Option Investor

Daily Newsletter, Wednesday, 7/16/2014

Table of Contents

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

Market Wrap

Going Up?

by Thomas Hughes

Click here to email Thomas Hughes
The Dow Jones Industrial and Transportation Averages make new all time highs while the S&P 500 is still flirting with resistance.


After another volatile day of trading the major indices moved to close at the highs of the days. Data, earnings and more testimony from Janet Yellen were all in the mix. The morning started off on a positive note with better than expected GDP data from China. GDP in the 2nd quarter grew at a slightly better than expected rate of 7.5%. Chinese indices were weighed down with other worries but Japanese and other Asian indices moved higher. European markets were happy with the news thinking that expansion in China will lead to expansion in the EU. This is thought is not far off but there are still risks. Regardless, the US markets were also positive this morning, boosted of course by expectations of robust earnings and expansionary economic data.

There were 6 economic releases throughout the morning from 7:00 to 10:00AM, not counting Janet Yellen's testimony or the Beige Book, released at 2:00PM. Early futures trading put the SPX up about 5 or 6 point with that number strengthening into the open. On top of the data there was also a fair number of positive earnings surprises, including some banks, to help lift the market. The SPX opened about 5 points above yesterday's close and quickly moved higher only to find resistance just below the current all time high. After hitting the early high, about 7 minutes into the day, the indices drifted lower with the SPX hitting support just above 1975. The range between 1975 and 1985 dominated trading the rest of the day. Even with such a good start to the season there the bulk of S&P 500 companies have yet to report and that may be what kept the index in check today. Other majors including the Dow Jones Industrial and Transportation Averages and the Nasdaq Composite all made new highs.

The Economy

First on the list today, released at 7AM, is the Mortgage Brokers Index. The index fell -3.6% last month on a seasonally adjusted basis after climbing in the previous month. On an unadjusted basis mortgage applications rose by 20% on a month to month basis.

The Producer Price Index was released at 7:30AM and indicates that there is some inflation in the economy. PPI climbed 0.4% this month compared to a decline of -.2% last month. This is ahead of the expected 0.2% analysts had predicted but still tame. Core PPI climbed 1.9% on top of a 2% rise last month. This isn't alarming but does lend some weight to the idea that the Fed will increase interest rates sooner rather than later.

Net Long Term TIC Flows rose by nearly $20 billion last month after dropping by over -$24 billion in the previous month. Total inflows of foreign investment money into US securities topped $35.5 billion with more than a third of that private money. Total holdings of US securities by foreign residents also increased, by $34.6 billion.

Industrial Production and Capacity Utilization figures were released simultaneously at 9:15AM. Industrial Production rose for the 5th straight month with another 0.2% gain. There were some revisions to previous data with May revised lower to 0.5% and April revised much higher to 0.9%. June's data was slightly below the expected 0.3% but with the revisions 2nd quarter production rose 6.7%. This is the biggest gain for 2nd quarter production numbers in two years. Capacity Utilization remains basically unchanged at 79.1%. This is down 2 tenths from last month and in line with utilization over the past couple of months.

At 10AM the National Association of Homebuilders released their monthly gauge of sentiment. The index rose to 53 this month, the first time in 6 months, indicating expansion in the sector. This is a 4 point gain from last month. Within the index the current sales component also gained 4 points, rising to 57. Expected future sales rose 6 points to 69 and traffic levels also rose, gaining 3 points to 39. Traffic levels are still very low but rising.

The Beige Book was released at 2PM, as usual, and indicates that the economy is expanding at a moderate to modest pace. This is inline with expectations and current data trends. The report was optimistic about the recovery and sees labor market improvement across all districts. Also up across the board was construction spending and manufacturing.

Janet Yellen's testimony carried on and did not include anything new.

Also in the news this morning was a call from the Obama administration to congress. He wants them to act now to stop tax inversions.

After the bell the administration made moves to widen sanctions against Russia. New moves are aimed at the banks and financing structure behind state run oil giant Gazprom.

The Oil Index

The data, in particular Chinese GDP data, helped to put a bid back into oil. WTI climbed more than a $1.50 today as global demand outlook improved on the same day that crude inventories declined by more than 7.5 million barrels. Global issues persist but did not reach the headlines today. The lift in oil prices was just what the XOI needed to help it bounce from support. The index has been consolidating and testing support for about two weeks and has now made a sharp move higher. The index climbed nearly a percent and a half today and is accompanied by some bullish indicators. MACD is still in the red but has peaked and will likely make the crossover in the next few days provided prices don't fall back again. Stochastic is already signaling the early buy and it is a strong version of the weak signal. There is some fairly strong technical resistance just above the current level around 1,700 with support just below at 1,600. There may be some backing and filling but I don't see any reason why the index won't move up to at least retest the recent all time high, provided earnings and economics remain positive.

The Gold Index

Gold prices climbed today and briefly topped $1300 before moving back below before the close of the US session. Gold prices are now below $1300 for the second day, following the sharp drop from recent highs we saw on Monday. A strong stock market, improving economics, a wee bit of inflation and the prospect that sooner might mean a lot sooner when talking about FOMC interest rate hikes are weighing gold down. Not to mention that with India maintaining its 10% tariff on gold the main source of physical demand growth is out of the picture. My targets for gold include $1275 and $1250 in the near to short term.

The Gold Index was able to recapture some of its losses climbing more than 1.75% in today's session. The candle action is worth taking note of; a harami pattern and one that can often precede a reversal. The other indications do not support that but it could mean that a bounce, test of support or some form of consolidation may happen at this level. Today's action was centered around a previous support/resistance line so again, worthy of note. Looking at the indicators MACD is still highly divergent and now signaling with a bearish crossover while stochastic is moving lower following its own bearish cross. It looks like the bulls are going to put up a fight with $100 as the line in the sand but the long term trend and short term signals are bearish. Downside target on a break below $100 are $95, $92.50 and $90.

Movers And Shakers

Rupert Murdoch wants to buy Time Warner Cable. The bid was announced this morning, was unsolicited and rejected, weeks ago. We are just finding out about it now but the news was market moving none the less. Now speculation is rampant over what he will do now. In order to get the deal to pass FCC and other regulatory scrutiny 21st Fox has already offered to give up CNN due to it competing with Fox News. Shares of Time Warner barely budged but shared of FOX tumbled on the news. The stock fell more than 4.5% today on high volumes and indications it will remain trapped within its long term range.

The Banking Index

Today was another in a string of big days for the banks. This morning at least three big names in the mega and regional banking category reported better than expected earnings, in line with the trend set Monday by Citibank. Now the bulk, all but one or two, of the biggest banks have reported and all but one have beaten the expected results. Yes, revenue and earnings are down from the previous comparable period but not down nearly as much as expected. In general the bankers are reporting improvements in places like margins, deposits, loan growth and other key areas of business. Today's names included Bank of America, US Bancorp and PNC Financial. Also in the mix was Piper Jaffrey, investment bankers, with another better than expected report. Bank of American reported earnings that beat on the top and bottom lines and yet shares of stock sold off today.

The Banking Index fell today from long term resistance. This is because not all the banks are participating in the rally. JP Morgan and Citigroup were still moving higher but Bank Of America, USB and PNC all fell today with PNC at the top of the group with a near 3.5% decline. The Banking Index fell a little more than 1$ today and appears trapped inside a tight support/resistance range between $71.50 and $72.50. This may be due to the mixed nature of trading in the banking sector today and could change at any time. Indicators are indeterminate for now, stochastic is indicating the early, weak, buy signal but it is so far unsupported. Tomorrow the last of the really big financial institutions report, Morgan Stanley and Capital One.

The Indices

The Dow Transportation Average led the market again today. The index climbed a little more than a half percent, 0.62%, and set another new all time high. The indicators are bullish but the stochastic is persisting to trend sideways, creating a divergence from price that is a little troubling. This may just be a sign of caution in the market as we wait on the real onslaught of earnings report next week but in need of watching. Momentum is on the rise at this time with no resistance ahead save what might come around by way of economic data or earnings. There may be a retest of support, currently about 150 points lower than today's around 8,250.

The Dow Jones Industrial Average was right behind its cousin with a 0.45% gain and also set a new all time high. The blue chips are also making a bounce up from support and the short term moving average but with much better looking indicators. MACD momentum is rising, but so is stochastic. Both %K and %D are moving higher, indicating an upward trend in the near and short terms. Stochastic is low in the range so there is plenty of room for it, and the index itself, to trend higher providing no market reversing events take place. Near term support is just below at the now old news level of 17,000. A break below that will find the 30 day moving average about 125 points below that.

The S&P 500 gained a little shy of 0.4% in today's session. The broad market, which is loaded with financial stocks, struggled some with resistance today. The surprising sell off in the regional bank names is partly to blame. The index is also moving up from the short term average, like the blue chips and the trannies, but has not yet made another new high. The indicators are rolling into the early trend following buy sign but MACD is still below zero and stochastic is showing a very weak version of the early buy signal. I think earnings may be a hurdle for the broader market until we can say for sure that most companies are meeting or beating expectations. To date about 67% of the 85 S&P companies that have reported are beating estimates, good but not as good as in previous quarters.

The tech heavy Nasdaq Composite only gained about a quarter percent today. Although there have already been some nice reports from the likes of Intel there have also been a few that are only OK. This index made a gain from yesterday's close but traded down from the open, creating a bearish candle. Along with the indicators this is making a correction in the index look like a possibility, the Nasdaq is a little more than 10% above the long term trend line I have been tracking. Bearish momentum is persisting and stochastic is moving lower in the range. Currently, next support is just below the at the short term moving average and previous long term high. Earnings season, and guidance, will tell the tale and it's still a little early to tell I think. I will be looking for the index to hold at support in the near term until the earnings picture becomes more clear.

There is a lot for the market to ponder. The economy is improving, the Fed said so. The Beige Book sees labor improving around the country. Economic trends are up for the most part if a little hit or miss. Earnings so far are good, some a little surprising but mostly just good. Guidance is also OK, not stellar but OK. Overseas things are still muddling along. China is growing but is it really? Europe is still on shaky footing but improving in fits and starts same as us. Things in general are OK and getting better a little at a time but there still hasn't been that spark, that one surprise jump in jobs, or unemployment or housing, or earnings or a combination of several factors to really convince the market that things really are OK. Just the same old incremental, steady improvement. Tomorrow is another round of weekly jobless data along with monthly housing starts, building permits, Philly Fed and Leading Indicators. Any one of them could be the ticket.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Did You Notice?

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. equity markets delivered relatively widespread gains today. The move was led by the big cap stocks. Technology stocks were up, driven by gains in the semiconductor industry. That was thanks to a +9.2% surge in shares of chip giant Intel (INTC), which reported earnings last night.

Did you happen to notice how the Dow Industrials and the S&P 500 both ended the session near their morning highs. Yet the NASDAQ composite and the small cap Russell 2000 both ended the session near their lows? This divergence could be a warning signal.

I would be cautious tomorrow.

We are not adding any new trading candidates tonight.

In Play Updates and Reviews

M&A and Beige Book Fuel Gains

by James Brown

Click here to email James Brown

Editor's Note:

The stock market continued to rally on Wednesday. The Dow Industrials and the Transportation average hit new record highs.

EMES and ROST hit our entry triggers.

Current Portfolio:

CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 131.82 change: -0.82

Stop Loss: 129.40
Target(s): To Be Determined
Current Option Gain/Loss: -31.4%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: The stock market started today on an up note but the bounce in AAP quickly faded. Shares underperformed the major indices with a -0.6% decline. I don't see any news to account for this relative weakness. The stock looks poised to test what should be support near $130.00. I am not suggesting new positions at current levels.

Earlier Comments: July 9, 2014:
The average car on the road in the U.S. today is over 11 years old. Even though the pace of new car sales has been strong in 2014 there are large chunks of the consumer that are still struggling. Older cars mean higher demand for auto parts.

AAP is in the services sector. The company is one of the largest auto parts retailers in the nation. They recently bought General Parts International for $2.08 billion in a cash deal that closed early this year. That added 1,233 Carquest stores and 103 Worldpac branches.

AAP believes they will be able to achieve about $190 million in synergies over the next three years. Analysts believe that AAP, now even bigger, will be able to negotiate better prices with wholesalers and rev up its supply-chain efficiencies.

The company delivered strong gains in the first quarter in spite of the lousy weather. That's a feat many retailers failed to accomplish with same-store sales up +4%. The company is also seeing improvement in its gross margins.

While the U.S. economy is slowly improving we are not seeing significant wage inflation. Consumers are still looking for bargains. That means more older cars on the road and more consumers buying auto parts to keep their older cars running.

IHS Automotive said the average age of light vehicles is currently 11.4 years. This includes cars, SUVs and light trucks. That's the average. This is expected to rise to 11.5 years by 2015 and 11.7 years by 2019. Older cars require more maintenance and more replacement parts. This is a strong tailwind for AAP.

AAP's recent breakout past resistance at $130.00 is bullish. The recent pullback looks like a buying opportunity. However, I'd like to see some follow through on today's bounce. Yesterday's intraday high was $133.99. I am suggesting a trigger to buy calls at $134.25.

FYI: We are not setting an exit target tonight but the Point & Figure chart for AAP is bullish with a $154.00 target.

- Suggested Positions -

Long Sep $140 call (AAP140920C140) entry $3.50*

07/14/14 triggered @ 134.25
*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 July 14 at $134.25
Average Daily Volume = 818 thousand
Listed on July 09, 2014

Apple Inc. - AAPL - close: 94.78 change: -0.54

Stop Loss: 88.80
Target(s): To Be Determined
Current Option Gain/Loss: + 6.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: AAPL started the day with a gap open higher. The stock had garnered yet another analyst buy rating and another $110 price target. Yet gains didn't last. AAPL started fading lower and the sell-off actually picked up speed in the last hour of trading. I don't see any news to account for this relative weakness. Today's move has technically generated a bearish engulfing candlestick reversal pattern. AAPL generated the same reversal pattern yesterday but today's is just a larger one.

More conservative investors may want to raise their stop loss given this relative weakness.

FYI: AAPL is scheduled to report earnings on July 22nd.

Investors need to decide. Will you exit your calls as AAPL near resistance at the $100.00 mark? Or will you hold on as 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

07/16/14 AAPL has generated two technical reversal patterns in back to back sessions.
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: 122.21 change: -0.09

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: +38.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: AMP spiked to a new high this morning before settling virtually unchanged on the session.

I am not suggesting new positions at this time.

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

07/10/14 new stop @ 115.75
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

Emerge Energy Services LP - EMES - close: 109.73 change: +0.37

Stop Loss: 104.75
Target(s): To Be Determined
Current Option Gain/Loss: -4.6%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: Our new trade on EMES is open. The stock market's widespread rally this morning pushed EMES to $110.48. Our trigger to buy calls was hit at $110.25. Unfortunately the rally retreated and EMES closed back below round-number resistance at the $110.00 mark. I would wait for a new rally past $110.25 or $110.50 before initiating new positions.

Earlier Comments: July 15, 2014:
The shale energy rush in America continues. Widespread hydraulic fracturing wells means big demand for sand. The process of hydraulic fracturing or "fracking" happens deep underground. Oil and natural gas drillers reach deep into the shale formation. Then they pump tons of water and proppants (usually sand) into the formation to fracture the rock and allow the oil and natural gas to escape and be pumped up to the surface.

Drillers use sand to prop open the tiny cracks in the shale rock formation, which allows for a better flow and larger output from the well. The demand for fracking sand is expected to grow +10% a year for the next 8 years. Drillers have figured out how to boost their production. Instead of fracturing the well just once they could do it up to 40 times. The amount of proppant used has jumped from 2,500 tons to 8,000 tons per well.

According to the EMES website, Emerge Energy Services is a diversified energy services company that operates in two key segments of the energy industry: Sand Production and Fuel Processing and Distribution. Through its subsidiaries, Emerge Energy Services provides critical products and services to both the upstream and midstream energy segments.

Emerge Energy Services' sand subsidiary produces silica sand that is a key input for the hydraulic fracturing of oil and gas wells. While the Company is able to produce sand suited for the stimulation of both oil and gas wells, the Company has developed a strong reputation in the industry for producing sand that meets the strict requirements for use in oil wells.

Emerge Energy Services' Fuel Processing and Distribution ("FP&D") segment is primarily focused on acquiring, re-refining and selling transportation mixture ("transmix"). Transmix is received by the business from a number of common carrier pipelines that include the Explorer, Plantation, and Colonial pipelines, as well as via truck and private pipeline from independent refinery and terminal operators. Additionally, the FP&D division includes wholesale, terminal and biodiesel operations.

EMES last reported earnings on May 5th. It was their Q1 results, which came in at 77 cents a share. Wall Street was expecting 69 cents. EMES' revenues soared +80% to $274 million, surpassing estimates of $261 million. EMES' Chairman of the Board said it was the company's strongest quarter as a public company. The Chairman also said, "even with an industry wide shortage of railcars, we sold a company record 882,000 tons of sand, while our fuel division continues to outperform our expectations." Analysts have forecasted EMES' 10-year earnings growth at 33%.

The company is investing over $100 million into two new sand mines that are expected to be ready for production by the end of next year. This will add 5 million tons of sand capacity, which would make EMES the largest fracking sand producer in the country.

I will note the stock's gap down on June 20th. That was a reaction to a secondary offering of 3.5 million units at $109.06 a share. Fortunately there was no follow through on the drop and shares of EMES have been drifting higher. Currently shares are hovering just below resistance at $110.00. We are not setting an exit target tonight but the Point & Figure chart is forecasting at $133 target. More than one Wall Street firm has a $120 price target on EMES.

Tonight we are suggesting a trigger to open bullish positions at $110.25.

Investors should note that shares of EMES can be volatile. We love the story and the bullish outlook but I would probably label this an aggressive, higher-risk trade due to the stock's volatile moves.

- Suggested Positions -

Long Sep $115 call (EMES140920C115) entry $6.50*

07/16/14 triggered @ 110.25
Option Format: symbol-year-month-day-call-strike

Entry on July 16 at $110.25
Average Daily Volume = 586 thousand
Listed on July 15, 2014

Harman Intl. Industries - HAR - close: 114.68

Stop Loss: 109.90
Target(s): To Be Determined
Current Option Gain/Loss: -25.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: Yesterday I cautioned readers to look for a dip to the 10-dma. That is where HAR fell today fortunately shares managed a bounce. A rally from here could be used as an entry point.

Earlier Comments: July 12, 2014:
Automobile sales in the U.S. have been strong this year. Instead of playing the carmakers, which run the risk of announcing yet another recall, consider a derivative play. HAR makes speakers and electronics that are part of the growing "connected car" trend (a.k.a. infotainment systems).

HAR is developing a very bullish trend of beating Wall Street's earnings estimates. Their last two reports were both upside surprises in January and May. Both times HAR not only beat estimates on the top and bottom line but management also guided earnings higher.

The most recent report was May 21st. Analysts were expecting a profit of $1.00 a share on revenues of $1.27 billion. HAR delivered $1.12 a share with revenues hitting $1.4 billion. HAR said recovering demand in European luxury cars and growing demand in China helped fuel their gains.

Management explains that consumers want the connected car experience. The HAR teams says there is pent up demand in Europe that will likely stabilize soon. Meanwhile their business in China is surging. China is now the largest automobile market in the world and HAR's sales surged +60% in China last quarter.

Looking at that last quarter HAR reported revenues were up +32% from a year ago to $1.4 billion. Their bottom line EPS grew +41% to $1.12. They expect to end their fiscal year 2014 with revenues of $5.275 billion, up +23% from the year before.

HAR has also been making acquisitions. They recently announced a $365 million deal to buy AMX LLC, which is an enterprise control and automation system company. HAR plans to roll that up into their professional division. HAR also bought Yurbuds last month. Yurbuds is the number one brand of sports headphones in the U.S.

Last month HAR announced they were raising their quarterly dividend from 30 cents to 33 cents a share.

Technically shares have broken out from a five-month consolidation phase in the $100-115 zone. Shares have weathered the market's recent weakness pretty well. Friday's close at $116.51 is a new seven-year high. I suspect HAR can rally into the $125-130 zone, which has been resistance in the past. The Point & Figure chart is more bullish and currently projecting at $146 target.

Tonight I'm suggesting a trigger to buy calls at $117.25. More patient investors may want to use a different strategy and buy a dip or a bounce from the $114.00 level, which looks like it could be short-term support.

We'll start with a relatively wide stop loss at $109.90.

- Suggested Positions -

Long OCT $120 call (HAR141018c120) entry $6.00*

07/14/14 triggered @ 117.25
*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 July 14 at $117.25
Average Daily Volume = 715 thousand
Listed on July 12, 2014

Cheniere Energy, Inc. - LNG - close: 70.60 change: +0.05

Stop Loss: 66.40
Target(s): To Be Determined
Current Option Gain/Loss: -26.9%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: LNG's performance today is troubling. The major indices posted gains but LNG just hovered near support above $70.00. I'm growing concerned that LNG is going to break down below $70.00 soon. More conservative investors may want to raise their stop loss.

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

07/10/14 new stop @ 66.40
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

Sanderson Farms, Inc. - SAFM - close: 101.29 change: -0.71

Stop Loss: 97.25
Target(s): To Be Determined
Current Option Gain/Loss: -17.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: Just like yesterday shares of SAFM spiked to a new high and then reversed. The stock looks like it will test what should be round-number support at the $100.00 mark soon.

Earlier Comments: July 12, 2014:
Sanderson Farms actually started out as a farm supply business back in 1947. A few years later they started raising chickens. Today they are the third largest chicken ranch in the United States processing more than 9.3 million chickens a week.

If you have been shopping for a little backyard BBQ this summer then you already know that meat prices are high. A long, widespread drought has been plaguing cattle ranchers for months and beef prices are soaring. At the same time disease has killed millions of pigs this year reducing the supply of pork. This has fueled a surge in beef and pork prices. Chicken has been on the rise as well but consumers appear to be buying more chicken as an alternative to pricier meats.

SAFM has developed a very strong trend of beating Wall Street's earnings estimates. They have beat analysts' estimates the last two quarters in a row by a very wide margin. Consensus estimates for the first quarter of 2014 was 85 cents. SAFM reported $1.25. Analyst estimates for the second quarter was $1.75. SAFM smashed that with a profit of $2.21 a share. Revenues have also beaten expectations. For the whole year SAFM's earnings are expected to rise +68%.

Summer is the peak season for chicken demand. Investors could start to bid up shares of SAFM ahead of its next earnings report in late August. Meanwhile SAFM could provide a floor in the stock price. Earlier this year management extended their stock buyback program to buy up to 1.0 million shares. That is almost five percent of the stock's 20.3 million share float. They have 23.0 million shares outstanding.

It is also worth noting that SAFM could be a buyout target. Back in May this year shares of Hillshire Brands Co (HSH) soared from $37 to $45 on a takeover bid. Suddenly a bidding erupted and three weeks later HSH had popped to $62 a share. Bloomberg thinks that SAFM could also be a takeover target as the meat industry continues to consolidate.

A takeover would be bad news for all the shorts in SAFM. The most recent data listed short interest at 17% of the float. The current breakout to new highs and the rally past round-number resistance at $100.00 could fuel more short covering.

Friday's high was $102.28. I am suggesting a trigger to buy calls at $102.55. More nimble traders might want to consider waiting for a potential dip into the $100.00-100.50 zone instead as an alternative entry point. The low on Friday was $99.90. We're not setting an exit target yet but do plan to exit prior to earnings in late August.

- Suggested Positions -

Long NOV $110 call (SAFM141122C110) entry $5.80

07/14/14 triggered @ 102.55
Option Format: symbol-year-month-day-call-strike

Entry on July 14 at $102.55
Average Daily Volume = 305 thousand
Listed on July 12, 2014

Starbucks Corp. - SBUX - close: 78.73 change: -0.16

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +34.9%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: The sideways consolidation in SBUX continues. Shares have been churning sideways for almost two weeks now. Earnings are coming up next week. Are investors just waiting for the earnings news?

I am not suggesting new positions at current levels.

The company has earnings on July 24th.

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: 57.72 change: +1.75

Stop Loss: 53.25
Target(s): To Be Determined
Current Option Gain/Loss: +61.9%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: Shares of SLCA rallied on news they were buying Cadre Services Inc., a regional sand mining company in Texas, for $98 million in cash. This deal will boost SLCA's fracking sand capacity by 800,000 tons a year.

Shares of SLCA have broken out past resistance near $56.00-56.50. Tonight I am raising the stop loss to $53.25.

SLCA could see potential resistance at $60.00. More conservative investors might want to consider taking profits as SLCA nears the $60 mark.

Earnings are coming up on July 29th.

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*

07/16/14 new stop @ 53.25
SLCA buys a Texas-based sand producer for $98 million
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

Energy SPDR ETF - XLE - close: 100.32 change: +1.50

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

07/16/14: Crude oil is bouncing. The USO looks like it has created a bullish three-candle reversal pattern. Strength in oil might have boosted the energy stocks today. The XLE was showing relative strength and surged +1.5%. The intraday high was $100.36. 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) current ask $0.84

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

Ross Stores Inc. - ROST - close: 62.15 change: -3.12

Stop Loss: 65.65
Target(s): To Be Determined
Current Option Gain/Loss: + 23.0%
Time Frame: 4 to 8 weeks
New Positions: see below

07/16/14: Our new trade on ROST is open. The stock was downgraded this morning and shares crumbled -4.78%. ROST gapped open lower at $64.57. Our suggested entry point was $64.75 so the gap down immediately triggered this trade.

Tonight we will lower the stop loss to $65.65.

Earlier Comments: July 14, 2014:
According to the company website, Ross Stores, Inc. is an S&P 500, Fortune 500 and Nasdaq 100 (ROST) company headquartered in Dublin, California, with fiscal 2013 revenues of $10.2 billion. The Company operates Ross Dress for Less ("Ross"), the largest off-price apparel and home fashion chain in the United States with 1,146 locations in 33 states, the District of Columbia and Guam at fiscal 2013 year end.

Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. The Company also operates 130 dd’s DISCOUNTS in ten states.

The retail sector has had a rough year. 2014 started off with a harsh winter that kept consumers at home. Just about everyone blamed the terrible weather on terrible sales numbers in the first quarter. ROST joined the crowd when they reported earnings in February and lowered guidance. The first quarter has been followed by a tough Q2 as well.

Winter seemed like it would never go away. When spring finally showed up retailers were fighting for every consumer dollar. The apparel stores are facing a very competitive and highly promotional environment. There have been warnings and bearish commentary from all sort of retail players including Family Dollar, The Container Store, Rent-A-Center, and retail giant Wal-Mart.

This year the consumer has had to suffer through elevated gasoline prices at the pump and a sharply rising food prices. Everything from beef, pork, vegetables, and eggs have been rising. Every dollar spent on groceries and gas is another dollar that doesn't make it into the discretionary items.

ROST has been no exception. The company's most recent same-store sales figures had fallen to just +1% growth. Wall Street is concerned as well. There is a growing worry that ROST's sales growth will remain stuck in low single digits. Margins are also under pressure and will likely be flat to down. It's no surprise

Technically ROST's bearish trend of lower highs and lower lows has pushed the stock to key support near $65.00. This is where the stock bounced back in February. The intraday February 2014 low was $65.15. Today ROST dipped to $64.96 intraday.

I am suggesting a trigger to buy puts at $64.75. If triggered our short-term target is $60.00. Earnings are coming up on August 21st. We may choose to exit prior to the earnings announcement.

I am listing the November puts but you might want to use the August puts, which have more volume.

- Suggested Positions -

Long Nov $62.50 PUT (ROST141122P62.5) entry $2.60*

07/16/14 new stop @ 65.65
07/16/14 triggered on gap down at $64.57, suggested entry point was $64.75
*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 July 16 at $64.57
Average Daily Volume = 1.4 million
Listed on July 14, 2014

Tractor Supply Co. - TSCO - close: 60.95 change: -0.03

Stop Loss: 62.15
Target(s): To Be Determined
Current Option Gain/Loss: -2.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/16/14: TSCO spent today's session drifting sideways. I don't see any changes from yesterday's comments. More conservative investors may want to just abandon ship since TSCO is not cooperating.

I am not suggesting new positions at this time.

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

07/15/14 TSCO is not cooperating. Readers may want to exit now with our option back to breakeven.
07/12/14 new stop @ 62.15
07/09/14 after the closing bell TSCO issued a Q2 earnings warning
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