Option Investor

Daily Newsletter, Saturday, 6/7/2014

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

Bulls raced into the market as indexes broke to new highs on a summer Friday.

Market Statistics

While historians are remembering the June 6th invasion in Normandy, traders are going to be remembering Thursday and Friday as the summer stampede. All the major indexes broke solidly above prior resistance with the Dow, $S&P, $OEX, $RUI, $RUA, $NYA, $TRAN and $SOX all surging to new highs. The Nasdaq 100 ($NDX) made a new 14 year high. The Nasdaq Composite ($COMPQ) and the Russell 2000 ($RUT) were up strongly for the week but they started from a lower level and did not make new highs.

It would appear on the surface the market has gone from stealth rally to stampede mode in the last three days. The Volatility Index fell to 10.73 and closed under 11 for the first time since February 2007. Anyone looking to sell option premiums to make money is going to be hard pressed to find any premiums worth the risk. However, those looking to buy calls will be rewarded with low prices.

The big news for the morning was of course the Nonfarm Payrolls for May. The headline number came in at a gain of +217,000 jobs and April was revised lower by a small -6,000 drop to 282,000 jobs. The estimate range for May was from 110,000 to 240,000 so it came in towards the high end of forecasts. Overall it was another Goldilocks report, not too hot and not too cold. Over the last 12 months the average gain was +198,000 jobs so there is no real acceleration in hiring.

The unemployment rate remained unchanged at 6.3% as the labor force participation rate remained weak at 62.8%. The separate Household Survey showed a rise of +192,000 in the labor force after a -806,000 drop in April. The Household Survey showed a gain of +145,000 jobs and a nice improvement over the -73,000 loss in April.

The economy needs to create TWICE as many jobs in order to accomodate the increase in the working-age population. That is not likely to happen and the long term unemployment is going to decline slowly as more workers enter the job market.

Approximately 3.6 million college students will graduate in 2014 and roughly 3.5 million will graduate from high school. Approximately 1.2 million legal immigrants will be allowed in and roughly 500,000 illegal immigrants will arrive according to to Homeland Security. Assuming 3.0 million college grads, 1.0 million high school grads, 600,000 legal immigrants and 400,000 illegal immigrants will enter the workforce that is roughly 5.0 million new workers. We only created 2.379 million jobs over the last 12 months or about half what is needed to keep unemployment rates from rising.

Private payrolls rose by +216,000 with business and professional services gaining +55,000 jobs, down from +71,000 in April, and healthcare also rose by +55,000. Retailers only added +13,000, down from +43,000 in April.

Analysts are still playing the weather card saying the job gains were boosted by the snapback from the bad weather in Q1. Outside projects delayed by the weather are just now ramping up to full speed now that summer weather is here to stay.

Employment has to improve significantly or the Federal budget is going even higher as a result of growing expenses for social programs to keep the rising number of unemployed persons from starving.

Next week is another light week for economic reports. The retail sales report is probably the most important for the week because it will tell us how consumers spent money in May. The Producer Price Index is expected to rise slightly due to the rising cost of commodities and fuel. If consumer spending remains soft the producers will not be able to pass that on to the retail purchaser.

The wholesale trade number is a lagging indicator for April so it will be ignored.

The biggest event is the Apple stock split. Apple's 7:1 split at the close on Friday is the fourth split in the company's history and the largest. The stock has gained +135 points since the April low at $511. The gains came primarily from the stock buyback and dividend announcements and of course the stock split.

We all know that the split has no impact on the fundamentals of the stock. It is simply a liquidity event that makes the stock more affordable for the smaller investor. They will surely pile into the stock at the open on Monday when the shares open at $92.20 based on the closing price on Friday.

Most investors that traded stock splits during the go-go days of the Y2K rally understand there are multiple phases of a stock split. The first is the announcement spike where all the shorts are forced to cover. Depending on the time between the announcement and the split there may be a post announcement depression period while traders are dormant waiting for the split to draw nearer. The next phase is the pre-split runnup. Normally about three weeks before the split date the trader community piles into the stock for the pre-split rally.

When the split actually occurs there is a very short term blip as new investors snap up the cheaper shares. However, this is normally a short term event of 1-2 days. The bigger pressure on the stock will be dividend selling.

When a company announces the stock split as a dividend, which is 99.9% of all splits, the holders of the stock after the split can sell their new shares and be taxed at dividend rates rather than regular tax rates.

This means can sell their "new" shares at a lower tax rate. That does not mean they will sell them all but they can sell a portion of their new shares and take some cash off the table. Given the +$135 rally in the last month there will be a lot of people taking profits.

Also, some pension funds are restricted as to the number of shares they can own. If they held 5 million shares on Friday they will have 35 million on Monday. If their limit was 20 million per position then 15 million have to be sold.

There were 861.38 million shares outstanding on Friday. On Monday there will be 6.029 billion shares outstanding. The volatility is going to be significantly reduced. Microsoft (MSFT) has 8.26 billion shares, Oracle (ORCL) 4.46 billion and Exxon (XOM) 4.29 billion. You rarely see those stocks moving more than $1 a day.

The vast number of shares available to trade next week is going to limit the movement in the stock unless a majority of existing shareholders decide to sell a chunk of their new shares and that overpowers the number of new investors buying the newly affordable shares. You have to think that shareholders of 6.029 billion shares could easily overpower the buying power of small account holders wanting to buy a 100 lot at the new price.

It is not unusual for the post split depression to push prices back to the price at the announcement. That would be $525 or $75 post split. With a lack of catalysts in Apple's immediate future I would hold off on buying new shares until we see what levels they reach in the post split depression phase.

Google (GOOGL) spiked to $588 on the day of the split but then declined to $511 within three weeks on post split depression.

MasterCard (MA) is a good example of a split run. They announced a 10:1 split in December at $760 and split on January 21st at $823 ($82.30). In the ten days after the split the stock declined to $71.75 or more than $10. Despite the suddenly affordable stock price dropping from $823 to $72 the stock moved sideways for two months. Will that happen to Apple? MasterCard had only 1.12 billion shares after the split and Apple will have 6.029 billion. I would say the odds of post split depression over the next several weeks are pretty good. However, MasterCard does not have the same retail investor sex appeal as Apple shares so anything is possible.

In stock news Caesars Entertainment (CZR) fell -3% after bond holders served the company with a notice of default. Investors owning more than 30% of Caesars Entertainment Operating Company's second lien, 10% bonds due in 2018, gave the company the notice of default. The group said the company defaulted on its obilgations by transferring assets, including the Bally's Las Vegas hotel to an affiliate and by removing the parent company's guarantee on the debt of the operating unit. There are $3.7 billion in notes outstanding.

Apollo Global Management (APO) and TPG Capital bought the parent company in 2008 in a leveraged buyout. The company has $23.4 billion in outstanding debt. If the company does not resolve the creditor concerns the creditors can file for receivership, file an involuntary bankruptcy or foreclose. The second lien debt is trading at 42.5 cents on the dollar. The $1.5 billion in first lien bonds are selling for 84 cents on the dollar.

Caesars is eventually going to default. The $23.4 billion in debt is simply too much for the company to carry and some of it carries a 10% interest rate. Analysts believe bond investors are positioning themselves for the eventual restructuring by pushing for concessions in advance.

Keurig Green Mountain was trading flat for the day at $112.58 at 1:30 in a very quiet session. By 3:45 the stock had spiked to $123.38 on absolutely no news. Option volume exxploded with 30 cent options rising to $5 in only a few minutes. More than 12,000 June $120 weekly calls traded against an open interest of only 54. The calls expire next Friday. To buy calls $8 out of the money with only a week until expiration ahead of a monster unexplained spike in the stock is sure to bring regulatory inspection.

Total option volume in GMCR topped 74,000 contracts, more than 14 times the daily average. Calls outnumbered puts 3 to 1.

After the close the rumor of an acquisition by Coke (KO) resurfaced but there was no news. Coke bought 10% of the company in February and then said they were raising their stake to 16% about a month ago. Some analysts speculated Coke might acquire the entire company if the new cold beverage dispenser sold well. Coke is looking for a way to expand its offerings.

Tesla (TSLA) got a reprieve in New Jersey with the legislature voting unaminously to allow Tesla to sell its cars direct to the consumer in the Garden State. They were forced to stop selling them on April 1st after the Motor Vehicle Commission passed a rule banning direct sales. The new bill allows Tesla to have up to four retail stores, two more than it had before, and at least one service center.

The reversal of fortunes should make other states reconsider their laws against Tesla. Currently Texas and Arizona ban direct sales in their states while Maryland, Virginia and Colorado have some restrictions in place. Since Texas and Arizona are vying for the gigafactory you can bet the winner will immediately allow direct sales as a condition on getting the factory. California has already offered to relax some of its regulatory and environmental standards to entice Tesla to build the factory there.

Panasonic has announced it had signed a letter of intent (LOI) to partner with Tesla on the $5 billion gigafactory. It is not yet a firm commitment but the two sides are working closely to reach an agreement. Tesla will put up $2 billion and Panasonic $3 billion based on the current planning.

Tesla shares are still struggling under the resistance at $220 because of uncertainity over the "controversial" plans Elon Musk suggested were coming last week. He said at the shareholder meeting in reference to his desire to see more manufacturers build electric cars. "I'm kind of planning on doing something fairly significant on that front, which will be kind of controversial, with respect to Tesla's patents. But I probably want to write something so I can articulate it properly and explain the reasoning for the decision." He also said he would share supercharging stations with other manufacturers if they would contribute capital to the project. None have volunteered.

NetFlix (NFLX) is going to war with the cable companies. Netflix has started putting messages on the screen when you are trying to watch a movie. When the delivery speed slows down and interferes with reception the customer is getting the message "The Verizon network is crowded right now." They are also claiming similar slowdowns with Comcast (CMCSA).

Verizon sent a letter to Netflix threatening legal action if the company does not stop the onscreen messages. The Verizon letter demanded that Netflix provide evidence and documentation that substantiates its claim the streaming issues were "solely attributable to the Verizon network." Verizon also demanded the customer information for all customers that received the onscreen message. "Failure to provide this information may lead us to pursue legal remedies." Netflix has previously agreed to pay Verizon and Comcast for faster Internet speeds and priority for downloads. Verizon claims Netflix offloads its content to low cost broadband providers that suffer congestion issues unrelated to Verizon instead of connecting directly to Verizon.

Netflix shares are up +$130 since April.

Family Dollar (FDO) shares surged 10% after the close when Carl Icahn announced he had acquired a stake of 10.7 million shares or roughly 9.4%. Icahn said he was urging the discount retailer to explore ways to boost its value. Based on the closing price of $60.53 the stake would be worth about $647 million.

The discount dollar stores have been struggling because the low dollar consumer remains under pressure. Walmart (WMT) has posted declining sales for the last five quarters and they have a lot more marketing power than the dollar stores. Same store sales at Family Dollar declined -3.8% in the first quarter.

Shares of Dollar General (DG) rallied +3.50 in afterhours on expectations Icahn may try to force Family Dollar to merge with Dollar General. They are the country's largest dollar store with 11,100 locations.

Amazon (AMZN) is engaged in a war of its own over the price of e-books. The retailer is already fighting with Hachette Book Group and Bonnier Media. In the near future contracts with Simon & Schuster and HarperCollins will also be up for renewal. The fight with Hachette will determine the success of the future contract renewals with everyone else. Digital books are surging in demand and physical books are seeing rapidly declining demand. Physical book sales are expected to be $19.5 billion this year, down from $26 billion in 2010. E-book sales are expected to top $8.7 billion, an 800% increase. Amazon is fighting for a larger discount off the sales price so the company can continue its everyday low price model and increase margins. Amazon is already blocking some preorders for Hachette titles like Silkworm, written by JK Rowling of Harry Potter fame. She wrote the book using a pseudonym.

Amazon feels it has a dominant market position and as such it can sell more of the digital books than anyone else. That benefits the publisher and Amazon wants a bigger quantity discount. Amazon has 60% of the e-book market. Amazon offered to fund 50% of an author pool to reduce the impact of lower prices on authors. Typically writers receive 25% of the publisher's sales. A bigger discount to Amazon would reduce author revenue. Four major publishers including Hachette settled a Justice Dept investigation in 2012-2013 claiming they, along with Apple, fixed e-book prices. As part of the settlement they had to cancel their contract with Amazon and enter a new deal in 2012 that allows Amazon to discount book prices. It is that contract that is coming to an end.

Some authors are on Amazon's side. Since Amazon created the e-book market they have been able to sell many more books than they would have without Amazon. Publishers tried to kick back against Amazon by setting a firm retail price and paying a commission for the sale. Discounting was not allowed. Apple had several deals under that model where they received a 30% commission on sales. That went against the Amazon model of discounting everything and the fight began. As part of the government settlement publishers had to allow retailers to discount. That reduces the price to the publishers and to the authors but sells more books.

How do you fight a retailer that has a 60% market share? Is it worth receiving a buck or two more for your books but selling 40% fewer books? Obviously some readers will find a way to buy them elsewhere. That is a big revenue haircut for authors and publishers alike. Amazon is the 800 pound gorilla and sometimes you have to just get along.

Amazon has announced a new product event on June 18th in Seattle. It is rumored they are going to announce the long awaited Amazon smartphone. Also rumored it is to have 3D capabilities. The leaked specifications are for a 4.7 inch screen, 720P display, 13 megapixel camera and a Qualcomm Snapdragon processor. While Amazon is not expected to really impact the smartphone market with a leap in market share the market cap of the stock did jump $8 billion on the announcement. That is twice the market cap of Blackberry (BBRY). If Amazon is lucky they might sell as many phones as Blackberry and sell them at a loss like Blackberry does. The wild card here is the sales model. If Amazon elects to sell them really cheap in hopes of users buying more Amazon products through their phones they could depress prices and profitability for the other manufacturers. For Amazon it is all about gaining that next 1% of market share in any way possible.

Sprint (S) and T-Mobile (TMUS) are about to enter into the worst deal of the decade. Sprint is rumored to be considering an offer worth $40 per share for T-Mobile with 50% in stock and 50% in cash. That values T-Mobile at $31 billion. If they could actually conclude a deal it would create a larger number three telecom company in the U.S. and provide some real competition for AT&T and Verizon.

However, analysts give it only about a 30-40% chance of being approved by regulators. What makes this the worst deal in a decade is the breakup fee. If they enter into a contract and can't conclude a deal Deutsche Telecom, the 67% majority owner of T-Mobile wants a $3 billion breakup fee. Softbank, 80% owner of Sprint only wants to pay $1 billion. They will probably meet in the middle. I can't imagine any board giving approval to incur such a monumental breakup fee when there is less than a 40% chance of getting a deal done. Have people lost their mind? Shares of both companies declined on the breakup possibility even though a combination would be beneficial.

The Apple 7:1 stock split has broken the barrier for high dollar stocks and there is likely to be a flood of new stock split announcements. If the Apple split is successful and the stock rises after the initial volatility you can bet there will be other companies announcing their own splits. It was ok to have a high dollar stock as a status symbol as long as Apple and Google were sporting high prices. The Google split did not really count since the two class share issue clouded the waters. However, the Apple split and the lame attempt to get included in the Dow could trigger a new wave of announcements.

There were only 30 stocks out of 4,000 commonly traded companies with a price over $100 at the height of the financial crisis in 2008. Today there are hundreds and the list is growing.

Some companies that could announce are listed below. Some will never split because they don't want to deal with the shareholder paperwork that comes with billions of shares. They know having a high share price means the majority of your investors will be institutions with low turnover rates. If you split your stock down from $200 to $20 your shareholder count could go up by 1000% over the next couple of years. That means more annual reports, more notices, more mail, more shareholder questions, etc. Plus the movement in your shares slows to a crawl. The larger number of shares makes it harder to increase your earnings per share. Instead of having your earnings go up by 50 cents a share they may only rise by 5 cents and that is far less impressive. Dell was a prime example. They split their shares so often it took a monster quarter just to move the needle by a few cents.

The companies I believe will split over the next year are TSLA, AMZN, NFLX, ISRG, AZO and CMG. I included the Berkshire A shares in the list at $192,903 but Buffett said in the past he would never split his A shares. Maybe when they reach $200,000 each he will reconsider.

For the last two weeks the S&P has been in a solid uptrend. Multiple resistance levels have been broken. As each was tested the analysts would say "if this resistance breaks it would be a bullish breakout." It would break and then the analysts would point to the next level and "well we still have to get over xyz level" for confirmation. "Now we need some critical economic numbers from the ISM and Payroll reports."

I am guilty of making those statements. My levels were 1,900 and 1,925. The S&P closed at 1,949 on Friday after a +26 point gain for the week. That is a clear sign of shorts covering and fund managers chasing prices.

The rally was operating in stealth mode from the 27th to the 3rd but broke out into stampede mode on the 4th. Back on May 15th when the S&P was testing 1,860 the predominant sentiment was for a potential correction. Because each rebound had only been about 20 points and then a failure at resistance everyone was asleep when we retested the 1,900 level on the 23rd. The move over that level began to attract attention but the bears kept warning it was a blow off top because the Nasdaq and Russell were not participating. The continuing climb by the S&P was slow and lackluster and that kept the bears on board for another week.

When the Nasdaq and Russell suddenly began to rebound as well the bears were trapped. Suddenly every day was short covering day. Fund managers who were under invested in the market ahead of summer suddenly had to chase prices higher and put that idle cash back to work.

The combination of decent economic reports, ECB stimulus, better than expected economic numbers out of China and peace talks between Ukraine and Russia increased bullish sentiment and stocks moved higher over a crumbling wall of worry.

The S&P has now managed to move from oversold to overextended in about three weeks. The close at 1,950 could be seen as resistance but the 1,965 level is the real deal. However, 1,957 is the median target price for the S&P for 2014. We are at the yearend target in June and there are 7 months left. What happens now?

While the median S&P target is 1,957 the real target everyone talks about is 2,000. With the short covering and price chasing I believe there is the potential for that 2,000 level to be tested. At the risk of jinxing the current rally there is no bad news to crater the market. Russia and Ukraine are holding peace talks. China is improving. The U.S. continues to slowly recover and there are no storm clouds on the immediate horizon. There is nothing in sight to keep the markets from continuing to rise.

However, as I have said many times, the markets don't need an excuse to correct. They can do it at any time and the market reporters will assign a convenient excuse.

If anything the bears are still in denial and there are more shorts left to cover. I am sure there are still some fund managers holding cash that has suddenly become a liability. Can we move higher, absolutely! Can we suddenly move lower, absolutely but I think we have finally established a directional trend to the upside and it may continue.

New highs tend to attract new money faster than flies at a picnic and the majority of indexes have all broken out into blue sky territory and that is a flashing buy signal for retail traders.

The fly in the ointment is the volume. Friday's bullish gains that pushed the VIX down to 10.73 and 7 year lows came on volume of barely 5.2 billion shares. It was a summer Friday so that may actually work out in our favor. When everyone returns to work next week the volume could pickup and it is likely to be to the buy side.

The Dow breakout over 16,800 and then 16,900 puts it truly in blue sky territory. The clear round number target here is 17,000 but 17,200 is the next level of uptrend resistance. I went through the Dow 30 stocks and only 9 of them are not in an uptrend and several are exploding to the upside. The laggards are MCD, PFE, WMT, T, PG, VZ, HD, V and IBM. The financial stocks have been laggards all year and they caught fire last week with Goldman and American Express moving up strongly. AXP set a new high on Friday. With the financials suddenly catching fire this rally could have some staying power.

The Nasdaq 100 ($NDX) broke out of resistance on the strength of Apple and it may die next week because of Apple. The post split depression story is the wild card for tech stocks. Apple is a sentiment indicator for techs and a big post split decline could poison sentiment. The NDX broke out to a 14 year high and there is no serious resistance until 3,950-4,000 with Friday's close at 3,794.

The Nasdaq Composite is a different story. The Composite has not broken out to a new high and has strong resistance at 4,344 and 4,371. That 27 point range could be really tough to break if Apple is struggling with the post split depression. Fortunately the Composite built some decent support early last week at 4,220 so the potential for a major decline has dwindled.

The Russell 2000 slammed into strong resistance at 1,165 at the open on Friday and remained stuck to that level the rest of the day. The Russell rebounded +4% from the week's lows at 1,119 and +2.7% in just the last two days. That was a very strong performance but I doubt it was new money rushing in. It was more likely shorts covering after the support at 1,120 was tested for three consecutive days and failed to break. Shorts are not stupid and three rebounds from support when the big cap market is moving to new highs was a strong incentive to abandon those short positions. As the rebound began I am sure there was some new money chasing prices higher.

However, just getting past resistance at 1,165 is only the first hurdle. There are four additional levels starting at 1,180 that need to be crossed as well. The Russell does not need to be charging ahead for the big cap market to continue its gains. The Russell just needs to be mildly positive so it does not act like an anchor holding the market back.

The Dow Theory followers should be jumping for joy. The Dow and the Dow Transports are both in breakout mode and the economic indicators are improving. In theory that should mean both will continue higher. However, as sure as night follows day the transports will eventually return to the 100-day average as support. I doubt it will be soon but it will happen.

Eurozone stocks are also breaking out after the ECB cut interest rates and discussed the potential for QE. The ECB actions were widely expected and stocks had pushed higher but the actual news worked to push them to a new post recession high. The ECB has served notice it is going to battle deflation and use every means possible so eurozone stocks should do well.

I look for the markets to consolidate their gains next week and for the Nasdaq 100 to be the weak link "IF" the post split depression in Apple shares occurs as expected. Otherwise I think we are in buy the dip mode until proven wrong. The economic calendar is light and there is nothing on the geopolitical scene that should roil the markets. Of course those geopolitical events are never telegraphed in advance. They just show up unexpectedly and investors pay the price.

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.

The ECB cut its deposit rate to -0.10% to become the first major central bank to charge for funds on deposit at the bank. This means correspondent banks in Europe will now have to move the money out of safe keeping at the ECB and put it to work. They are no longer able to collect even a miniscule amount of interest by parking the money. They are going to have to find some other way to invest it.

The ECB cut the benchmark interest rate by 10 basis points to 0.15% and the marginal rate was reduced by 35 points to 0.4%. The ECB also opened a 400 billion euro ($542 billion) "liquidity channel" tied to bank lending. This is another effort to get banks to lend money. Banks will be able to borrow from the ECB up to 7% of their outstanding loan balance to non-financial corporations and households. The name for this is Targeted Long Term Refinance Operation or TLTRO. That means they can borrow money for practically no interest as long as they loan it to businesses. The ECB also said from March 2015 to June 2016 banks will be able to borrow as much as three times the amount of their net lending to euro-area companies. Lastly they are working on an "asset purchase" plan or QE to be announced in the future.

The final numbers are in. The Russians withdrew 61% of their money from U.S. banks in the month before the sanctions took effect. Deposits held by Russians in U.S. banks fell from $21.6 billion to $8.4 billion in March.

Remember the sky high GDP forecasts from two weeks ago? Q2 GDP was expected to snap back to 4% or even 5% and the full year GDP was going to be 3% to 4% depending on who was making the prediction. Surprise, the estimates are dropping like a rock. Bloomberg published this chart last week after a survey of economists. The full year estimate now averages 2.5% growth and is still falling.

Chart from Bloomberg Briefs

David Rosenberg from Gluskin Sheff said there is ZERO chance of recession because none of the ten checkpoints leading into a recession have come true. List courtesy of Pragmatic Capitalism

1. Inverted yield curve – despite the decline in bond yields, the spread between the 10 year US T-note and the three month T-bill is 244 points.

2. Morgan Stanley Cyclical Stock Index down more than 10% – the index closed at a record high on Monday and is up 4.9% year to date.

3. Bond yield rally of at least 135 basis points – the 10 year T-note yield has fallen 56 bps from the recent peak of 3.04% hit at the end of December.

4. Commodity prices down 5-10% – the CRB spot commodity price index is just off a two year high hit in May and is up 9.3% year to date.

5. High yield corporate bond spreads widen out 350 bps or more – spreads have continued to narrow and currently sit at almost seven year lows.

6. ISM below 50 for at least on month – the ISM manufacturing index just ticked up to its highest level so far in 2014 at 55.4 in May.

7. Initial jobless claims (four week moving average) up 75K – the four week moving average of initial claims fell to 311,500 in the week of May 24th, the lowest level since August 2007.

8. Relative strength of the S&P Financials down at least 20% – the ratio of S&P financials to the S&P 500 is down 2% year to date and down 6% from the recent peak from last July.

9. ECRI smoothed index of -5 or worse – the index was +5.3 for the week of May 23rd.

10. 20 point decline in University of Michigan consumer sentiment – the gauge of consumer confidence fell 2.2 points in May from April’s nine month high and is 3.2 points below the post-recession high hit last July.

David Tepper tapered his concern over market conditions. Two weeks ago he said he was concerned over the stability of the market and stocks swooned. On Thursday he said he was not as concerned and the market rebounded. Since he has a history of moving the market I wonder if he bought puts before the first comment and then bought calls before his last comment.

Ralph Acampora was right back in the flip flop chair last week. Three weeks ago he was saying the market could correct by as much as -25%. On Thursday he was bullish again. When questioned about his flip-flop he said that is the beauty of technical analysis. "When the technicals change direction you change your outlook." So is Acampora a day trader now?

China's PMI came in better than expected and at a 4 month high last week. Does that mean China is back to abundant growth? Not hardly as anyone will tell you one number does not make a trend. In fact the IMF lowered their forecast for GDP growth from 7.5% to 7.0% for 2015. China is on track for 7.3% growth in 2014 and will miss the current 7.5% target.

Let's be realistic. Everyone in the world would love to have 7% GDP growth. It just means China's economy has grown so big it is difficult to keep growing at a monster rate.

I saw a great comment on the VIX closing at 10.77 on Friday. "It has never stayed lower than that. And never is a long time." Is it time to buy long term VIX calls?

The most important number in the jobs report was 23.5 million. According to the BLS 23.5 million people either want a job or are working part time because they can't find full time employment. This is down from the 30.4 million four years ago but up from the 16 million just prior to the recession. That makes the real unemployment rate about 14.5%. The percentage of American civilians aged 16 and over and are not actively seeking one remained at 37.2% or 92,018,000 people and a 36 year high in May. The number of working Americans was 65.7% of the population when President Obama took office. It has declined to 62.8% and a 36-year low over the last five years.

Sell in May and go away. While that is historically the normal trend there are exceptions and 2013 and 2014 were two good years. The Stock Trader's Almanac did a study and on years when May is positive and the month of June is positive more often than not. However, the good news is that since 1968 when May is positive the rest of the year was positive 18 times and negative only 8 times. The positive years averaged a gain of +22% and the down years a loss of -4%. If history repeats itself this year we have a roughly 70% chance of a good year. Whether this overcomes the horrible history of the second and third quarters of a midterm election being negative is yet to be seen. While we can't trade on the historical seasonality it does make it interesting to see if they come true.

Jeffery Hirsch, editor of the Almanac, was questioned on CNBC why the sell in May cycle did not appear this year. The answer is "QE." The Fed is still buying $45 billion in treasuries every month and that is supporting the market along with the slowly recovering economy and the positive news from Europe.

Markets run on earnings. The PE may get ahead of earnings but they always come back to meet at some point in the future. Either earnings grow to meet the price or prices decline to meet the earnings. This is like gravity. We can avoid it temporarily but we always come back to earth. Today's S&P-500 PE is 16.5 and not high but not low either. It is right at the Goldilocks level where stocks are fairly priced.

The S&P has risen in 20 of the last 24 months with a 46% gain. That makes this the second most positive period in S&P history going back to 1952. The only time that there were more positive months in a 24 month period was 1994-1996 when the S&P rose in 21 of 24 months and rose +67%.

Quote of the week from Scott Krisloff from Avondale Asset Management.

Last month a Norwegian journalist who has been reading my analysis contacted me asking for a bearish quote. He mentioned to me that I have been waiting for "quite a long time" for a decline. My response to him was that it really depends on how you define a long time. Within the context of economic cycles, the six months that we've been bearishly positioned is not exceptionally long.

We experience time in hours and days, but economic cycles are measured in months and years. The average economic expansion has lasted 58 months since World War II, and we are in the 60th month of this expansion. On that time scale an extra three or six months is not meaningful. But when you are in the thick of things, that time can feel like an eternity.

It is probably this very disconnect that ends up creating economic cycles. The cycles last just long enough for emotional memory to fade so that we can make the same mistakes a second time. Market cycles trend towards extremes because we project the short term onto eternity and convince ourselves that the present environment will continue indefinitely.

Prices do not trend linearly in one direction though. Economic cycles rise and fall, and even though it may feel like things will stay this way forever, I can promise that they will not, and it’s highly likely that the top will be the precise moment that we're most convinced that they will. The longer that prices rise without a commensurate increase in earnings, the more likely that the correction will be severe when it eventually arrives.

The CIA went social last week with its first ever tweet. Apparently someone there has a great sense of humor. The tweet was "We can neither confirm nor deny that this is our first tweet."

Do you want me to continue the Random Thoughts section? Click the email link below and give me your thoughts. Thank you in advance.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Never argue with stupid people. They will drag you down to their level and then beat you with their experience."

Mark Twain


Index Wrap

The Market Sees Stronger Upside Momentum

by Leigh Stevens

Click here to email Leigh Stevens

After NDX made a double bottom low in mid-April and gained 8.9% into Wednesday's Open (the S&P 500 & 100 rebounded 6% in the same time frame) traders finally got very bullish as CBOE equities call volume was 2.3 times puts (on 6/4). Good grief, what were they (traders) waiting for! Someone to teach them technical analysis? Kidding! Sort of.

The psychology of bullish/bearish market sentiment extremes and the theory of contrary opinion is that the overall market views of traders/investors usually considerably lags market reversals and AFTER sizable price swings. Traders seem to prefer to wait until they believe trend momentum and in this case, the crowd 'gets' that it's still a bull market.

Not to be too harsh a critic here, as most traders don't live by the adage that chart patterns FORECAST what's coming for stocks well ahead of time, most of the time, ahead of OBVIOUS trend shifts. This is what Charles Dow discovered prior to the 20th century and we're in the 21st. Nothing much new under the sun!

IF you get bullish only when ALL can see major upside momentum, it may be that the herd has determined that the Market will gain another 30/30+ percent like 2013! In stocks maybe one can 'afford' to give up the first 6-9% gain from reliable bottom patterns and trend 'following' works to a degree. This strategy isn't so great in options, at least in directional trades. Trading based on widely recognized price momentum is not generally a great idea in options. My first success in trading Index futures and in forecasting to UBS was in using charts and indicators to identify EARLY trend changes, when momentum first shifted and bullish sentiment was still relatively, or very, low. My biggest following was the options brokers.

The charts look quite bullish now but they (the charts) have looked bullish since the signs for a mid-April bottom. However, this past week brought 'confirmation' of a rebounding economy and some waking up in Europe as to doing more than 0% interest rates.

The Dow 30 (INDU) is the best illustration (versus the S&P 500 & 100 charts) of a broad Head & Shoulder's (H&S) bottom with Friday's strong advance an upside breakout above the H&S neckline and suggesting a potential 'minimum' upside target to the 17400 area. See the Dow chart below.

A short-term correction and pullback can occur at any time, given a near-term overbought condition. Objectives I talk about are expected over time.

I'll save any further prognostications for my individual major market index commentaries seen below.



The S&P 500 (SPX) Index has accelerated to the upside, most easily 'seen' in yet another overnight upside price gap. This suggests a greater confidence in my interpretation of the highlighted 'measuring' gap, as suggesting half way in a move. If so, SPX could get up to around 1987, close to my long-standing objective for the Index to reach 1980-1985. Stay tuned!

Support is seen at 1920, then in the 1900 area. Resistance (red down) arrows are highlighted at 1960 and then at the upper end of SPX's broad uptrend channel, intersecting at 1985 currently and coincidentally to a key price objective.

As noted in my initial 'bottom line' comments, SPX ran up 6% into Wednesday's Open, from its mid-April (double) bottom, before we saw CBOE traders' awaken from their bearish slumber, causing a big jump in bullish sentiment. First real 'extreme' we've seen in weeks and a reason to have stayed bullish from the lows on and cautiously bullish for some further upside.


The S&P 100 (OEX) chart is strongly bullish. Upside momentum has accelerated since OEX pierced resistance in the 840 area then did the same above 850.

There's potential for a move to the 880 area in OEX. (And really, if so, why not 900 as big fat juicy target for the bulls!) 870 is next resistance, then 880, at the top end of OEX's well-defined and broad uptrend channel.

The Index is at an oversold extreme both short and intermediate-term. However, a minor dip and some sideways price movement will tend to 'throw off' the most overbought (RSI) extreme readings. Enough so for some further gains ahead.

Technical/chart support is at 850, then in the 841-840 area.


The Dow 30 Average (INDU) has broken out above some important resistance at 16800 and appears headed for 17000-17100. I got struck, after this past week's trade, by the possible Head & Shoulder's (H&S) bottom pattern as highlighted on INDU's daily chart this week.

The last spurt higher so looked like a breakout above an imagined 'neckline' to such a H&S bottom pattern. If so, this recent up side 'breakout' move sets up an INDU objective to around 17400. Over time, I would also say, as I don't anticipate such an immediate strong spurt higher. INDU is overbought on a near-term basis like the other major indices.

Resistance is projected to come in next in the 17000 area, with resistance extending to 17100. Over time higher objective are possible.

Pullbacks to the 16800 area should be well bought, with chart support down to the low-16700 area. Trendline support is suggested currently at 16560.


The Nasdaq Composite Index (COMP) is kept up the bullish pace anticipated after COMP crossed well above a 2/3 retracement of the last big downswing; this in turn, suggesting at least a re-test of the prior top in the 4370 area. This move looks to be on track. I've noted resistance beginning next at 4350, extending to 4370.

That last sizable upside price gap now more so to be half way in a move to the 4370 area.

Near support is suggested at 4250, with support/buying interest on down to the low-4200 area.

Bullish extremes now have been seen in the 13-day RSI and in terms of 'extreme' bullishness suggested by the CPRATIO indicator. Some volatility could come in, versus what has been a very low VIX. Nevertheless, price charts are in a strong bullish pattern and prices should go higher still. Prepare for some possible zig-zags along the way!


The Nasdaq 100 (NDX) has been on 'fire' since the Index went to new highs, leading the way in my opinion for the overall Market rally that's got juiced this past week. 3800 may offer some near-term resistance, extending to 3850. NDX is also now quite overbought on both a short-term and intermediate basis. Fairly major resistance begins at 3900-3930.

I've noted anticipated support around 3738-3740, extending to the low-3700 area.

The possible 'measuring' implications of last upside price gap as highlighted below, suggest that was maybe half way in a move, with a target to 3850. This isn't to suggest NDX can't or won't go higher but I'd be happy exiting bullish strategies there.

The game can be more rocky ahead as the probabilities for a pullback increase. I don't anticipate a big downdraft but it won't take much of a dip and, some sideways consolidation, to 'throw off' the bullish 'overbought' extremes; enough so that another up leg is possible after such consolidations.


The Nasdaq 100 tracking stock (QQQ) is in a strong bullish move and projects still higher but getting there may get more rocky ahead.

Resistance is highlighted at 94 and extends to 95. A move to 95 would fulfills a 'measured move' objective.

Pullbacks to support in the 91.3-91 area could occur but the bulls may not make it even that easy for the QQQ shorts. 90 is the next and likely solid support for the Q's.


The Russell 2000 (RUT) has finally gained some traction and broke out above its down trendline with the move above 1160 which is bullish and suggests further upside retracement. That there could be a strong recovery move was implied by the huge 'double bottom' low.

I project next technical resistance coming in at 1180, extending to 1200. Look for support initially at 1155-1153, then at 1140 and next at 1120.


New Option Plays

Defense & Healthcare

by James Brown

Click here to email James Brown


Lockheed Martin Corp. - LMT - close: 167.17 change: +0.84

Stop Loss: 163.95
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:
LMT is in the industrial goods sector. The company is a major players in aerospace technology and the defense industry. Business has been booming for this defense contractor. Q4 earnings came in better than expected on both the top and bottom line. The trend continued when LMT reported its Q1 results on April 22nd. Wall Street expected a profit of $2.53 a share on revenues of $10.89 billion. LMT beat the bottom line estimate with $2.87 per share but missed the revenue estimate at $10.65 billion for the quarter. However, management gave an optimistic outlook and raised their 2014 guidance on both net profits and revenues.

Zacks had some interesting numbers on LMT's Q1 results. LMT's operating margins were at record highs and the first quarter of 2014 saw LMT's free cash flow hit a record $2.0 billion. LMT spent $1.1 billion buying back 7.0 million shares of stock and another $500 million on dividends.

It's not surprising to hear LMT management raising guidance. The company has been on a huge roll with a series of big contract wins from the U.S. Department of Defense. Just this past week LMT beat out Raytheon Company (RTN) for a $915 million contract to build a "space fence" for the U.S. Air Force. This "fence" is actually a radar system that will track and categorize up to 500,000 pieces of space junk orbiting the earth.

LMT is also seeing strong business overseas. Right now they're rumored to be the top pick for Canada to buy 65 new fighter jets. Canada's decision is expected in the new few weeks. Right now they're reviewing bids from LMT's rivals. Russia recent actions may have also generated more business for LMT. Since Russia invaded and annexed Crimea earlier this year LMT said they've seen a lot more interest from European countries looking to upgrade their defenses.

Technically shares of LMT are in a long-term up trend. They have spent the last three months consolidating gains and building a new base. A breakout past its recent highs could launch the next leg higher.

We are suggesting a trigger to buy calls at $168.55. We're not setting an exit target just yet but the Point & Figure chart for LMT is bullish with an $188 target.

Trigger @ $168.55

- Suggested Positions -

Buy the Sep $175 call (LMT140920C175) current ask $2.35

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

Annotated Chart:

Weekly Chart:

Entry on June -- at $---.--
Average Daily Volume = 1.2 million
Listed on June 07, 2014

Thermo Fisher Scientific, Inc. - TMO - close: 119.81 change: +0.81

Stop Loss: 115.90
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:
TMO is in the healthcare sector. The company makes analytical instruments, equipment, reagents and consumables. Plus they provide software, and services for research, manufacturing, analysis, discovery, and diagnostics in the United States and abroad. The story looks pretty simple. TMO is executing its business well. The company is developing a trend of beating analysts' estimates on both the top and bottom line and raising guidance. They've done it two quarters in a row.

TMO reported its Q1 results on April 23rd. Analysts were expecting a profit of $1.40 per share on revenues of $3.78 billion. TMO delivered $1.53 per share and revenues grew +22.3% from a year ago to $3.9 billion. How many companies are growing that fast? Shares did see a pullback when the markets were selling all the high-growth names in March and April. Investors have stepped up to buy the pullback.

At its Q1 earnings announcement TMO's management also raised their 2014 guidance on both the top and bottom line. A few weeks later at least one analyst firm issued bullish comments on TMO stating their opinion that TMO's management is being too conservative, even with their raised guidance.

Wall Street seems pretty happy with TMO's recent acquisition of Life Technologies for $13.6 billion. The deal is accretive to TMO's bottom line and should generate significant synergies. The new, combined company is seeing strong growth in Asia, especially in China. TMO is currently aiming to generate 25% of its annual revenues from China by 2016.

Technically shares of TMO are bouncing from its long-term up trend. They have also just recently broken out from its three-month consolidation and down trend of lower highs. Right now TMO is trading just below $120.00. We're suggesting a trigger to buy calls at $120.50.

Trigger @ $120.50

- Suggested Positions -

Buy the Sept $125 call (TMO140920C125) current ask $3.10

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

Annotated Chart:

Weekly Chart:

Entry on June -- at $---.--
Average Daily Volume = 1.7 million
Listed on June 07, 2014

In Play Updates and Reviews

Summer Melt Up

by James Brown

Click here to email James Brown

Editor's Note:

Stocks begin the month of June with widespread gains and record highs for the S&P 500.

DLPH hit our entry trigger. IBM hit our stop loss.
New stop losses on FB and LYB.

Current Portfolio:

CALL Play Updates

The Boeing Company - BA - close: 138.25 change: +1.43

Stop Loss: 129.90
Target(s): To Be Determined
Current Option Gain/Loss: +40.0%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: BA shot higher on Friday morning and ended the session with a +1.0% gain. The stock is now above potential resistance at the top of its January gap down. The next level of potential resistance is most likely the $140.00 level.

Earlier Comments:
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.

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.

- Suggested Positions -

Long Aug $140 call (BA140816C140) entry $2.25*

06/02/14: Triggered @ 135.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Entry on June 02 at $135.55
Average Daily Volume = 2.95 million
Listed on May 31, 2014

Biotech ETF - BBH - close: 93.45 chang6: +0.10

Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: + 9.8%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Biotech stocks had a good week but the rally in the BBH stalled near its simple 100-dma on Friday. This ETF is now up four weeks in a row. Broken resistance near $90.00 should be new support.

Investors may want to raise their stop loss.

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: 80.80 change: +0.98

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: +34.7%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Financials continued to rally on Friday and COF outperformed with a +1.2% gain. This stock is also breaking out past potential round-number resistance at the $80.00 mark.

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: 78.92 change: +0.30

Stop Loss: 74.65
Target(s): to be determined
Current Option Gain/Loss: +41.3%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: CVS spent most of the week consolidating sideways near $78.00 but ended at new highs. Shares are nearing what could be resistance near $80 and its trend line of higher highs (see daily chart below).

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

Delphi Automotive - DLPH - close: 70.74 change: +0.23

Stop Loss: 67.75
Target(s): To Be Determined
Current Option Gain/Loss: - 14.5%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Our brand new trade on DLPH is open. Shares rallied to new all-time highs at $71.27 before trimming its gains on Friday afternoon. Our suggested entry point was hit at $71.15. I would consider new positions now or you could wait for a new high (above $71.25).

Earlier Comments:
DLPH is a British company. They're also one of the largest auto parts suppliers on the planet. The stock has been a strong and steady performer for bullish investors.

The recovery in the U.S. auto market and the booming growth in the Chinese auto market has been a boon for DLPH. Wall Street analysts believe that DLPH benefits from its product mix that are focused on fuel economy, car safety, and automotive electronics. U.S. regulators are demanding a significant upgrade in fuel economy from American carmakers, which should be a tailwind for DLPH. The future of automobiles is more and more electronics, which is bullish for DLPH as well.

China will prove to be a big market for DLPH. The Wall Street Journal reports that DLPH believes its business in China could double to almost $5.5 billion by 2016.

DLPH's Q1 earnings report was strong. Analysts were expecting a profit of $1.08 per share on revenues of $4.29 billion. DLPH delivered $1.20 per share with revenues rising more than 6% to $4.28 billion. The company issued generally bullish guidance for 2014's profit and revenue estimates. DLPH also bought back 2.38 million shares of its own stock in the first quarter of 2014.

Wall Street analysts are bullish with price targets in the $84-90 range. The Point & Figure chart is bullish and forecasting at $81 target.

- Suggested Positions -

Long Aug $72.50 call (DLPH140816C72.50) entry $1.93

06/06/14 triggered @ 71.15
Option Format: symbol-year-month-day-call-strike


Entry on June 06 at $71.15
Average Daily Volume = 1.4 million
Listed on June 05, 2014

Express Scripts Holding - ESRX - close: 71.38 change: +0.26

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: +32.6%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: ESRX gapped open higher on Friday morning at $71.52 and then spent the rest of the day drifting sideways inside a 32-cent range.

More conservative investors might want to move their stop loss closer to the 200-dma (currently at 69.25).

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*

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.

option format: symbol-year-month-day-call-strike


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

Facebook, Inc. - FB - close: 62.50 change: -0.69

Stop Loss: 61.85
Target(s): To Be Determined
Current Option Gain/Loss: -23.0%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Shares of FB appear to be a little sick. The stock is just not performing the way it should. The last few days have seen the market's major indices surge higher. Yet FB is not participating. I don't see any good explanations for the underperformance. It's possible this is just a temporary sideways pause before the next move higher. The stock has been struggling with resistance near $64.00.

I am not suggesting new positions at this time. We are going to try and reduce our risk by raising the stop loss to $61.85.

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

06/07/14 new stop @ 61.85
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: 82.39 change: -0.41

Stop Loss: 78.75
Target(s): GILD @ 83.95
Current Option Gain/Loss: +41.5%
Time Frame: 4 to 8 weeks
New Positions: see below

06/07/14: Investors may want to just take profits now in our GILD trade, especially since we only have two weeks left on our June calls. Shares underperformed again on Friday. The stock has seen its rally stall at resistance on the underside of its prior bullish channel (see chart below).

We do think GILD has potential down the road but we may need to see a breakout past resistance near $85.00 before considering new positions. If shares roll over here it will look like an ugly bearish double top pattern.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

06/07/14 Consider taking profits now
06/05/14 new stop @ 78.75, adjust exit target to $83.95
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

Hanesbrands Inc. - HBI - close: 86.32 change: +1.59

Stop Loss: 81.75
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: HBI displayed relative strength on Friday with a +1.8% gain. Friday also marked its eighth weekly gain in a row.

Earlier Comments:
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.

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

- Suggested Positions -

Long Oct $90 call (HBI141018C90) entry $2.94

06/04/14 triggered @ 85.25
Option Format: symbol-year-month-day-call-strike


Entry on June 04 at $85.25
Average Daily Volume = 690 thousand
Listed on May 31, 2014

LyondellBasell Industries - LYB - close: 99.00 change: -0.04

Stop Loss: 98.45
Target(s): to be determined
Current Option Gain/Loss: +33.3%
Time Frame: 6 to 9 weeks
New Positions: see below

06/07/14: LYB snapped a five-week winning streak with a decline last week. The rally has stalled near round-number resistance at $100.00. More conservative investors will need to seriously consider taking some money off the table right here. Technically last week's pullback has created a bearish engulfing candlestick reversal pattern on the weekly chart. I am not suggesting new positions.

We are moving the stop loss to $98.45.

- Suggested Positions -

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

06/07/14 new stop @ 98.45
06/03/14 new stop @ 94.75
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: 77.47 change: +0.63

Stop Loss: 72.35
Target(s): To Be Determined
Current Option Gain/Loss: - 5.9%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Shares of MA shot higher again on Friday morning but the rally stalled near its late May highs just under $78.00. I would still consider new bullish positions now or investors could use a new rally above $78.00 as an entry point to buy calls.

Earlier Comments: May 24, 2014:
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: 144.64 change: +0.93

Stop Loss: 138.75
Target(s): MMM @ $144.75
Current Option Gain/Loss: +36.2%
Time Frame: 4 to 8 weeks
New Positions: see below

06/07/14: Dow Jones Industrial Average component MMM was doing its part on Friday to lift the index to new highs. Shares of MMM added +0.6% and closed at an all-time high as well.

Our exit target is $144.75. The high on Friday was $144.64. More conservative traders may want to take profits now. We only have two weeks left on our June calls.

- Suggested Positions -

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

06/05/14 set exit target at $144.75
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

PPG Industries - PPG - close: 204.93 change: +1.78

Stop Loss: 192.90
Target(s): To Be Determined
Current Option Gain/Loss: +17.8%
Time Frame: 8 to 10 weeks
New Positions: see below

06/07/14: Shares of PPG also ended the week at record highs. If the market sees any profit taking PPG should have short-term support at its 10-dma or the $200.00 mark.

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: 103.59 change: -0.03

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: +102.0%
Time Frame: 4 to 8 weeks
New Positions: see below

06/07/14: I am growing concerned with our UPS trade. The stock is underperforming the broader market and the transportation average. Shares closed virtually unchanged on Friday while the S&P 500 hit new highs.

UPS did have some headlines on Friday with the company announcing a new CEO. The current CEO Scott Davis is retiring. The current COO David Abney will become CEO on September 1st. He's a 40-year UPS veteran who started with the company has a part-time package loader.

Earlier Comments:
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

Bally Technologies - BYI - close: 59.24 change: +1.76

Stop Loss: 60.35
Target(s): To Be Determined
Current Option Gain/Loss: - 31.8%
Time Frame: 8 to 12 weeks
New Positions: see below

06/07/14: Bearish trades are not working in this market. Beaten down BYI exploded with a +3.0% gain on Friday. Shares are nearing what should be resistance at $60.00. Our stop loss is at $60.35. I am not suggesting new positions at this time.

Earlier Comments: June 2, 2014:
BYI is in the services sector. The company designs, manufactures, and sells gaming equipment (gambling type games, slot machines, etc.). After an incredible run in 2013 shares of BYI have reversed sharply and is in a bear market with a -29.9% drop from its January 2014 highs.

Looking at the earnings news you would think BYI should be doing better. They raised guidance after their Q4 report and offered bullish guidance again when they reported earnings on May 1st. Their most recent results missed Wall Street estimates by two cents with a profit of $1.10 per share but revenues came in better than expected. Revenues were up +30% thanks to its acquisition of SHLF entertainment. In spite of this news investors were not happy with the results and have continued to sell BYI.

It would appear that the game-making business is facing industry-wide headwinds. BYI is considered one of the biggest and strongest in the industry but the big names are losing market share with new comers making an already competitive business even worse. Casino operates are delaying or cutting back on upgrading new machines. Expectations on how many slot machines Vegas is going to replace in 2014 has been downgraded.

A number of analyst firms have been downgrading their price targets on BYI over the last few months. News of a new CEO came as a shock. After less than a year and a half on the job BYI announced they were replacing their CEO with its former CEO effective May 23rd. This was a surprise. As one analyst put it, "You don't change CEOs when things are going well."

FYI: The Point & Figure chart for BYI is bearish with a $50 target.

- Suggested Positions -

Long Oct $55 PUT (BYI141018P55) entry $3.30

06/03/14 triggered @ 57.25
Option Format: symbol-year-month-day-call-strike


Entry on June 03 at $57.25
Average Daily Volume = 697 thousand
Listed on June 02, 2014


Intl. Business Machines - IBM - close: 186.37 change: +0.39

Stop Loss: 187.50
Target(s): To Be Determined
Current Option Gain/Loss: -36.4%
Time Frame: 8 to 10 weeks
New Positions: see below

06/07/14: As the market rallied on Friday morning shares of IBM popped above its 20-dma and 100-dma and hit our stop loss at $187.50 before paring its gains.

- Suggested Positions -

Aug $180 PUT (IBM140816P80) entry $4.50* exit $2.86 (-36.4%)

06/06/14 stopped out
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