare services will grow. Long-term CVS will benefit from an aging population more dependent on their prescriptions. Plus, CVS will benefit from the growing number of new Americans being covered under Obamacare. Payments for these services will be covered by health care plans, Medicaid, and now the Affordable Care Act mandate.

Wall Street is happy with its steady growth. The most recent earnings report showed profits rising 18% year over year for the fifth consecutive quarter of double-digit earnings growth.

We're not setting a bullish exit target yet but the Point & Figure chart for CVS is bullish with a $102 target.

- Suggested Positions -

Long Aug $80 call (CVS140816C80) entry $1.04

05/22/14 triggered @ 77.25
option format: symbol-year-month-day-call-strike


Entry on May 22 at $77.25
Average Daily Volume = 5.1 million
Listed on May 21, 2014

Express Scripts Holding - ESRX - close: 71.47 change: +0.41

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +36.7%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: The rebound in ESRX continues with shares up four weeks in a row. You'll notice the rally stalled at its simple 50-dma on Friday. I would not be surprised to see a pullback here. We can look for support near $70.00 or the simple 200-dma closer to $69.00.

Earlier Comments:
ESRX is in the healthcare sector. The company provides pharmacy benefit management (PBM) services in the U.S. and Canada. Both the NASDAQ and shares of ESRX peaked in early March. It would appear that investors considered ESRX one of the higher-growth, momentum names since it has been sinking with that group over the last couple of months.

That big drop you see on ESRX's daily chart was market reaction to its latest earnings news. The results were disappointing. You could call it a trifecta of bad news. ESRX missed Wall Street's estimates on both the top and bottom line. Management guided lower for 2014. Plus they disclosed three separate subpoenas from different state authorities as the company is investigated for its relationship with drug makers.

Investors already had lowered expectations for ESRX's earnings because the company lost UnitedHealth Group (UNH) as a client last quarter. The loss of UNH accounted for about half of ESRX's lost revenues. ESRX complained that a lot of expected new enrollments had been postponed. They didn't see quite the impact from the new Obamacare exchanges previously expected.

It sounds like plenty of bad news for ESRX. Yet here's the interesting part. The stock lost -6% following its earnings report but there was no follow through lower. Investors have been buying the dip. Shares are up two weeks in a row and slowing chewing through resistance. With a drop from $79 to $65 (-17.7%) it is possible that all the bad news is already priced into ESRX stock price. The long-term trend for ESRX is still higher. As the new affordable healthcare policy changes gain momentum it should mean more enrollments for ESRX.

- Suggested Positions -

Long Aug $70 call (ESRX140816C70) entry $2.45*
option format: symbol-year-month-day-call-strike
05/21/14 triggered @ 69.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/19/14 adjust entry trigger from $70.50 to $69.50
adjust the strike price to the August $70s.


Entry on May -- at $---.--
Average Daily Volume = 6.5 million
Listed on May 17, 2014

Facebook, Inc. - FB - close: 63.30 change: -0.53

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: -13.7%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: Hmm... shares of FB are up three weeks in a row yet the rally has stalled near $64.00 resistance. Traders were buying the dip on Friday afternoon but technically Friday's session has created a bearish engulfing candlestick reversal pattern.

Readers might want to wait for another rise above Thursday's high ($64.30) before initiating positions.

Earlier Comments:
FB is in the technology sector. The company operates the largest social network on the planet with monthly active users up +15% year over year to 1.28 billion as of March 31st, 2014. Mobile monthly users were up +34% to 1.01 billion.

When investors started selling the momentum stocks and high-growth names in March shares of FB were not immune. The stock corrected from $72 to $55, a -23.6 percent correction. We suspect when investors return to the high-growth names they will flock to FB.

The company is firing on all cylinders with a strong Q1 report. Analysts were expecting a profit of 24 cents a share on revenues of $2.35 billion. FB delivered a Q1 profit of 34 cents with revenues soaring +71.6% year over year to $2.5 billion. Advertising revenues were up +82% from the same quarter a year ago. Mobile advertising has increased from 30% of ad revenues to 59% of ad revenues.

Wall Street is pretty bullish on shares of FB. Many analysts have price targets in the $75-85 zone. David Tepper's Appaloosa Management initiated a new position in FB last quarter. ITG Research recently offered positive comments on FB suggesting the current quarter could also come in ahead of estimates.

Update on the P&F chart: The recent rise above $64.00 has created a new P&F chart buy signal with a $79.00 target.

- Suggested Positions -

Long Sept $70 call (FB140920C70) entry $3.42

05/29/14 triggered @ 64.25
Option Format: symbol-year-month-day-call-strike


Entry on May 29 at $64.25
Average Daily Volume = 62 million
Listed on May 24, 2014

Gilead Sciences - GILD - close: 81.21 change: -0.87

Stop Loss: 77.90
Target(s): to be determined
Current Option Gain/Loss: +18.8%
Time Frame: 4 to 8 weeks
New Positions: see below

05/31/14: Uh-oh! I've been cautioning readers about GILD's slowing momentum under resistance near the $84.00 level. Last week's very short-term trend of lower highs finally produced a temporary breakdown on Friday with GILD closing below its simple 10-dma for the second time in the five days.

GILD still managed a gain for the week and is now up seven weeks in a row. Investors could be nervous ahead of the annual ASCO cancer research conference. If GILD says something disappointing the stock could drop. The ASCO conference is May 30th - June 3rd this year.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/15/14 new stop @ 77.90, readers may want to exit now to lock in potential gains.
05/10/14 new stop @ 75.75
05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00


Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014

LyondellBasell Industries - LYB - close: 99.57 change: -0.78

Stop Loss: 93.75
Target(s): to be determined
Current Option Gain/Loss: +41.1%
Time Frame: 6 to 9 weeks
New Positions: see below

05/31/14: After hitting all-time highs on Thursday shares of LYB saw a little profit taking on Friday. Look for short-term support at its 10-dma near $98.25.

I am not suggesting new positions at this time.

Earlier Comments:
The Point & Figure chart for LYB is bullish with a $110 target.

- Suggested Positions -

Long Sep $100 call (LYB140920C100)* entry $2.55**

05/15/14 new stop @ 93.75
05/12/14 LYB gapped open higher at $96.20 (+75 cents)
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 12 at $96.20
Average Daily Volume = 3.1 million
Listed on May 10, 2014

MasterCard Inc. - MA - close: 76.45 change: -0.34

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: -11.2%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: MA continued to see a little bit of profit taking on Friday. The stock should find some support in the $75-76 region. I would look for a dip in this area as a new bullish entry point to buy calls.

Earlier Comments:
MA is in the financial sector. The company provides transaction processing and payment-related services. Globally cash is still the most dominant method of payment. That may not be true in the most developed countries but worldwide there is a long-term trend with consumers moving away from cash more toward cards and electronic payments, which will benefit MasterCard.

MA's latest earnings on May 1st was positive. The company beat Wall Street's estimates on both the top and bottom line. The company said a 14% increase in transactions, on a local currency basis, hit $1.0 trillion. They also saw a +14% jump in processed transactions. Cross border volumes were up +17%.

MA's CEO and President Ajay Banga said the company signed new deals with Wal-Mart (WMT), Sam's Club, and Target (TGT). WMT and Sam's will move their co-brand portfolios to MasterCard. TGT will also shift its co-brand cards to MasterCard and use MA's chip and PIN technology to upgrade their security. Banga said MA will, "continue to invest in technology and acquisitions that will speed our development of mobile and online solutions."

Both Visa and MA were caught up in the sanction backlash between Russia and Europe and the U.S. The two companies were not singled out but new legislation in Russia was going to force the two American companies out of the country. Working with Russian officials MA and Visa have found a way to sidestep the issue by creating a domestic (Russian) payment system within six months and create a Russian company to handle domestic transactions.

Technically shares of MA saw a -20% correction on an intraday basis from its January 2014 highs to the April intraday lows. The stock bounced near its long-term up trend. Now MA appears to be breaking out past resistance near $76, resistance at its 100-dma and 150-dma, and resistance at its five-month trend of lower highs. We're not setting an exit target yet but the point & figure chart is bullish with an $87 target.

- Suggested Positions -

Long Oct $80 call (MA141018C80) entry $2.85*

05/27/14 triggered @ 77.25
*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


Entry on May 27 at $77.25
Average Daily Volume = 5 million
Listed on May 24, 2014

3M Company - MMM - close: 142.55 change: +0.16

Stop Loss: 138.75
Target(s): to be determined
Current Option Gain/Loss: - 5.7%
Time Frame: 4 to 8 weeks
New Positions: see below

05/31/14: The rally in MMM continues with another close above short-term resistance at $142.00. This looks like a new bullish entry point but readers will want to buy longer-dated calls.

Our current suggestion on the June calls will expire in three weeks.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/24/14 if you open new positions, use the July or October calls
05/20/14 adjust stop loss to $138.75 due to the dividend
05/15/14 new stop @ 139.49
05/08/14 triggered @ $142.00


Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014

Potasch Corp. of Saskatchewan - POT - close: 36.32 change: -0.08

Stop Loss: 35.75
Target(s): to be determined
Current Option Gain/Loss: -18.8%
Time Frame: 3 to 4 months
New Positions: see below

05/31/14: Shares of POT have spent this past week consolidating sideways inside the $36.00-36.50 zone. I am suggesting investors wait for a new close above the simple 10-dma (currently 36.58) before considering new positions.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/27/14 new stop @ 35.75
05/15/14 new stop @ 34.90
05/02/14 triggered @ 36.50


Entry on May 02 at $36.50
Average Daily Volume = 5.0 million
Listed on April 26, 2014

PPG Industries - PPG - close: 201.61 change: +0.61

Stop Loss: 192.90
Target(s): To Be Determined
Current Option Gain/Loss: -13.6%
Time Frame: 8 to 10 weeks
New Positions: see below

05/31/14: Our brand new play on PPG is now open. Shares continued to rally on Friday and hit new all-time highs at $202.88 before paring its gains. Our suggested entry point to buy calls was hit at $202.00. I would still consider new positions now at current levels.

Earlier Comments:
Big cap industrial names have been leading the market higher. PPG is one of them. The company is in the basic materials sector. PPG manufacturers coatings, specialty materials, and glass products.

PPG has developed a strong trend of beating Wall Street's earnings estimates. They just did it again when they reported earnings on April 17th with EPS coming in 10 cents above estimates. Revenues were up +17% year over year to $3.64 billion. Earnings were up +33% from a year ago at $1.98 per share. The company is also seeing margin improvement.

Last month PPG's management announced a $2 billion stock buyback program and raised their dividend by +10% to $0.61 per share. PPG's CEO said that his company saw volumes improve in Europe for the first time in ten quarters. The tough winter in the U.S. did not hurt them. Thus far PPG has been able to pass along small price increases to offset rising commodity costs.

Technically the stock is in a long-term up trend. Shares have spent the last three months consolidating below the $200 level. Now the bullish pattern of higher lows is about to push PPG through major resistance near $200-201.

The Point & Figure chart is bullish and forecasting at $222.00 target.

- Suggested Positions -

Long Aug $210 call (PPG140816C210) entry $3.65*

05/30/14 triggered @ 202.00
*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


Entry on May 30 at $202.00
Average Daily Volume = 552 thousand
Listed on May 29, 2014

United Parcel Service - UPS - close: 103.88 change: -0.18

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: +122.2%
Time Frame: 4 to 8 weeks
New Positions: see below

05/31/14: After a four-day surge higher shares of UPS paused on Friday with a minor decline. The stock is up six out of the last seven weeks.

I am concerned that the $105 level could be resistance. More conservative traders may want to start taking profits now or closer to $105.00.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $123 target (up from $114 a few weeks ago).

- Suggested Positions -

Long Jul $100 call (UPS140719C100)* entry $1.98

05/29/14 more conservative investors may want to start taking profits now or as UPS gets closer to potential resistance at the $105 level.
05/12/14 triggered @ 100.25
*I've provided the more standardized option symbol format.


Entry on May 12 at $100.25
Average Daily Volume = 2.9 million
Listed on May 10, 2014

PUT Play Updates

Intl. Business Machines - IBM - close: 184.36 change: +0.60

Stop Loss: 187.50
Target(s): To Be Determined
Current Option Gain/Loss: -11.1%
Time Frame: 8 to 10 weeks
New Positions: see below

05/31/14: IBM is not cooperating. The stock is not seeing any follow through on Wednesday's bearish breakdown below support near $185 and its simple 200-dma. Traders may want to wait for a failed rally or new lower high before initiating new put positions.

Earlier Comments:
IBM is in the technology sector. The company has grown from a massive hardware manufacturer into a global information technology services company.

The company reported earnings on April 17th. Results were in-line with Wall Street estimates on the bottom line at $2.54 per shares. Revenues fell -3.9% and missed estimates by a wide margin. Management reaffirmed their 2014 guidance. This was the fifth quarter in a row that IBM missed analysts' revenue estimates and its eight quarter in a row of revenue declines. Shares plunged from $196 to $187 on this earnings news. Since its quarterly report IBM's stock has rallied just high enough to fill the gap and then reverse lower.

The company is currently facing a new problem and that's China pressuring local companies to stop using U.S. technology. Actually it's not a new problem. This has been trending for a couple of years and the issue was exacerbated after the Edward Snowden scandal. Now many foreign governments distrust any tech hardware from big name U.S. corporations for fear there could be U.S. spying malware on it.

This tension between China and U.S. has escalated following America's recent allegations of five Chinese military officers hacking American businesses. In response the story now is China's government is pressuring large state-run banks to stop using IBM servers and replace them with local domestic hardware. Chinese officials are arguing that using IBM machines could be a national security threat. The Chinese market accounts for about 5.5 percent of IBM's total sales.

This political pressure to stop buying U.S. technology could last a while, especially as China takes a more belligerent pose against the west and its neighbors.

Technically shares of IBM are underperforming. The stock just broke down below support near $185.00 and technical support at its simple 200-dma. There appears to be significant support near $172.00. Coincidentally the point & figure chart is bearish and forecasting a $172 target.

We're not setting a target but $175-172 is a good spot to aim. I wouldn't be surprised to see a short-term bounce at $180.

- Suggested Positions -

Long Aug $180 PUT (IBM140816P80) entry $4.50*

05/29/14 trade begins. IBM gapped higher at $183.64
*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


Entry on May 29 at $183.64
Average Daily Volume = 3.2 million
Listed on May 28, 2014

Whole Foods Market, Inc. - WFM - close: 38.24 change: +0.14

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: -24.7%
Time Frame: 8 to 12 weeks
New Positions: see below

05/31/14: WFM spiked lower again on Friday morning but traders were still in a buy-the-dip mood. Shares drifted higher by the closing bell.

Friday's intraday low was $37.72 and readers may want to wait for a new decline below this low before initiating new bearish positions.

Earlier Comments:
WFM is in the services sector. The company runs a grocery chain focused on natural and organic foods. As of May 2014 they had 379 stores. Unfortunately their success in the higher-margin organic foods has fueled significant competition.

The stock has been sinking for months as investors worried about growing competition. WFM's recent earnings report confirmed their fears. The stock crashed -19% after WFM missed estimates on both the top and bottom line and confessed they were facing tougher rivals. Management then lowered their 2014 guidance.

WFM said revenues still grew +10% and their same-store comparable sales were up +4.5%. Unfortunately profits were relatively flat and margins are getting squeezed with higher cost of goods sold and rising capex.

WFM is facing competition on all sides. Sprouts Farmers Market (SFM), The Fresh Market (TFM), Kroger (KR), Wal-mart (WMT), and regional competitors like HEB and Trader Joe's are all jumping on the organic and natural food bandwagon.

- Suggested Positions -

Long Aug $35 PUT (WFM140816P35) entry $1.01

05/19/14 trade begins. WFM opens at $37.89


Entry on May 19 at $37.89
Average Daily Volume = 9.2 million
Listed on May 17, 2014