Option Investor

Daily Newsletter, Monday, 7/7/2014

Table of Contents

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

Market Wrap

Calm Before The Earnings Storm

by Thomas Hughes

Click here to email Thomas Hughes
The week started with relative calm as the market digests last weeks jobs numbers, enters earnings season and waits on FOMC minutes.


The week started off with relative calm following the three day holiday. International markets began the week mixed as traders contemplated the upcoming earnings season and weaker than expected data from Europe. In Germany industrial production fell -1.8%, the second month in a row of decline and below the expected rise of 0.3%. Asian and EU equity indices fell about a half percent on on the news with earnings and GDP growth in focus.

Early trading on the US market was muted. The futures trade indicated an open about 5 points below last weeks close for the SPX with the other major indices on similar footing. There was no economic data today to impact the early trading but comments from the IMF's Lagarde made over the weekend was the talk of the morning. She expects the US economy to improve over the next 18 months although momentum has declined. She also hinted at possible lower GDP estimates for 2014 based on some weakness in Europe and China.

There was no economic data today and the calendar is pretty light for the week. Tomorrow we'll get the JOLTs number, expected job openings, and consumer credit. JOLTs is released at 10AM while consumer credit is scheduled for 3PM. On Wednesday the FOMC minutes are released for the prior meeting. Traders will be looking for clues into the Fed's view on the economy, when the taper will end and more importantly when interest rates may begin to rise. After that the economic front is dominated by the weekly jobless claims on Thursday along with wholesale inventories, followed up by the Treasury Budget on Friday.

Trading was weak at the open as expected. In the first few minutes the SPX dipped down by about -6 points before finding early support around 1980. The index made a small bounce bringing it up to about -3 ish until just before 11AM. Right aroud 10:52AM the market began to sell off, bringing the index down about a half percent to just above 1975. The SPX held near this level for the mid part of the day with the Nasdaq down about 30 points and the Dow Jones Industrials about 45. Intraday bottom was hit about 2:30PM with the SPX down about 0.5%. The day's low levels held for the better part of the afternoon with a slight pick in action going into the close leaving the SPX at -0.39% for the day.

The Economy

No economic reports were released today except Moody's Survey of Business Confidence. Mark Zandi reports that business remain upbeat and “sunny” about the economy. He continues to add that the report is consistent with an economy growing faster than anticipated and that June hiring was strong. Personally, I have noticed that quite a few of my local stops have hired and are training new staff.

Earnings Season Starts Tomorrow

Earnings season gets underway tomorrow with Alcoa. The aluminum giant is expected to report earnings of $0.13 per share, up $0.07 from the previous quarter and well ahead of earlier estimates for the second quarter. Analysts forecast for Alcoa earnings have been on the rise and are nearly double what they were at the first of the year. There is an expectation for revenue to decline somewhat on weak aluminum prices but the foreward guidance will be of more importance, especially after the recent acquisition of Firth Rixson last month. Alcoa is currently up over 85% for the last 12 months and currently testing resistance at the $15 level. $15 has been a pivotal level for this stock over the past 5 years in the wake of the 2008 market crash. The long term trend is up but the indicators suggest a return to the trend line could be on the way. Today shares of Alcoa fell more than 1.5% from the current high and long term resistance.

The next significant earnings report will come from Wells Fargo on Friday. The bank is the second big report of the season and the lead off for the banking sector. Monday Citigroup reports followed by JPMorgan and Goldman Sachs on Tuesday. Wells Fargo is expected to report earnings slightly lower than the previous quarter but remain in line with full year projections. To date Wells Fargo remains one of the strongest of the big banks. Today the stock lost about -.95% but remains above the long term resistance turned support level of $52.50. The stock has been trending up for about 9 months and is within a percent or so of the high set within the last two weeks. Indicators are bullish but a growing divergence in the stochastic and weak momentum suggest a pull back or correction is likely. Near and short term support exists at the current level near $52.50, just below along the 30 day EMA and then longer term support a little further down along the $50 level. This week could see the stock consolidate or pull back ahead of the earnings report on Friday.

The Banking Index also fell today, dropping from resistance set earlier this year. In the near term momentum is bearish but extremely weak while stochastic indicates the sector is neither overbought nor oversold. While being consistent with a trading range the indicators also leave open the possibility of a break out, providing what little economic we will get this week is positive, bank earnings do not disappoint and future guidance is acceptable. Current resistance is $72.50 with an upside target, on a break out, near $77.50. Near term support is just below the current level near $71.50 with short and longer term support below that around $71, $70 and $67.50.

The Oil Index

Oil prices continued to fall today as Iraq fear exits the market and Libyan oil ports prepare to reopen. WTI fell by roughly $0.75 today with Brent dropping about $0.30 per barrel. The insurgent uprising in Iraq has yet to have an impact on Iraqi oil production or supply which is allowing the fear premium to subside while at the same time the stand off in Libya which has had oil shipping ports shut down for over a year is near an end. Rebels and officials have reached some agreement which could lead to ports reopening in the near future. If so Libyan supply could more than double to nearly 1.5 million barrels per day. This has been on the table before and failed to come to fruit so there is still risk up to and until the ports are actually opened. In the meantime the Oil Index also traded down today, losing about three quarters of a percent. The index remains above long term support along the 1650-1675 level. The indicators are bearish at this time, in line with the current pull back from the recent all time high, but not to troubling at this time so long as support holds. The prolonged run of high oil prices this spring should convert into higher revenue and potential earnings for the big oil companies, the bulk of which will report earnings in the first week of next month. Until then watch support levels and developments in Iraq and Libya.

Sector Watch

Fourth of July box office revenue was reported today and is down 44% from last year. The top box office title this year was Transformers which actually opened the week before. Total holiday weekend revenue was just over $130 million, about $13 million less than last years single top income producer Despicable Me 2 which brought in over $143 million on its own. This years top three hopefuls were only able to produce about $33 in revenue together. Industry insiders blame the drop in sales on a lack of big blockbusters and no animated family titles. Today the Consumer Discretionary Spyder (XLY) fell from last weeks new high to drop back below resistance. The ETF, which includes names like 21st Century FOX, Disney and Time Warner, fell about a half percent to trade just below the previous all time high set this past march. Both MACD and stochastic are weak and divergent, consistent with resistance and a potential trading range. Most of these names, in particular Walt Disney and Time Warner, do not report until the first week of next month so there could easily be some consolidation or pull back until then. The longer term trend in the sector is up so I expect to see some discretionary spending somewhere, it just isn't in the movie theaters at this time. Other top names held by this ETF include Amazon which never makes money, Home Depot, which has been doing well and benefiting from the slowly rebounding housing market, and Priceline, darling of the market.

Apple Does It Again

Apple made a move this weekend that sent the newly split stock to a new high. The company hired Tag Heuer executive director of sales, according to Reuters. The news fueled speculation of the upcoming iWatch and along with reported strong June sales sent the stock up by over 1.5%. Apple made no comment on the report. The move up in the stock is accompanied by bullish indicators and could carry the it higher. In the nearer term stochastic is overbought but momentum has just turned bullish so the current move may have only just begun. Apple is scheduled to release earnings in two weeks on July 22nd and is expected to report EPS of $1.22 or 40% less than the previous quarter.

The Indices

The Dow Transports once again led the indices into the red. The Trannies fell by more than a full percent today, falling from all time highs set last week. The indicators have just turned bearish with MACD and stochastic both indicating near term weakness. The long term trend is still up so I don't think this is much to worry about, just another chance to buy on the dip unless earnings from the sector don't pan out. Higher oil prices are a concern for this sector and could hurt the bottom line for many. Guidance will be an important factor as always and of course, if oil prices continue lower then that burden will lighten for the transports.

The Nasdaq Composite was second up in terms of today's loss. The tech heavy index fell by more than -0.80% today on light volume. Today's decline is a retreat from new highs set in the previous trading session and not unexpected in light of the index position relative to support, the short term moving etc. The index has been making a push higher on economics and earnings hope and, even with today's drop, is still 2.5% above the 30 day EMA. The long term trend is bullish but the upcoming earnings season may provide reason enough for traders to wait for news and cause the index to consolidate or correct. At this time MACD momentum is bullish but divergent and stochastic is entering a bearish crossover high in the range. This is not a reversal signal but one that could lead to a consolidation, pullback or correction. A potential catalyst for this index will be Intel earnings next Tuesday. Current support is about 100 points below the current level, around 4350.

The SPX lost about a half percent in today's trading. The broad market also fell from a new all time high set last week with weak indicators. Although still bullish, the indicators are both divergent at this time. With the index extended 1.5% beyond the moving average it is not unwise to expect some form of a pull back. On the longer term charts of weekly prices the index is still bullish and advancing, but also appears to be quite extended. I don't think any major correction is in the offing but some consolidation ahead of and into earnings season is not out of the question. After that it will come down to the earnings themselves and guidance into the end of the year.

The Dow Industrial Average was today's strongest index. At the end of the day the blue chips had lost only about a quarter percent, falling less than 50 points. The index managed to close above the all important psychological level of 17,000 with divergent and weak indicators. If the index does not hold onto 17,000 going into earnings season then a pull back to 16,750 is likely with further support indicated just below that around 16,500. Tomorrow will be a big day for the Dow even though Alcoa is no longer a Dow Component. Earnings from the Aluminum giant will surely be taken as an indication of what is to come for the actual Dow components.

Today's the markets fell, but from all time or at least new highs. Highs driven by the rising economic tide and the much better than expected jobs data released last week. The much better than expected ADP, Challenger and NFP numbers, if not one time events, could be pointing to the jobs rebound we have all been expecting to come.If so, then the data should continue to improve into the summer and that could lead to improved earnings, GDP growth a quick end to the taper.

Earnings season this time around may not be as good as we might like, simply because of all the down ward revisions to past data we have had, so it will be the forward looking guidance that trumps all. In that vein the companies reporting earlier will be more of a backward looking indicator versus those reporting next month who's current quarter is more in line with the calendar year. What will companies say in their reports? According to Mark Zandi and Moody's Survey of Business Confidence “Business' sunny disposition remains firmly in place”. If this is true and the earnings and data show it then the market could rally on into the summer. Between then and now there are FOMC minutes on Wednesday and an FOMC meeting next week.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Worrisome Move In The Russell 2K

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market delivered a widespread decline on Monday. There was no discernible catalyst for the pullback. You could argue the bull market had gotten a little bit ahead of itself. Profit taking was actually pretty mild with the S&P 500 down -0.39%.

On the CNBC Halftime report they had Laszlo Birinyi, the found and president of Birinyi & Associates as a guest. He said it's not too late for investors to jump into stocks and predicted the S&P 500 would hit 2100 before year end. It appeared no one was listening.

What is concerning is the action in the small cap Russell 2000 index ($RUT). The $RUT is retreating from resistance and could be forming a potential bearish double top pattern.

Overall we hesitant to launch new positions. We are not adding new plays tonight.

(daily chart of the $RUT)

In Play Updates and Reviews

Bull Market Hangover?

by James Brown

Click here to email James Brown

Editor's Note:

After the bulls partied hard last week, driving the big cap indices to new record highs, the market appeared to have a hangover today.

In the weekend newsletter we raised some stop losses in anticipation of possible profit taking. Today COF, DWRE, PPG, and URI all hit our stop losses.
Fortunately, COF and PPG were still winners.

Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 94.03 change: +0.55

Stop Loss: 88.80
Target(s): To Be Determined
Current Option Gain/Loss: +31.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: Rumors around Apple's as yet unannounced iWatch continue to swirl. Pacific Crest raised their price target on AAPL from $93 to $100 based on the expectation for strong iWatch sales. Meanwhile Cantor Fitzgerald added bullish comments on AAPL's Q2 sales, which Cantor believes could rise +20% this year, which is above AAPL's recent trend of +10% revenue growth.

The stock displayed relative strength today with a +2.0% gain and a breakout past potential resistance at $95.00.

Investors need to decide. Will you exit your calls as AAPL near resistance at the $100.00 mark? Or will you hold on until we get closer to the expected iPhone 6 product launch in September.

Earlier Comments: June 28, 2014:
You don't get any more high-profile than Apple Inc. (AAPL). Many consider AAPL a technology company but they are known for their consumer electronics. Their ecosystem continues to grow with iPods, iPads, iPhones, Macintosh computers, Apple TV, and soon Beats music headphones and possibly an iWatch.

Right now the market is focused on Apple's upcoming launch of its next iPhone, rumored to be the iPhone 6. It's also rumored to be coming out on September 19th. Everything seems to be a rumor these days when it comes to Apple's next product. Right now the big rumor is that Apple might introduce two different iPhone 6s. One with a 4.7 inch display and one with a 5.5 inch display.

It really doesn't matter what the display size is. There is a legion of loyal iPhone customers that will jump at the chance to upgrade. One analyst firm is estimating that iPhone 6 sales could hit a record-breaking 80 million units in 2014 alone. That's amazing if the phone doesn't come out until mid September.

Why do we care about Apple's next iPhone launch? We care because the stock tends to see a pre-launch rally in its stock price. Now that shares have split 7-for-1 just a few weeks ago we can actually trade it. AAPL stock rallied seven out of eight weeks in a row until it peaked at round-number resistance near $95.00 on June 10th. The stock split was June 6th.

Since peaking at $95.00 AAPL has slowly consolidated sideways. I heard a lot of traders on CNBC saying they wanted to buy it at $85.00. It looks like that may not happen. Investors have jumped in to buy the dip at $90.00. The point & figure chart is bullish and forecasting at $131.00 target. I think AAPL can rally toward $100 before its iPhone launch in mid September as long as the broader market cooperates.

Be careful when choosing an option strike. There are a lot of weird strikes due to AAPL's 7:1 split. We are listing the October $95.00 call. (FYI: Look for the Oct. $95 call with more than 22,000 in open interest)

- Suggested Positions -

Long Oct $95 call (AAPL141018C95) entry $3.93

06/30/14 triggered @ 92.75
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $92.75
Average Daily Volume = 38 million
Listed on June 28, 2014

Ameriprise Financial - AMP - close: 122.00 change: -0.42

Stop Loss: 114.40
Target(s): To Be Determined
Current Option Gain/Loss: +38.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: AMP held up reasonably well on Monday with only a little bit of profit taking.

I am not suggesting new positions at this time. Readers may want to raise their stop loss.

Earlier Comments: June 18, 2014:
AMP is in the financial sector. The company, and its subsidiaries, provides a range of financial products including advice and wealth management. The company had a record year in 2013 and it looks like the momentum has continued into 2014. The company' last earnings report was its Q1 results, reported on April 28th. Wall Street was expecting a profit of $1.88 per share on revenues of $2.84 billion. AMP delivered $2.04 with revenues rising +11% to $3 billion.

AMP's Q1 results were a +19% improvement from a year ago. Furthermore both revenues and margins are improving. AMP raised its dividend 12 percent to 58 cents (currently at a 2.0% yield) and announced a $2.5 billion stock buy back program.

Technically shares of AMP are in a long-term up trend and just recently broke out from a five-month consolidation. Traders have already jumped in to buy the dip at prior resistance near $115.00.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

06/20/14 triggered @ 118.80
Option Format: symbol-year-month-day-call-strike

Entry on June 20 at $118.80
Average Daily Volume = 823 thousand
Listed on June 18, 2014

Anadarko Petroleum - APC - close: 106.79 change: -0.79

Stop Loss: 105.85
Target(s): To Be Determined
Current Option Gain/Loss: + 21.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: It's not looking good for our APC trade. The stock underperformed the S&P 500 and the XLE today with a -0.73% decline. Shares closed at three-week lows. Our stop loss is at $105.85 but more conservative investors may want to exit immediately while our option is still profitable.

Earlier Comments: June 10, 2014:
APC is in the basic materials sector. The company is a very active oil and natural gas producer. They have assets in the Rocky Mountains, the Southern U.S., the Gulf of Mexico, and Alaska. Plus, APC is active internationally with assets in Algeria, Brazil, China, Colombia, Ghana, Liberia, Mozambique, New Zealand, Sierra Leone, and South Africa. Altogether APC has a strong onshore and off-shore portfolio.

The company's latest earnings report on May 5th was better than expected. Wall Street was expecting $1.14 per share. APC delivered $1.26. APC said they set record volumes in the quarter at 819,000 barrels of oil equivalent (BOE) per day. Management went on to raise their full-year sales-volume. A week later they increased their dividend by 50% from 18 cents to 27 cents per share.

APC could end up a big liquefied natural gas (LNG) producer with their assets in Mozambique (Southeast Africa). Last year APC drilled two natural gas off-shore wells. This year they could drill up to eight new wells. The company recently upgraded their view on how much recoverable gas in their northern Mozambique assets to 50 trillion to 70 trillion cubic feet. APC is developing an LNG project and plan to deliver their first LNG cargo in 2018.

One of the biggest headlines for APC has been its settlement over the TROX litigation. This refers to a large lawsuit over the bankrupt Tronox company, which was spun-off from APC's Kerr-McGee division. Previously the estimated penalty range for this TROX lawsuit was in the $5.15 billion to $14.17 billion with many analysts estimating the final results would probably be around $10 billion. On April 3rd this year APC reported they would settle this for $5.15 billion, the very low end of the range and the stock exploded higher. Getting past this TROX liability has removed a very dark cloud for the company and the stock price.

It is worth noting that APC still has potential legal risk from the April 2010 Macondo well blow out. BP Plc was the operator and majority owner of the well but APC did own 25% of it. The U.S. judges are arguing that APC will be held responsible for its 25% of the penalties. The final numbers could be huge. The U.S. Clean Water Act allows the government to fine the companies $1,100 per barrel of oil spilled into the Gulf. Plus, they could add another $4,300 penalty per barrel for gross negligence. Right now BP is arguing with the courts over how much oil was spilled. The U.S. is claiming 4.2 million barrels of oil escaped into the Gulf of Mexico. BP estimates only 2.45 million barrels. APC management has suggested they may not be fined for any gross negligence penalties since they did not have any direct operational involvement. The penalty phase for this lawsuit is scheduled for January 2015. This issue is clearly not stopping the rally in shares of APC today.

Technically shares of APC have been consolidating sideways under resistance near $105 with a bullish trend of higher lows. Now the stock is on the verge of breaking out.

- Suggested Positions -

Long NOV $110 call (APC141122C110) entry $4.80*

07/05/14 new stop @ 105.85
06/28/14 new stop @ 102.40
06/11/14 APC hit our trigger at $105.25
rumors this morning that XOM might buy APC.
*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 11 at $105.25
Average Daily Volume = 2.8 million
Listed on June 10, 2014

Cheniere Energy, Inc. - LNG - close: 72.50 change: -0.02

Stop Loss: 64.90
Target(s): To Be Determined
Current Option Gain/Loss: + 7.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: LNG held up very well on Monday with shares closing virtually unchanged. I don't see any changes from my prior comments. If this market decline continues I would expect LNG to test support near $70.00.

Earlier Comments: June 28, 2014:
According to LNG's website, Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in LNG-related businesses, and owns and operates the Sabine Pass LNG terminal and Creole Trail Pipeline in Louisiana. Cheniere is pursuing related business opportunities both upstream and downstream of the Sabine Pass LNG terminal. Through its subsidiary, Cheniere Energy Partners, L.P., Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities for up to six LNG trains, each of which will have a design production capacity of approximately 4.5 mtpa ("Sabine Pass Liquefaction Project"). Cheniere has also initiated a project to develop liquefaction facilities near Corpus Christi, Texas. The Corpus Christi Liquefaction Project is being designed and permitted for up to three LNG trains, with aggregate design production capacity of up to 13.5 mtpa of LNG and which would include three LNG storage tanks with capacity of approximately 10.1 Bcfe and two berths.

Why is Cheniere's ability to turn natural gas into liquefied natural gas (LNG) important? Natural gas has to be turned into LNG to be transported. The oil and natural gas boom in the United States thanks to technology and hydraulic fracturing rigs that access tight oil in shale rock formations has generated a huge supply. Right now the price of natural gas in the U.S. is less than $5.00 per million British thermal units (BTUs) or mmbtu. In Europe the cost per mmbtu is over $10.00 and in Japan the cost is almost $16 per mmbtu. There is a huge opportunity if producers can export natural gas to these markets. Unfortunately, building an LNG terminal that can export natural gas is a massive undertaking. It takes years to build them and there is a very long permit process from the government. Cheniere is quickly becoming the major player in this space in the U.S.

Cheniere recently moved one step closer to a FERC approval on the Corpus Christi LNG facility. The Federal Energy Regulatory Commission draft review said the project will result in the permanent loss of more than 25 acres of wetlands, but measures Cheniere plans to take will minimize any further disturbance. FERC will take public comments until August 4th and then issue a final review by Oct 8th.

They are building the largest LNG facility in the U.S. and it takes time. They are building six trains with annual production of 4.5 million tons per annum each (MTPA). Trains 1&2 began 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. Purchase orders for 7.7 MTPA have been received for trains 1&2 and another 8.3 MTPA for trains 3&4. Trains 5&6 are still in permit mode with 3.75 MTPA of purchase agreements 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 5.53 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.

You might be wondering, "what is an LNG train?" According to Cheinere, The LNG industry has adopted the analogy of a "train" meaning the series of processes and equipment units that individually remove elements from raw inlet natural gas that would otherwise plug or freeze the small passages in the downstream heat exchangers that in a cascade fashion reduces the temperature from ambient to -260 F. Each of these processes and equipment units are sequentially arranged, similar to cars of a railroad train.

Just a couple of days ago the House of representatives voted to fast track more LNG export projects, which if signed into law, should be beneficial for Cheniere's current projects under review.

Technically shares of LNG have been consolidating sideways the last few weeks after the sharp end of May rally. That big pop at the end of May was market reaction to news that the U.S. Department of Energy proposed new rules to streamline their approval process and focus on projects with the best chance of actually getting built. That was good news for LNG and the company is on track to be the first to export LNG produced in the U.S.

- Suggested Positions -

Long Sep $75 call (LNG140920C75) entry $3.45

06/30/14 triggered @ 70.25
Option Format: symbol-year-month-day-call-strike

Entry on June 30 at $70.25
Average Daily Volume = 3.0 million
Listed on June 28, 2014

Starbucks Corp. - SBUX - close: 78.69 change: -0.37

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +44.5%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: It was a relatively quiet session for shares of SBUX. The stock closed down -0.4% and looks like it could test the $78.00 level and its 10-dma tomorrow.

I am not suggesting new positions at the moment.

Earlier Comments: June 14, 2014:
The twin-tailed siren of Stabucks could be ready to sing for investors again. The company is named after the first mate in Herman Melville's Moby Dick. According to company literature their mission is "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time."

Notice it didn't say one cup of coffee at a time. Make no mistake. Coffee is big business. According to Business Insider coffee is worth about $100 billion globally and planet earth drinks about 500 billion cups of coffee every year. Quite a few of those cups are consumed at Starbucks' ubiquitous coffee chain, which now has over 10,000 company-run stores and over 9,500 licensed stores.

Believe it or not but tea is a bigger market. Tea producers churn out more than 4 billion kilograms of tea every year. Tea is the second-most consumed beverage behind water. Several months ago SBUX purchased the Teavana chain for $620 million. Now they're planning to update and expand the brand into 1,000 tea bars in the next five years.

SBUX recently said that food remains a big opportunity and currently food sales are only 22% of its U.S. business. SBUX purchased the French bakery chain "La Boulange" in 2012 and they've started distributing some of the bakery's products in more than 6,000 Starbucks stores. These should reach all of their coffee stores by the end of this year. They're also testing lunch items and testing alcohol sales in certain states. That means Malbec wines and bacon-wrapped dates could be available at a Starbucks store near you soon. The company said that adding food items has increased purchases and boosting ticket growth.

This past week SBUX said they're going to roll out wireless charging mats for smartphones in some of their stores soon.

Put it altogether and the company has big plans. Their latest earnings report in late April was mixed. Profits were in-line with estimates but revenues were a miss although same-store sales came in above expectations. SBUX management raised their Q4 guidance and 2014 guidance following its results.

- Suggested Positions -

Long OCT $80 call (SBUX141018c80) entry $1.66

07/05/14 new stop @ 74.75
06/28/14 new stop @ 73.40
06/17/14: triggered @ 75.65
Option Format: symbol-year-month-day-call-strike

Entry on June 17 at $75.65
Average Daily Volume = 3.5 million
Listed on June 14, 2014

U.S. Silica Holdings - SLCA - close: 55.34 change: -0.63

Stop Loss: 49.25
Target(s): To Be Determined
Current Option Gain/Loss: +23.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: SLCA couldn't escape the market's widespread profit taking on Monday and shares slipped -1.1%. If this dip continues we can look for support in the $53.00-54.00 area.

Earlier Comments: June 14, 2014:
There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

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

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

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

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

We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long Sep $55 call (SLCA140920C55) entry $3.15*

07/01/14 new stop @ 49.25
06/17/14 triggered @ 52.15
*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 17 at $52.15
Average Daily Volume = 1.2 million
Listed on June 14, 2014

Synaptics Inc. - SYNA - close: 91.21 change: -1.47

Stop Loss: 87.65
Target(s): To Be Determined
Current Option Gain/Loss: -8.6%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: SYNA bounced off support near $90.00 and its 10-dma around lunchtime. Shares still closed down with a -1.58% decline.

I am not suggesting new positions at this time consider today's relative weakness.

Our stop is at $87.65. More conservative investors might want consider a tighter stop loss.

Earlier Comments: July 1, 2014:
"We are the leading developer of human interface solutions which enhance the user experience in the expanding digital lifestyle. We were founded in 1986 by Federico Faggin and Carver Mead and over the last 26 years we have grown from a neural network research organization into the leading human interface solutions partner of a global customer base. Simply put, our next-generation interfaces set users free to interact with devices in ways the world couldn't have imagined a decade ago." (source: SYNA website)

SYNA has over 500 patents or patent pending for technology. Over one billion devices have an interface designed by Synaptics. The company recently purchased Renesas SP Drivers, who happens to be the only supplier of touchscreen chips to Apple Inc. (AAPL). SYNA believes this acquisition will boost the company's market by +50%.

SYNA also purchased Validity Sensors late last year. Fingerprint sensors on your devices is a growing trend and Validity is a major player in the fingerprint ID solutions. Some estimates suggest we could see fingerprint sensors on more than 500 million devices in the next two years. This could fuel widespread adoption of fingerprint sensors for a number of security and payment applications, especially on mobile devices. SYNA's new fingerprint sensors could end up on Apple's phones, Android phones, and Windows phones.

SYNA raised its guidance the same day it announced the acquisition of Renesas. SYNA boosted its Q4 revenue guidance to the $300-310 million range, up from $275-295 million. The company raised its full year 2014 revenue guidance to $933-943 million, up from $918.5.

Wall Street seems to like SYNA's acquisitions. Combining SYNA's technology with Renesas' technology could make SYNA a dominant player in the smartphone, tablet, touchscreen technology space. It could also boost SYNA's margins as they combine the solutions together into one product. The acquisition and the raised guidance sparked a wave of analysts upgrades for shares of SYNA.

- Suggested Positions -

Long Sep $95 call (SYNA140920C95) entry $6.35*

07/02/14 triggered @ 92.35
*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 July 02 at $92.35
Average Daily Volume = 1.45 million
Listed on July 01, 2014

Energy SPDR ETF - XLE - close: 99.62 change: -0.77

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

07/07/14: The U.S. stock market experienced some widespread profit taking today. The XLE slipped -0.76%.

Currently we are on the sidelines waiting for a move higher. Our suggested entry point is $100.75.

Earlier Comments: July 5, 2014:
Energy stocks are some of the stock market's best performers this year. The S&P 500 index is up +7.4% year to date. The XLE is up +13.4%. Earlier in the year a harsh winter helped drive demand for heating fuels. Now the industry is boosted by rising geopolitical events between Ukraine & Russia and more recently a Sunni jihadist uprising that is pushing Iraq toward a civil war.

Iraq is the third largest oil producer in the Organization of Petroleum Exporting Countries (OPEC). The country produces about three million barrels of oil a day. Iraq also accounted for over half of OPEC's recent production growth. Today the world is concerned that a civil war between hard-line Sunni Muslims in the north and northwest of Iraq and the Shia Muslim government in the south and southeast could damage or severely handicap Iraq's oil production. Meanwhile the Kurds will carve out their own independent nation at the very northern tip of Iraq.

Why should we care about a civil war in Iraq and its three million barrels of oil production a day? We should care because the difference between global oil demand and global oil supply is very tight. The U.S. Energy Information Administration (EIA) estimates that global oil demand will be in the 92 and 93 million barrels a day (mb/d) range in 2014-2015. Furthermore demand will rise 1.2 mb/d both in 2014 and 2015. The Paris-based International Energy Agency (IEA), from the latest data in June 2014, estimates global demand will rise 1.3 mb/d in 2014 to a total of 92.8 mb/d. Yet global supplies are only at 92.6 mb/d.

The world is already falling behind on oil supplies. People often forget that once you drill an oil well production is always declining as there is less and less oil in that well. Eventually wells run dry. Globally this lost production is between -3% and -5% a year. Not only do we need to discover, drill, and produce another +1.3 mb/d to meet growing demand we also have to replace the -3.6 mb/d we're losing every year due to maturing wells. That's almost 5 million barrels of oil a day!

You can see now why Iraq's 3 mb/d production is a focus for the equity markets. We've been lucky so far that nearly all of the fighting in Iraq has been in the northern half while most of the country's oil production and infrastructure is in the southern half. Thus far Iraq's production has not been seriously damaged. There is no guarantee the fighting will stay contained to the north. What happens if Baghdad falls or if the country is permanently divided? Terrorist could target Iraq's production facilities and pipelines.

Fortunately oil production in the U.S. is booming. America just hit 11 million barrels a day. That makes the U.S. the biggest single producer in the world. Current forecast put U.S. production hitting a peak of 13.1 mb/d in 2019. Unfortunately global demand might rise by another 5 or 6 mb/d by then (let's not forget the lost production from declining wells).

Oil prices will most likely remain elevated for an extended period of time. That should mean good news for all the energy companies, up stream, down stream, and everyone in between. A good way to play this strength in energy demand is the XLE, the Energy Select SPDR Exchange Trade Fund (ETF).

The XLE is a basket of over 40 of the biggest names in the energy space from production, to drilling, oil services, and refining. The XLE's top ten components are:

Exxon Mobil (XOM)
Chevron Corp. (CVX)
Schlumberger Ltd. (SLB)
ConocoPhillips (COP)
EOG Resources (EOG)
Pioneer Natural Resources (PXD)
Halliburton Co (HAL)
Occidental Petroleum (OXY)
Anadarko Petroleum (APC)
The Williams Companies Inc. (WMB)

As the violence in Iraq worsened last month we saw the XLE sprint higher in the first three weeks of June. When the stock market experienced some widespread profit taking on June 24th traders rushed into to lock in profits on the XLE. Since then the ETF has been slowly drifting higher.

We believe the up trend continues. The July 1st high was $100.66. Tonight we're suggesting a trigger to buy calls at $100.75. We'll start this trade with a stop loss at $97.95.

Trigger @ $100.75

- Suggested Positions -

Buy the Oct $105 call (XLE141018C105)

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

Entry on July -- at $---.--
Average Daily Volume = 8.8 million
Listed on July 05, 2014

PUT Play Updates

Tractor Supply Co. - TSCO - close: 61.54 change: -0.11

Stop Loss: 62.65
Target(s): To Be Determined
Current Option Gain/Loss: - 6.1%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: TSCO delivered a very quiet day with shares moving sideways in a narrow range. I am disappointed that TSCO did not show more relative weakness given the market's decline on Monday.

Earlier Comments: June 24, 2014:
TSCO has everything from cowboy boots to chicken coops and everything you might possibly need on the farm. The company has over 1,300 stores in 48 states. This specialty retailer is focused on the "lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses."

A lot of things are on the rise for TSCO. They have rising sales, a rising dividend, rising stock buyback program. What is not rising is their stock price. Shares peaked in January this year after surging to all-time highs in 2013. The company has been raising its dividend, now up to 16 cents a share. They also recently announced another $1 billion to their stock buyback program. Unfortunately these do not seem to be helping the share price.

Their last earnings report was April 23rd. TSCO reported Q1 earnings of 35 cents a share on revenues of $1.18 billion. That missed estimates of 37 cents on revenues of $1.21 billion. To be fair the terrible weather in the first quarter really did affect their sales, given their farm and rancher focus. Management believes these sales will return as the weather improves. TSCO reaffirmed their 2014 sales guidance of $5.62 billion to $5.7 billion and same-store sales of 2.5% to 4%. The company plans to open over 100 new stores this year.

Not everyone on Wall Street believes TSCO is a buy. The company was recently downgraded thanks to its high valuation (over 26 times its 2014 earnings estimates) and weaker gross margins. TSCO also seems to be suffering from slowing same-store sales. Last year their average same-store sales growth was +4.8%. The fourth quarter's was +3.5%. The first quarter of 2014 it was down to +2.2%. Again, you could blame that on the weather but it's not a good trend.

We are not setting an exit target tonight. It is worth noting that the point & figure chart is bearish and suggesting a $46 target.

- Suggested Positions -

Long Oct $60 PUT (TSCO141018P60) entry $2.45

07/01/14 new stop @ 62.65
06/26/14 triggered
Option Format: symbol-year-month-day-call-strike

Entry on June 26 at $61.90
Average Daily Volume = 871 thousand
Listed on June 24, 2014


Capital One Financial - COF - close: 83.57 change: -1.38

Stop Loss: 83.85
Target(s): 85.95
Current Option Gain/Loss: +108.6%
Time Frame: exit prior to earnings on July 17th
New Positions: see below

07/07/14: COF was a target for profit taking after last week's sprint higher. With the market producing a widespread decline today shares of COF gave back -1.6%. Shares hit our new stop loss at $83.85.

NOTE: I would keep COF on your watch list for a potential entry point after its earnings on July 17th.

- Suggested Positions -

Sep $80 call (COF140920C80) entry $2.30* exit $4.80** (+108.6%)

07/07/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/05/14 new stop @ 83.85, set target at $85.95
06/28/14 new stop @ 77.95
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

Demandware, Inc. - DWRE - close: 61.60 change: -5.21

Stop Loss: 65.35
Target(s): To Be Determined
Current Option Gain/Loss: -27.7%
Time Frame: 8 to 12 weeks
New Positions: see below

07/07/14: Software stocks as a group were down sharply today. The XSW software ETF fell -1.6% compared to the NASDAQ's -0.76% pullback. Yet the drop in DWRE was a lot worse. Shares plunged -7.79% on no news and sliced through multiple layers of potential support.

Our brand new stop loss was hit at $65.35.

Earlier Comments:
I would consider a more aggressive, higher-risk trade. DWRE can be volatile and the options are not cheap. I'm suggesting small positions to limit our risk.

*small positions* - Suggested Positions -

Oct $70 call (DWRE141018c70) entry $6.92 exit $5.00* (-27.7%)

07/07/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
07/05/14 new stop @ 65.35
06/28/14 new stop @ 62.45
06/18/14 triggered @ 66.75
Option Format: symbol-year-month-day-call-strike


Entry on June 18 at $66.75
Average Daily Volume = 705 thousand
Listed on June 14, 2014

PPG Industries - PPG - close: 208.38 change: -1.78

Stop Loss: 207.75
Target(s): To Be Determined
Current Option Gain/Loss: +23.2%
Time Frame: exit prior to earnings on July 17th
New Positions: see below

07/07/14: PPG shot lower at the open. Shares spiked below short-term support at $208 and hit our stop at $207.75 before paring its losses.

NOTE: I would keep PPG on your watch list for a potential entry point after the company reports earnings on July 17th.

- Suggested Positions -

Aug $210 call (PPG140816C210) entry $3.65* exit $4.50** (+23.2%)

07/07/14 stopped out
07/01/14 new stop @ 207.75
06/19/14 new stop @ 200.75
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 Rentals, Inc. - URI - close: 106.36 change: -2.60

Stop Loss: 106.60
Target(s): 109.85
Current Option Gain/Loss: - 3.0%
Time Frame: exit before earnings on July 16th
New Positions: see below

07/07/14: In the weekend newsletter we adjusted our strategy and our stop loss on URI after considering the time frame of this trade and URI's upcoming earnings report.

Unfortunately after closing last week at all-time highs the stock reversed sharply today with a -2.3% decline. URI hit our new stop loss at $106.60.

NOTE: I would keep URI on your watch list for a potential entry point after they report earnings on July 16th.

- Suggested Positions -

Sep $110 call (URI140920C110) entry $4.62 exit $4.48 (-3.0%)

07/07/14 stopped out
07/05/14 new stop @ 106.60 and set a target at $109.85
07/01/14 triggered @ 106.70
Option Format: symbol-year-month-day-call-strike


Entry on July 01 at $106.70
Average Daily Volume = 1.6 million
Listed on June 25, 2014