Option Investor

Daily Newsletter, Saturday, 7/19/2014

Table of Contents

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

Market Wrap

Failure to Crash

by Jim Brown

Click here to email Jim Brown

The markets failed to crash after a week of monumental headlines. Dips continue to be bought.

Market Statistics

It was a rough week for headlines with the events in the Ukraine and Israel plus testimony by Janet Yellen that took direct aim at the market and some less than exciting earnings guidance. Despite the world shaking events the Dow closed near its recent high and the Nasdaq 100 closed at a new 14-year high. This has to be seen as bullish but we have to wonder how much longer this can last.

When markets ignore the headlines and dips are bought on really bad news it does not pay to be betting against the market. We are clearly in dip buying mode until proven wrong. The fly in this bullish ointment is the Russell 2000, which set a new two month low on Thursday. The Russell rebounded +1.6% on Friday with an 18 point gain but I believe that was short covering and option expiration pressures rather than a sudden surge of new buyers.

I believe the market took the downing of the Malaysian jet very well even when it turned out to be directed by a Russian advisor to the separatists in the Ukraine. A Russian colonel and Russian weapons but no serious blowback on Russia, yet. Many were initially worried that the downing of the jet could lead to U.S. military involvement much like the sinking of the RMS Lusitania in May 1915 caused a serious change in public opinion against Germany and caused the U.S. to enter World War I. The passenger liner Lusitania was torpedoed by a German U-boat and sank in 18 minutes killing 1,198 and leaving 761 survivors.

So far there does not appear to be direct link to Putin despite news the U.S. had intercepted a transmission between a Russian "advisor" and the missile crew telling them to fire on the plane. It is thought the missile crew believed the radar contact to be another Ukrainian An-26 transport like the one they shot down three days earlier. There were posts on Facebook and Twitter bragging they shot down another An-26 until early responders to the wreckage discovered it was a passenger plane. The posts were immediately taken down. The Ukrainian government claims it also had intercepted radio communications between separatists bragging about downing what they thought was an An-26. The Russian SA-11 Gadfly missile is radar guided. The operator on the ground could not determine visually what plane was flying at 33,000 feet. It is only a blip on a screen.

The point keeping this from being a major international incident is the fact the crew on the ground did not know it was a passenger airliner or at least that is what everyone believes today. If they had communication talking about attacking a passenger plane I think the reactions would be a lot more severe. All the nations involved appear to be holding back on their response until more evidence can be gathered. I believe we can expect some serious additional sanctions against Russia in the days ahead.

The impact to the market should be over unless there are further events out of the Ukraine that suggest future military intervention by other nations.

There has been a number of shoot downs of passenger aircraft in the past and none have caused a war. In Oct 2001 a Sibir Airlines passenger plane was downed by a Ukrainian missile during a training exercise. The crash killed all 78 passengers and crew.

In September 1998 a Lionair (Sri Lankan) plane was downed by separatists killing all 65 passengers. In September 1993 an Orbi Georgian Airways flight was shot down by Abkhazian rebels and crashed on the runway at Sukhumi-Babusheri Airport killing 108. In July 1988 an Iran Air flight was mistakenly shot down by missiles from the U.S. Navy in the Strait of Hormuz killing 290 passengers. In June 1987 a Bakhtar Afgan Airlines plane was shot down by rebels killing 53. In August 1986 a Sudan Airways plane was shot down by a missile fired by the Sudan People's Liberation Army in South Sudan killing 60. In 1983 a Korean Airlines 747 was shot down by Soviet fighter aircraft killing 269. In February 1979 an Air Rhodesia plane was hit by a missile fired by the Zimbabwe People's Revolutionary Army killing 59. In 1962 a Russian Aeroflot plane was shot down by a stray missile during an air defense exercise in Russia killing 84.

The Israel retaliation into Gaza is not a market mover. As of Friday night Hamas has fired 1,636 missiles into Israel in the last ten days. Hamas is funded and supplied by Iran. Very few people are complaining about Israel responding militarily against the missile attacks. Hamas and Israel have been fighting since Israel abandoned Gaza in 2005. Hamas had agreed in 2004 to stop the offensive against Israel if they would leave Gaza. Israel evacuated more than 7,000 citizens from their homes in Gaza but less than six months later Hamas was again launching attacks. This fighting has been going on for more than a decade with flare ups every couple of years. The market is immune to the Gaza headlines.

What the Ukraine and Gaza headlines did was distract traders from the earnings and economics. It was all overseas headlines all day on Friday. The economic reports were not market movers even if there had been no headlines.

The regional and state employment for June was positive with employment rising in 33 states while declining in 22. Florida led the country with 37,400 new jobs followed by California with 24,200 new jobs and New York with 22,500. Decliners included West Virginia -9,100, Alaska -5,900, New Mexico -4,700 and New Hampshire -3,900. This report was ignored.

Consumer Sentiment for July declined from 82.5 to 81.3 and the lowest level in four months. The present conditions component rose from 96.6 to 97.1 but the expectations component declined from 73.5 to 71.1. That is the lowest level since March for the expectations component.

The three month old conflict in the Ukraine plus the IS insurgency, formerly ISIS or ISIL, now just Islamic State, in Iraq that pushed gasoline prices to the highest level for this time of year probably weighed on expectations. Also, the news in late June of the -2.9% contraction in GDP in Q1 may have soured the outlook for consumers. Consumer spending in June missed estimates and suggests consumers were already starting to feel the pinch of higher gasoline prices and lowered economic expectations.

The economic calendar for next week is front end loaded with the Chicago Fed and Richmond Fed surveys on Monday and Tuesday. The Consumer price Index (CPI) on Tuesday will be a look at inflation at the consumer level for June. The CPI has shown a significant uptick in inflation starting in March with a rise of +0.2% followed by +0.3% and +0.4% in April and May. Janet Yellen said this three month uptick was just "noise" and she expects inflation to remain low. This report will be critical confirmation of her expectations. If it fades back towards the 0.1% average over the last year then the market will be pleased. If it continues to rise or even maintain the level of the last two months Yellen will be under a lot of pressure to substantiate her noise call.

The Durable Goods numbers on Friday will be important for Q2 GDP estimates. Orders fell in April and May, which was after the severe winter weather, so the June number is going to be critical for closing out Q2. If it remains negative like the -1.0% in May the economists are going to be running in circles trying to produce a new GDP forecast that shows growth. This number will be important for the Fed, which meets the following Tuesday to determine monetary policy.

St Louis fed President James Bullard was out on Thursday repeating his expectations for the normalization process to begin sooner rather than later. Normalization is code for returning interest rates to normal. Earlier in the week Yellen repeated her claim that rates will stay low for a considerable period after QE ends late this year. She indicated QE may be terminated in October. Bullard said the rapid drop in unemployment could push inflation "well above" the Fed's target. He is predicting 2.4% inflation in late 2015. Bullard wants the Fed to raise the interest rate by the end of Q1-2015. The market lost ground after Bullard's comments on Thursday but there were a lot of other headlines at the time.

Friday was a light day for earnings with GE the only major company reporting. GE reported earnings of 39 cents, a +13% increase on a +3% rise in revenue to $36.23 billon. Analysts expected 39 cents and $36.26 billion. Profits from industrial divisions rose +9%, oil and gas +25% and aviation profits rose +12%. However, transportation earnings declined -14%.

The company said it plans to sell 125 million shares at $23-$26 of its retail finance unit named Synchrony Financial (SYF) to raise $3.1 billion. GE will retain 85% ownership in SYF. Before the financial crisis GE received more than half of its revenue from financing operations.

GE shares declined fractionally on the news. With 10 billion shares outstanding it would take a major event to move the stock.

Skyworks Solutions (SWKS) reported earnings Thursday after the bell that rose +54% to 83 cents compared to estimates of 80 cents. Good but not great. However, they warned that results for the current quarter would be well ahead of estimates and said the company is "forecasting sustainable, above-market growth for the foreseeable future." Revenue for the current quarter is now expected to br $680 million with earnings of $1. Analysts were only expecting $607 million and 87 cents. Shares rocketed +14% higher to $53.

Schlumberger (SLB) reported earnings of $1.37 that was down from the $1.57 earned in the year ago quarter and barely exceeding the $1.36 analyst estimate. Revenue rose +7.8% to $12.1 billion and beat estimates for $11.9 billion. Shares declined -2% after the CEO expressed a "slightly more cautious outlook" from sluggish growth in the U.S. and "anemic" growth in Europe.

On Thursday Baker Hughes (BHI) said the North American fracking market is still 20% oversupplied and prices have been falling for two years due to a glut of equipment. Prices are expected to remain low for 2014. SLB said margins had declined from 19.7% to 18% due to the rising cost of frac sand.

AMD was the biggest loser with a -16% drop after reporting earnings of 2 cents compared to estimates of 3 cents on revenue of $1.44 billion. Revenue is expected to increase +2%, plus or minus 3%, sequentially, compared to consensus estimates of $1.57 Billion meaning they will probably miss Q3 estimates. The cautious outlook caused multiple downgrades and the stock drop. This was the biggest one-day decline in nine ears. Q2 sales in its computing solutions unit declined -20% while Intel's PC processor division rose +6.2%.

Next week is the busiest week of the earnings cycle with 133 S&P companies and 12 Dow stocks reporting. The major players are highlighted in yellow in the graphic below. Apple, Netflix, Facebook and Amazon are probably going to get the most attention.

Microsoft shares have already rallied on the Intel earnings beat and the massive job cuts. I can't imagine what they could announce to push the stock much higher.

Apple will either miss by a mile or beat by a mile and the shares will act accordingly. Last quarter there was a slowdown in sales of some iProducts but shares of Apple spiked from $75 to $85 in post split terms after they announced the 5:1 split and additional buyback plans. Without another split announcement of another $50 billion buyback I would be surprised if a simple earnings beat will power the stock much higher.

Apple will benefit from the new product announcements in the near future so buy any dip after earnings.

Dunkin Donuts (DNKN) reports earnings on Thursday. The company was downgraded by Janey Capital on Friday from buy to neutral and the price target cut from $56 to $45. Janey said same store sales trends for the rest of the year may be lower than expected. Another analyst said ignore Janey because Dunkin margins at 30-40% are twice that of Starbucks and they have plenty of room to expand. They are heavy in the northeast and south but only have three stores in California and very few stores in the west. Shares dipped initially on the downgraded but rebounded to gain 25 cents on the day.

Amazon (AMZN) reports earnings on Thursday and while nobody expects any blowout numbers the stock is still up +$30 over the last week. With Fox bidding for Time Warner we could see Amazon up the ante on the content wars by acquiring somebody like Lions Gate (LGF). Amazon has a $165 billion market cap and LGF only $5 billion. Amazon could pick up a progressive studio for pocket change and then ramp up content generation to compete with companies like HBO and Netflix. Lions Gate has been up on takeover rumors all week as a result of the Fox/TWC acquisition headlines. Content is king and LGF is producing a lot of very good material.

Amazon also announced a read all you want plan for the Kindle. For $9.95 per month you can download all the books you want without paying for them individually. This would let customers binge on reading without breaking the bank. Piper Jaffray said Kindle Unlimited could be generating $1 billion a year in revenue in the next several years. This is to compete with several other e-book sellers with similar plans.

In the "you can't make this stuff up" department the U.S. Justice Dept filed drug trafficking charges against FedEx (FDX) for accepting shipments from Internet pharmacies. The U.S. charged FedEx with 15 counts of conspiracy to distribute controlled substances and misbranded drugs that carry fines of twice the gains from the conduct. The government alleged that to be $820 million in shipping fees.

Attorney Larry Cole, formerly associate chief counsel for the DEA said this is "an unprecedented escalation of a federal crackdown on organizations and individuals to combat prescription drug abuse. Targeting a company that's two to three steps removed from the actual doctor-patient, pharmacy-patient relationship is unprecedented."

It may not be that unprecedented since UPS gave up $40 million in billings to online pharmacies last year under a non-prosecution agreement after the feds threatened to file similar charges. Walgreens (WAG) agreed to pay an $80 million civil fine last year to resolve claims their distribution center in Florida failed to report suspicious drug orders of oxycodone, or should have known, that prescriptions being filled were not for legitimate medical use. CVS Caremark (CVS) paid a $78 million fine in 2010 to settle claims that stores in California and Nevada allowed customers to buy cold medications that were used to make methamphetamine.

I can see how some of those events could be interpreted as lax management or looking the other way to make sales. However, FedEx is just a shipper. They pick up a load of prepaid, preaddressed boxes and deliver them to the address on the label. They don't know if the contents are medical supplies, candy, shampoo, mouth wash or prescription drugs. The shippers could just as easily packed them in priority mail boxes and dropped them off at the post office.

The Justice Dept said "FedEx delivered drugs to or for Internet pharmacies that supplied pills to customers who filled out online questionnaires, and were never examined by doctors, knowing these practices violated federal and state drug laws." FedEx said it can't be responsible for the contents of the 10 million packages it transports daily and that policing the content of customer's packages would violate their privacy.

FedEx said Friday it repeatedly asked the government for a list of illegal pharmacies so it would know which ones not to do business with. The U.S. never gave it such a list. The government said FedEx should have known the drugs were illegal with some packages sent to addresses that were vacant homes. I can see in some cases where that would have been obvious but if there is no signature required FedEx just leaves the package on the porch. If the criminals were doing their job right they would pick homes that did not look vacant.

After an initial dip FDX shares rebounded to close up +$1 for the day.

The rebound on option expiration Friday should have produced more volume than the rest of the week. The average volume for the prior three days was 6.3 billion shares. Friday's expiration volume was only 5.7 billion shares. The down volume on Thursday was 5.23 billion shares and the up volume on Friday was only 4.49 billion. If you allow for the normal expiration volume it suggests the rebound was on very low volume and should not be trusted.

I believe the downdraft on Thursday was the result of multiple headlines from Ukraine, Israel, Iraq and from Bullard's sooner rather than later prediction. The flurry of headlines prompted a lot of people to run for the exits and for the bears to pile in with new shorts. When there was no follow through to the downside on Friday morning after a -12 point drop on the S&P futures overnight there was a rush to cover before the weekend. There was a +32 point rebound in the S&P futures from Thursday night's low of 1,942 to Friday afternoon's high at 1,974. That is a huge move and can only be associated with short covering.

The Russell 2000 futures rebounded from 1,123 to 1,149, a +26 point sprint. The Russell cash had been heavily shorted for the last two weeks with the low at 1,131 at Thursday's close. That was an 82 point drop from the July 1st high at 1,213. To say the Russell was oversold would be an understatement. The Russell rebounded +18 points by noon on Friday. That was clearly short covering with the rest of the day flat.

I pointed out in the July 5th newsletter that the Russell 2000 was setting up for a potential double top when it failed to break through 1,208 for three days and so far that has come true. If it continues to decline the initial target would be 1,100.

Support at the 50-day average failed on Thursday with a close under the 200-day as well. The Friday rebound stopped exactly at the 50-day, which should now be resistance. However, as you can see in the chart below the Russell has not been very reactive to the various moving averages. The next material support is 1,096.

If the Russell continues its decline next week I would expect the big cap averages to follow. The small caps typically lead the broader market in both directions.

The S&P failed to return to strong support at 1,950 but it also failed to make a higher high of even reach the old high of 1,985. This is grasping at technical straws since the intraday high on Thursday was 1,984 but resistance appears to be strengthening with a pattern for the week that looks like a short term rounded top.

We can debate technicals all week long but the bottom line is a market that refuses to go down. There are many reasons analysts are giving for the resiliency from improving economics to strong earnings expectations but those reasons are based on hope rather than facts since earnings have been lackluster and economics remain mixed.

Whatever the reason for the underlying strength we need to continue to buy the dips until proven wrong. Sometimes market rallies are based more on people being afraid of not being in the market more than being afraid of the market.

Fund manager stock allocations are at 9 year highs, cash allocations at 9 year lows and outflows from high yield bond funds at 11 month highs. According to Merrill Lynch, global fund managers are overweight equities by 61% and the most exposed since February 2011. That is the second highest rate in the survey's history.

Apparently fund managers are all in until the Fed actually ends QE and begins to raise rates.

Support on the S&P is 1,950-1,955 and resistance 1,985-1,990.

133 S&P companies report next week. This is the busiest week of the earnings cycle and that means there will be plenty of post earnings moves to push the index around.

The Dow traded in a 200 point range for the week but the majority of that movement came on Monday and Thursday. Thursday's opening high of 17,151 was followed by a plunge to 16,966, a -185 point decline. Friday's close at 17,096 erased the majority of that decline and left the Dow poised to make a new high with very little effort. Uptrend support is now 16,900 with the 30-day average at 16,925.

The Dow is moving up slowly in the rising wedge of support-resistance and a breakout-breakdown, when it comes, could be significant.

With 12 Dow components reporting earnings next week we could see some significant movement if companies like Visa, reporting on Thursday, were to move sharply after their earnings.

The Nasdaq put in a series of lower highs despite strong earnings from companies like Intel. Support at 4,344 is still intact with the low for the week at 4,352. With Apple, Amazon, Intuitive Surgical and Baidu all reporting earnings next week there will be plenty of opportunity for further declines. Apple is expected to beat estimates but Amazon will likely disappoint simply because of increased spending on building the next big Amazon shopping feature.

The Nasdaq 100 ($NDX) looks a lot better than the Composite index. The NDX closed at a new 14 year high on Friday at 3,939. Instead of a down sloping trend on the composite the NDX trend is up sloping. This suggests the fund managers are still storing money in the big caps in case of trouble ahead.

Next week is going to be a challenge. Several commentaries I have read this weekend suggest the growing hostility against Russia could impact the market given some new headlines this weekend. Others believe the rebound on Friday has already taken into account the tragedy and by Monday it will be old news. The U.S. is not going to become involved militarily and Putin is going to be under a lot of pressure to smooth over the headlines by calming hostilities in the Ukraine. Time will tell.

The market is showing what I consider to be an unreasonable resiliency. However, that is just my view and when in doubt the trend is your friend. I believe we should continue buying the dips until proven wrong.

Random Thoughts

"If you have trouble imagining a 20% decline in the stock market, you should not be in stocks." John Bogle.

Since 1950 there have only been four bull market streaks without a 10% correction that are longer than this one. The current streak is now 32 months old. The four longer streaks were starting June 1984 at 38 months, June 1962 at 44 months, March 2003 at 54 months and October 1990 at 84 months. The corrections following those streaks were -33%, -16%, -56% and -11% respectively.

Josh Brown said the potential for major geopolitical events has not changed but the "awareness" that events may occur has definitely changed. In times of greater uncertainty momentum stocks are the first to decline since the fundamentals are rarely an issue. Investors buy them because they are going up, not for fundamental reasons. When investors are not invested for fundamental reasons they tend to rid themselves of those stocks very quickly when uncertainty rises.

The Bank of Italy slashed GDP growth estimates to +0.2% for 2014 and only 1.3% for 2015. The bank sees "downside risks for growth this year." This sent the euro to a seven-month low.

Portugal's Espirito Santo International Bank said it could no longer meet its financial obligations and applied for the equivalent of a chapter 11 bankruptcy trustee. The bank said a significant portion of its debt was maturing and it could not make the payments.

Greece is likely to apply for a third round of bailouts from the EU/ECB because of a 12.6 billion euro financing gap in 2015. Greek bonds rallied last year and the country was able to sell 4.5 billion euros in additional debt. However, the market for new debt is shrinking and with Portugal's ESI bankruptcy it looks like the public market for Greek debt may have evaporated.

This is an interesting look at how the different newspapers around the world reported on the Ukraine disaster. Newspapers of the World

One theory floated by a Russian newspaper was that the bodies found in the wreckage were long dead and speculated the plane was actually the vanished MH370 that had been hidden and then re-used to stage a "provocation" against Russia.

Beware of another Taper Tantrum 2.0. You may remember in June 2013 when Bernanke suggested the Fed was going to start tapering QE. The market declined sharply on worries QE would end. Janet Yellen said last week that QE could end at the October Fed meeting. That was pretty much ignored by the media but as we get closer to October it is likely to take center stage. The bond market is still ignoring the potential for higher rates but a few more statements from hawks like Bullard or a couple more months with higher inflation in the CPI and the realization could hit home in a flash. The first rate hike is often the worst for the market.

Comments from the StockTradersAlmanac.com. On average, the year prior to a Fed Funds rate increase has been positive. However, one month after a major shift in policy to tightening, the market has never been up, and averaged a loss of 2.8%. Three months later has been even more negative with an average loss of 4.9%. From six months to one year later, the averages are still negative, but a few modest gains have occurred. Also notable are that the last two times that tightening occurred with DJIA at or near all-time highs (1973 and 1999) the impact was clearly negative.

Housing starts fell -9.3% in June from 1.001 million to an annualized rate of 893,000. This is the second monthly decline. This was supposed to be the summer the housing market was poised to accelerate. Housing permits fell -4.2%. Analysts had expected both numbers to rise sharply. Oops! The severe winter weather is long gone and mortgage rates fell back to their 2013 lows around 4.1%. In short, the housing recovery appears to be fading rather than accelerating.

A Bloomberg poll found that 47% of investors believe the equity market is at unsustainable levels while 14% believe it is already in a bubble. Having Janet Yellen claim biotechs and social media stocks are overvalued did not help.

The Bullish Percent Index on the S&P is currently 82.8%. That means 82% of S&P stocks have a buy signal. However, as you can see by the chart below that is normally the level where the market tends to fade.

According to Laurence Lewitinn the Investor Intelligence bull/bear ratio is 4:1 bulls over bears. That is the highest ratio for the year, close to the peak in 2013 and approaching levels not seen since 1987. Ari Wald, head of technical analysis at Oppenheimer explained that high of a ratio is bearish. You want to buy when there are more bears than bulls.

The streak is dead! The S&P streak of 62 consecutive days without a 1% move ended on Thursday. That was the longest since 1995 when the S&P was only 605 instead of the 1980 today.

I went on vacation last week to Langara Island 26 miles south of Alaska. It was a great trip. My son goes every year and he invited me along this year. In three days of fishing we caught over 50 salmon, kept 14 and released the rest. It is hard to get used to releasing 10-15 pound fish because they are too small. I highly recommend Langara Fishing Lodge to anyone who likes "catching" as opposed to just "fishing." The fish in the picture below were 16-18 pounds. The biggest fish from the group of 72 fisherman was a 46 pound Chinook salmon with several caught over 30 pounds. My son caught the biggest halibut also at 46 pounds.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"When you are dead you don't know it because you are dead. Only those people around you know it. The same goes for being stupid."

Alaskan fishing guide last week.


Index Wrap

Big is Beautiful

by Leigh Stevens

Click here to email Leigh Stevens

The big cap Dow 30 (INDU), S&P 100 (OEX) and Nas 100 (NDX) indexes may have only paused in their uptrends, versus the broader S&P and Nasdaq indices that have looked more 'toppy'. To add to a mixed picture, the small cap Russell 2000 (RUT) could have found a bottom after retracing a Fibonacci 62 per cent of it previous advance and then rebounding. RUT also has a history of bottoms when its 13-day Relative Strength Index (RSI) falls to the 35 area which is what you'll see on that chart at bottom.

I've been suggesting exiting bullish positions as further upside potential has looked to me about equal to downside risk (of a pullback) in the S&P 500 (SPX) and Nasdaq Composite (COMP). I make such recommendations given risk-to-reward looking about equal (and not a good NEW trade bet) and also based on how prolonged the move has been up until the point where many stocks stopped sailing and started bailing.

I haven't said that a bearish outlook and strategies are warranted, especially in the INDU, OEX and NDX. These look like they could break out to the upside, having previously gone to new highs for the move and, in the case of OEX, successfully re-tested its up trendline. I redrew NDX's up trendline this week to a slightly lower slope which 'redefines' it somewhat, as will be seen on its chart. INDU didn't retreat even to its up trendline, given sizable advances in IBM, INTC, MSFT and moderate strength in bank/broker stocks GS and JPM, as well as with healthcare stock UNH.

The Dow might have even stronger bullish prospects if the current advance broadened out with MORE of the 30 Dow stocks continuing to move higher. Keep in mind with the Dow also that it is a price average and not capitalization weighted. Any company in the Dow with big price gains will move INDU more than might be the case in the cap-weighted S&P 100 Index for example.

IF 'decisive' upside breakouts occur in the big cap indexes and these continue higher is should pull up the broader SPX and COMP. I consider a decisive upside chart 'breakout' to be initially suggested by TWO consecutive days at new Closing highs, which hasn't happened yet.


The 'Investor Exchange' (IEX) and only a few months old is an equity trading venue owned by buy-side funds and highlighted in Michael Lewis' fascinating Flash Boys book. IEX traded 119 million shares on both Thursday and Friday, which is getting respectable. Friday saw matched trades of 106 million shares within this pool, a percentage well above many public exchanges; i.e., such trades were crossed with orders within this pool and not routed out. IEX is the only such dark pool that publishes its rules of operation, fee structure and by ways described in the book, prevents High Frequency Traders from 'front-running' orders coming into IEX. An idea whose time is come, judging by the way their volume is growing!



The S&P 500 (SPX) Index is mixed in its short-term chart pattern as the Index has been trending sideways for the past two weeks. SPX has a minor double top pattern within its current lateral trend. The intermediate-term trend remains up. There was one Close below the important (from a trading perspective) 21-day moving average but only one and SPX has rebounded from the highlighted up trendline, although that's a re-drawn line to reflect what looks to be the current 'best fit' up trendline.

1960 is a key near chart support. Back to back Closes below 1960 would suggest at least an interim top. Next support is 1940.

Near resistance is at multiple tops that occurred at and just under a 1985 line of resistance. Next higher resistance is projected at 2008, extending to the upper channel line intersecting currently around 2022.

The 13-RSI fell to a more or less 'neutral' (not overbought, not oversold) reading in the 50 area. Bullish trader sentiment has no longer been consistently on the high-bullish end of the CPRATIO indicator scale. No trading recommendations.


The S&P 100 (OEX) went to new highs around 880 which is bullish and then stalled a bit. However, on recent weakness OEX held a key support at its up trendline and 21-day moving average.

870 is pivotal near support, extending to 865. A next important chart support then comes in at 860, extending to 857 at the 50-day moving average. Traders should keep track of the 21-moving average but investors will focus more on the 50-day average.

Near resistance is at 880-881, extending to around 885. Resistance currently implied by the top end of OEX's broad uptrend price channel well above current levels, is at 894.

OEX looks like it may be poised to break out above 880 but I'm watching from the sidelines currently. I'd want to see two back to back daily Closes above 880 to resume a short term bullish outlook, with the 880 area subsequently acting as support on pullbacks; prior resistance, once penetrated, often 'becomes' later support.


The Dow 30 Average (INDU) has been drifting sideways in the past few sessions and needs to achieve a decisive upside penetration above 17150 to regain short-term upside momentum. I seem to always be adding a note about what I mean by 'decisive' and a move well above a technical line of resistance is the most obvious way to see that; alternatively, Closes over two days running that simply stay above such a prior line of prior intraday highs is also a bullish plus.

I discussed last week that there were in my evaluation only around 8, of 30, Dow stocks that hadn't "faltered" in their bullish weekly chart patterns. I'd expect to see this number of (bullish) stocks EXPAND before seeing sizable further gains. Instead, as noted above in my initial 'bottom line' comments, the INDU rally this past week was largely due to a major thrust higher in IBM, INTC and MSFT, as well as moderate strength in bank/broker stocks GS and JPM and with healthcare stock UNH.

Near resistance is at 17000, extending to 17075. Near support is seen at 16800, with next technical/chart support suggested in the 16720-16700 area.

I'm neutral on the near-term outlook. INDU could go up, could go down. Yes, I know, not a profound statement but that's the way things look, especially when you flip through the 30 Dow component charts. It's a coin toss to a degree but short-term momentum is down and the trend uncertain in the near-term.


The Nasdaq Composite Index (COMP) fell under its steep up mid-May/early-July up trendline and led to limited downside and pullback to a line of support that developed in the 4350 area. COMP traded briefly below its 21-day moving average, but the Index only once Closed below this key trading average. I'd rate the short-term trend as mixed/sideways currently. The intermediate to long-term trend remains up.

Resistance is seen at 4437, at a minor down trendline. This trendline resistance extends to recent highs in the 4450 area. Above 4437-4450, resistance is implied by the prior 4485 high. Long-term resistance may come into play in the 4650-4700 area if we look out over the next several weeks. First, COMP has to make it back above 4485-4500! As mentioned already, pivotal near support is 4350, extending to 4300.

The Nasdaq Composite, which of course includes a large stock universe, has been relatively weaker than the S&P 500 in terms of slippage below its prior peak and its pattern of some descending highs (making the minor down trendline). COMP also looks to be weaker than the elite Nas 100 big cap index. The RSI retreated to a 'neutral' mid-range reading and bullishness has tapered off, which could be a 'set up' for a next rally, but all eyes are on NDX for that. The most bullish aspect is possible 'base-building' in COMP as the Index establishes a line of support at 4350.


The Nasdaq 100 (NDX) chart has been undergoing, what is so far, a short-term correction with a still-bullish pattern of higher relative pullback lows. A revised up trendline is seen below a bit under the prior trendline. Bullish technical aspects are seen with the up trendline and the pullbacks TO (and not a point under) NDX's 21-day moving average. Not so bullish is the recent stall and remaining to be seen is the ability of NDX to pierce 3950.

A pair of closes above 3950 would suggest potential for a new up leg, especially to the technically (and media!) important 4000 level.

I've highlighted initial support at 3850 but bulls should also watch for any decisive downside penetration of (or simply a minor close below) NDX's 21-day moving average at 3872 to suggest declining upside momentum. Next support is highlighted (green up arrow) at 3800.

I'm still trading 'neutral' on NDX. The way some tech stocks continue to advance keeps the Index challenging the 3950 area. Stay tuned as to a breakout above this resistance. A close above 3950 to be 'true' should be followed by a second such close if NDX is headed next to 4000. It almost seems a 'likely' fate that NDX, having come near this big target, will test the 4000 level.


The Nasdaq 100 tracking stock (QQQ) short-term pattern is mixed in the basically sideways trend of the past two weeks and the inability over this past week for QQQ to pierce 96.3 after a few attempts.

If 96.3 near resistance is pierced and QQQ then holds above the 96 area on pullbacks, it sets up potential for the Q's to advance toward the upper end of its broad uptrend price channel, which currently intersects around 97.4. Near technical support is in the 94.5 area to 94 even; 94 is highlighted on the chart. Next lower support is assumed to lie at the up trendline currently intersecting at 93.5.

The On Balance Volume line (OBV) is trending sideways to a bit lower still, so this key measure of volume is also neutral and should shift more strongly up or down by a breakout or breakdown.

As with NDX, I'm trading neutral and lack conviction in the prospects of a renewed push higher or at least don't like the risk to reward equation of NEW bullish strategies. I've suggested in the past couple of weeks to take profits on bullish positions. If wanting to stay in, with profits or without, risk protection could be set by liquidating stops based on a fall in QQQ below its 21-day average.


The Russell 2000 (RUT) chart remains bearish but hope for a bottom is suggested to me by RUT's retracement of a Fibonacci 62% AND by the oversold extreme suggested by the Relative Strength Index. It happens that for whatever reason, maybe just that RUT trades very 'technically', oversold or overbought extremes at 35 and 70 respectively, are frequent harbingers of tradable bottoms and tops.

Very near resistance is suggested at the 50-day moving average at 1152.8 currently. Next resistance, as highlighted on the chart (red down arrow) is at 1170, with next resistance suggested at 1185. Near support is in the 1130-1131 area, with next potential chart support at 1120.

As I wrote last week: "I suggest, besides keeping an eye on price action for signs of bottoming, to follow the 13-day Relative Strength Index (RSI) when readings are below 40 and especially when RSI gets to around 35." The 13-day RSI got to 35 before rebounding. Stay tuned for what follows in terms of a potential bigger rebound. This 'oversold' rule of thumb for RUT bottoms works a lot but not always, otherwise it wouldn't be the Market!


New Option Plays

Underperforming Consumer Goods

by James Brown

Click here to email James Brown


Fossil Group, Inc. - FOSL - close: 100.20 change: +0.68

Stop Loss: 100.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Aug 12th
New Positions: Yes, see below

Company Description

Why We Like It:
Fossil Group Inc. (FOSL) is a giant in the multi-billion global watch industry. They started in 1984 and have grown to over 400 retail locations, 4,000 wholesale locations, and annual revenues of more than $3 billion. They own the Watch Station line of stores. A couple of years ago FOSL purchased the Denmark brand Skagen. They also own or market Michele, Zodiac, Relic, Burberry, Emporio Armani, Michael Kors, DKNY, Karl Lagerfeld, Tory Burch, Diesel, Armani Exchange, and adidas Originals brands. Altogether FOSL has about 45% market shares of the U.S. fashion market.

FOSL also sells jewelry, handbags, wallets, belts, sun glasses and clothing. While FOSL has done a pretty good job of growing sales, they are seeing rising expenses. Lately it has become a very competitive market for the higher-end luxury goods industry. Just look at stocks like Coach (COH) and Michael Kors (KORS). Granted COH and KORS are more leather goods and hand bags but they cater to the same customer.

FOSL is also facing the smart watch revolution. Smart phones have become ubiquitous and replaced their older rivals. Could investors be worried that smart watches will do the same to traditional watches? Currently Samsung has 78% of the smart watch market. A smaller, newer company named Pebble has 18%. At the moment the smart watch market is small and still dwarfed by the traditional watch market. Current estimates put the smart watch/wearable devices market at $2.5 billion in 2013. That's expected to surge to $13 billion by 2017. It will obviously be a growth area for the accessories industry.

Back in March Google announced it was partnering with HTC, LG, Motorola, Samsung and Fossil to promote its Android wearable products. It seemed like a natural fit to include Fossil given the company's dominant market share in the watch industry. Yet when Google held its I/O conference a few weeks ago there wasn't any news on FOSL and any upcoming smart watch launch. That might be troubling news. Apple is rumored to have their own smart watch (dubbed iWatch) to be coming out later this year.

Looking at the earnings picture FOSL last reported in May and issued an earnings warning for the second quarter that send shares lower. Consumer spending has not been as robust as many had hoped. Investors could be worried that FOSL will disappoint again when they report earnings in mid August.

In summary, FOSL is strong in the traditional watch market but the overall retail environment remains challenging. Plus, FOSL could be facing really tough competition in the growing wearable devices/smart watch industry.

Technically shares are in a bearish trend of lower highs and lower lows. FOSL is about to breakdown under its May low of $98.53. The Point & Figure chart is bearish and suggesting at $90.00 target.

We are suggesting a trigger to open bearish positions at $98.40. Plan on exiting prior to earnings in mid August.

Trigger @ $98.40

- Suggested Positions -

Buy the Aug $95 PUT (FOSL140816P95) current ask $2.45

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

Annotated Chart:

Weekly Chart:

Entry on July -- at $---.--
Average Daily Volume = 548 thousand
Listed on July 19, 2014

In Play Updates and Reviews

Equities End Week With A Gain

by James Brown

Click here to email James Brown

Editor's Note:

Friday's bounce helped lift the S&P 500 to a gain for the week.

AAP and TSCO hit our stops on Friday. We want to exit our AAPL trade on Monday.

Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 94.43 change: +1.34

Stop Loss: 91.90
Target(s): To Be Determined
Current Option Gain/Loss: +4.3%
Time Frame: exit prior to earnings on July 22nd
New Positions: see below

07/19/14: After a three-day drop shares of AAPL bounced on Friday with a +1.4% gain. Technically shares still look short-term bearish. Tuesday's move generated a technical sell signal. Wednesday's session did it a gain with a bigger sell signal. Thursday's drop is technically confirmation of Thursday's sell signal. Friday's bounce is just an inside day. Unless we see AAPL close above $95.28 again the short-term trend is down (within its longer up trend). However, none of that matters tonight.

AAPL is due to report earnings on Tuesday, July 22nd, after the closing bell. In the Thursday night newsletter we decided to exit AAPL positions prior to the earnings announcement. Tonight I am suggesting we exit on Monday, July 21st, at the closing bell. We will bump the stop loss to $91.90.

We're still longer-term bullish on AAPL but a post-earnings sell-off could be a great entry point to ride the stock up into a September iPhone 6 launch.

- Suggested Positions -

Long Oct $95 call (AAPL141018C95) entry $3.93

07/19/14 prepare to exit on Monday, at the closing bell
We do not want to hold over the earnings report.
07/19/14 new stop loss at $91.90
07/17/14 has confirmed yesterday's bearish reversal candlestick. Readers may want to exit early now. We will plan to exit prior to earnings on July 22nd
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: 122.18 change: +1.47

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: +25.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: AMP delivered a nice bounce on Friday (+1.2%) and almost erased Thursday's losses. The trend of higher lows and higher highs remains in effect. Investors may want to raise their stop loss.

FYI: AMP is scheduled to report earnings on July 29th.

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: 109.16 change: +0.59

Stop Loss: 104.75
Target(s): To Be Determined
Current Option Gain/Loss: -16.9%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: The last few days have been quiet for EMES. Aside from the intraday spike above resistance at $110.00 the stock has continued to churn sideways in the $108.00-110.00 zone. The high last week was $110.48. I would wait for a rally past $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: 114.38 change: +2.12

Stop Loss: 109.90
Target(s): To Be Determined
Current Option Gain/Loss: -33.3%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: HAR bounced off the $112.00 area on Friday and almost erased Thursday's losses. If both HAR and the S&P 500 index open positive on Monday investors could launch new positions in this stock although you may want to wait for a rally past $115.00 before buying calls again.

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: 72.82 change: +2.47

Stop Loss: 66.40
Target(s): To Be Determined
Current Option Gain/Loss: - 4.3%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: LNG displayed relative strength on Friday with a +3.5% surge from support near $70.00. The next challenge is the July highs near $73.80. 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: 100.70 change: +1.22

Stop Loss: 97.25
Target(s): To Be Determined
Current Option Gain/Loss: -24.1%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: It is encouraging to see SAFM bounce on Friday (+1.2%) but don't be fooled. Friday is an inside day. The pullback that started on Wednesday may not be over yet. I would wait for a rally past $101.20 before considering new positions and more conservative investors will want to wait for a close above this level.

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

07/17/14 today's move breaks short-term support. More conservative investors may want to exit early now.
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: 77.94 change: +0.70

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +12.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: SBUX's drop on Thursday was short-term bearish. Fortunately shares did not see any follow through lower on Friday. More conservative investors might want to move their stop loss closer to Thursday's intraday low ($77.12).

SBUX has earnings coming up on July 24th. We are choosing to exit ahead of earnings. The plan will be to close positions on Tuesday this week (July 22nd).

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

07/19/14 prepare to exit on Tuesday
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: 58.29 change: +0.77

Stop Loss: 53.25
Target(s): To Be Determined
Current Option Gain/Loss: +68.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: SLCA got a new price target on Friday with one analyst firm raising their target to $69.00. That may have helped SLCA post a +1.3% gain.

The simple 30-dma is short-term technical support (currently at $54.19). More conservative investors might want to adjust their stop closer to this moving average.

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: 98.99 change: +0.29

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

07/19/14: The XLE is currently hovering at the bottom of its bullish channel. If we see shares breakdown under $98.00 we will likely drop XLE as an active candidate. Currently we are still on the sidelines with a suggested entry point at $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

Ross Stores Inc. - ROST - close: 63.31 change: +1.12

Stop Loss: 64.15
Target(s): To Be Determined
Current Option Gain/Loss: + 3.8%
Time Frame: 4 to 8 weeks
New Positions: see below

07/19/14: Someone decided ROST was a bargain near $62.00 and shares outperformed with a +1.8% gain on Friday. Or maybe it was just short covering as bears locked in gains.

The overall trend and the story for ROST is bearish but we do not like the bounce. Tonight we're moving the stop loss to $64.15.

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*

07/19/14 new stop @ 64.15
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


Advance Auto Parts Inc. - AAP - close: 130.47 change: +0.61

Stop Loss: 129.40
Target(s): To Be Determined
Current Option Gain/Loss: -50.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: The market managed a bounce on Friday. AAP rebounded as well. Unfortunately shares were weak on Friday morning and hit our stop loss at $129.40 before bouncing.

- Suggested Positions -

Sep $140 call (AAP140920C140) entry $3.50* exit $1.75 (-50.0%)

07/18/14 stopped out
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


Tractor Supply Co. - TSCO - close: 62.22 change: +1.12

Stop Loss: 62.15
Target(s): To Be Determined
Current Option Gain/Loss: -19.1%
Time Frame: 8 to 12 weeks
New Positions: see below

07/19/14: The oversold bounce in TSCO continued on Friday. Shares have rallied five out of the last six days and Friday's move pushed through some overhead resistance. Our stop was hit at $62.15.

- Suggested Positions -

Oct $60 PUT (TSCO141018P60) entry $2.45 exit $1.98 (-19.1%)

07/18/14 stopped out
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