Option Investor

Daily Newsletter, Saturday, 7/26/2014

Table of Contents

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

Market Wrap

Cracks in the Foundation

by Jim Brown

Click here to email Jim Brown

Despite better than expected earnings growth some high profile misses knocked the market for a loss.

Market Statistics

Earnings growth for Q2 is an astounding 8.3% based on nearly half of the S&P-500 that has already reported. However, some high profile earnings misses and guidance warnings are pressuring the indexes as we head into the summer doldrums. There may be some cracks forming in the bull market's foundation.

Visa and Amazon were the major problems on Friday. Dow component Visa (V) lost -$8 and knocked around 60 points off the Dow. Amazon, 13% of the Nasdaq 100, lost nearly 45 points at the open to help push the NDX lower by nearly 40 points at the open.

Visa's guidance was a wet blanket after they said they saw no signs of an economic recovery. That was a slap in the face to investors wanting to be long this market. Analysts may be imagining green shoots everywhere but Visa said it is not happening. Of course Visa's guidance may have been prejudiced by the very weak consumer spending. Retail sales are shrinking and high gasoline prices have kept consumers out of the malls. However, Visa also said cross border transactions were very weak. That means travelers are not spending money either. Visa's comments really weighed on the market.

Friday had only one economic report and it was neutral. The June Durable Goods orders rose +0.7% compared to a decline of -1.0% in May. After a +0.9% gain in April that gives us only a +0.2% average for the second quarter. That is not good and it will impact the Q2 GDP.

Orders for capital goods rose +1.9% but a weak rebound from the -5.3% decline in May. They are now down -10.4% for the year. Backorders rose one tenth to 0.8 and shipments were barely positive at 0.1. New orders did improve from -1.0 to +0.7.

There may be green shoots in the durable goods orders but they are growing in barren ground given the overall picture.

Next week is going to be very busy economically. This is payroll week, GDP, ISM Manufacturing and a Fed meeting all in one. The potential for volatility is very high and all the major reports are lumped into the last three days of the week.

The ADP Employment on Wednesday is expected to show employment fell from 281,000 new jobs to only 200,000 for July. The Nonfarm Payrolls on Friday are expected to show a decline from 288,000 to 247,000 new jobs. Both numbers are still in the Goldilocks zone but nobody wants to see new jobs decline.

The first look at the GDP for Q2 on Wednesday is expected to show growth of +2.5% compared to a -2.93% decline in Q1. The Q2 number is also going to be very volatile. Numerous companies have blamed weak earnings on weather in Q2 so there is the potential for a weaker than expected number. Weak retail spending and a slowing housing market could also have pushed it lower.

The first of the three estimates for GDP is normally the highest. As late data for the quarter becomes available the second revision which we will get next month is normally lower. The third report in September can go either way.

The ISM Manufacturing Index on Friday is expected to show a minor increase from the 55.3 in June so any decline there will be a surprise.

The FOMC meeting is not expected to be a market mover but anything is always possible. The data has been mild enough they are not likely to change course on the QE taper. Only three months remain with Yellen saying it will likely end in October. There is no press conference after this meeting so the announcement at 2:PM Wednesday is the only hurdle.

Earnings were driving the market all week and Friday was no different. The semiconductor sector was hard hit. On Friday Silicon Labs (SLAB) reported earnings of 58 cents that beat estimates of 46 cents. Revenue rose +10% to $154.9 million beating estimates of $149 million. However, great earnings still needs great guidance to avoid declines in the market. For the current quarter the company sees revenue in the range of $155 million, under the $156.8 million analysts expected. For earnings they forecast 45-51 cents and that was well below the 54 cent consensus. John Vinh of Pacific Crest Securities said they were buyers on the dip and they thought the company was trying to under promise on their guidance. Shares fell -14% on that weak guidance.

The Semiconductor Index ($SOX) is down -5.3% since Intel reported earnings two weeks ago. The selloff has been brutal and there was no specific reason. There were some earnings misses but most of the reports have been positive.

Texas Instruments (TXN) reported earnings that rose +3.5% to 62 cents compared to estimates for 59 cents. Revenue rose +8% to $3.29 billion and ahead of $3.28 billion estimates. Guidance for Q3 was 71 cents and $3.45 billion and analysts were expecting 68 cents. TXN shares dropped nearly $3 after the news with the biggest decline on Friday.

Arctic Cat (ACAT) did not enjoy the same boost in sales as experienced by Polaris (PII). The company said earnings declined -35% to 35 cents but that still beat estimates of 31 cents. Revenue rose +19% to $143.6 million compared to estimates of $131.8 million. It would appear they had a good quarter despite the decline in profits but the stock was sold with a 6% decline. Arctic Cat was probably too close to the blowout Polaris earnings and investors were hoping for a repeat.

On the positive side Lear Corp (LEA) reported earnings of $2.12 that beat estimates for $1.97. Revenue rose +11% to $4.59 billion and also ahead of estimates for $4.44 billion. The auto parts manufacturer said auto sales in China rose +12% and that accounts for 11% of Lear's revenue. The company raised revenue guidance to $627 million, up from $597 million. Analysts were looking for $625 million. They also raised revenue guidance ahead of consensus. Shares rose +3.3%.

Stanley Black & Decker (SWK) reported earnings of $1.43, an increase of 17.2%, compared to estimates of $1.37. Revenue of $2.885 billion rose +1% but missed the estimates of $2.939 billion. However, they raised full year guidance from $5.35-$5.50 to $5.50-$5.60. The hike in guidance overcame the shortfall in revenue and shares rose sharply by nearly 7%.

The Nasdaq decline would have been a lot worse if it were not for Baidu (BIDU). Profits rose +35% to $571.1 million and revenue rose +58.5% to $1.9 billion. Shares of BIDU rose +11% or $22 and a new high. This offset some of the decline in Amazon.

Amazon declined despite a +23% increase in revenue. The company said expenses rose +24% as the company continues to build out monster distribution centers, phone production and marketing plus numerous other improvements in services or new services being added.

Once Amazon ends the empire building they should be able to turn on profits at will because they are building millions of satisfied customers that are shifting to an Amazon lifestyle by ordering everything online.

The Amazon Fire phone finally went on sale on Friday.

Pandora (P) declined -10% after reporting the number of active listeners rose +7.5% to 76.4 million. That missed the 76.6 million estimate by Pacific Crest Securities and 77 million forecast by RBC Capital Markets. Shares fell -10% and the most ever in a single day. Other analysts were quick to call this a buying opportunity because the majority believe Pandora will eventually be acquired by somebody like Google. With a market cap of $5 billion they are a pocket change acquisition for the big players.

The earnings cycle continues unabated next week with a few high profile names. This is energy, healthcare and pharmaceuticals week. Twitter and LinkedIn also report but I would not expect a repeat of the Facebook performance. Herbalife reports on Monday and that will be interesting after the failed attack by Ackman last week. UPS reports on Tuesday and they will be another read on the economy because of package volume comments.

Zillow (Z) is about to become a monopoly in the online real estate market. It is rumored Zillow maybe preparing a $2 billion bid to acquire Trulia (TRLA). Zillow is already the largest U.S. real estate website and taking over Trulia would make competition even tougher. Together the two sites had more than 85 million unique visitors in June and accounted for 89% of all traffic to the 15 most used real estate websites tracked by ComScore.

Zillow bought StreetEasy.com for $50 million in 2013 and HotPads.com for $16 million in 2012. Trulia expects a 70% increase in revenue in 2014 to about $253 million. Zillow's revenue was expected to grow 58% to $311 million. Zillow partnered with Yahoo Homes and had 53.8 million unique visitors in June compared to Trulia's 31.6 million. Move Inc (MOVE) had 23.8 million. MOVE is the parent of Realtor.com. Real estate firms spend about $28 billion a year on advertising so these companies have just scratched the surface in terms of revenue available.

Earnings for Q2 have come in better than expected. So far 230 S&P companies have reported. Earnings growth has risen to 8.3% and well over the initial expectations for the quarter and the lowered revisions from several weeks ago. The long term average is 9% earnings growth and we could actually hit that average before the quarter is over. More than 69% of companies have beaten earnings estimates and 63% have beaten or met estimates on revenue. However, 37% of companies have missed on revenue. Even with those misses revenue growth is about +4% for the quarter and the long term average is only +6%.

Even with earnings better than expected they were not able to hold up the market. Equities declined on Friday for multiple reasons. The first was reactions to lowered guidance from multiple companies. Second was news from Ukraine that Russia was shelling Ukraine positions from across the border and U.S. claims that Russia was sending heavy caliber long range multiple launch rocket launchers and other heavy weapons. The third reason was the belief the EU and U.S. were going to launch some heavy sanctions on Monday.

Lastly there was a call by Goldman to cut equities to neutral for the next three months. Goldman believes the selloff in the bond market and the buying in the treasury market could lead to a selloff in equities over the next three months. They said the global acceleration in economic growth is "largely behind us and geopolitical risks are elevated." They "also expect the general pace of returns to slow compared to what we have seen in the last couple years." Long term, 12 months or more, Goldman is still bullish equities "by a wide margin."

The corporate bond market has sold off hard over the last three weeks and Goldman is worried the sharp rise in rates will harm corporate profits or at least the outlook for earnings.

Meanwhile the yield on the 30-year treasury has fallen to a 13 month low as people run to the safety of treasuries. I believe some of this is overseas money looking for a safe haven.

The following chart is a comparison of the High Yield ETF (HYG) in red and the S&P in black. They are very highly correlated as shown in the bottom panel. When the HYG corrects the S&P does as well. Note the top right crossover of the HYG. That is the first time since 2009 the HYG moved below the S&P.

To summarize they expect the market to decline over the next three months and they recommend buying the dip.

Lipper said equity funds saw outflows of $8.6 billion in the last week so quite a few investors are already heading to the sidelines.

The S&P closed at a new high on Wednesday and Thursday with closes over 1,987 but fell back to 1,978 at the close on Friday. We can't derive much in the way of a market change from one day of declines, especially on a Friday with geopolitical news swirling. The Amazon and Visa declines set the tone for the market early and the market swoon could have been just a normal bout of profit taking ahead of the weekend.

Volume was low at 5.0 billion shares as it should have been on a summer Friday. There were twice as many decliners at 4,676 as advancers at 2,254 in the broader market but it was 3:1 in favor of decliners on the S&P at 347:117. On the Nasdaq it was 2:1 decliners over advancers.

The S&P has seen 230 companies report and post earnings depression (PED) is a very real event. With another 140 S&P companies reporting next week that PED is going to worsen by the weekend. Even if companies beat on earnings there is a tendency for the earnings spike to fade as traders take profits and move to a new stock that has not yet reported.

With multiple analysts and firms coming out last week with a market weakness call there will probably be some reluctance on the part of investors to put their recent profits back into the market until summer is over. The heavy economic calendar next week is also a risk investors should consider.

Goldman was the big market call on Friday with David Kostin, Kathy Matsui and Peter Oppenheimer heading a group of 11 strategists predicting equity market weakness over the next three months. Kostin still has a 2,050 year end target. Jeffery Saut of Raymond James warned of an impending 10-12% selloff in the prior week.

I believe the combination of PED, economics, geopolitical issues and the summer doldrums will plague us for the month of August. While the broader market may weaken there will still be pockets of strength where investors are taking advantage of any dips to pick up bargains. The majority of fund managers would welcome a short decline to add to or start new positions. One man's trash is another man's treasure. As investors take profits others will likely be ready to step in and pick up those cast offs. I just expect it to take more than the short 3-5 day dips we have seen in the past. I would not be too eager to rush in on the first sign of weakness.

Current support on the S&P is 1950-1960 followed by 1930. The 50-day average is 1946 and the 100 day is 1906 with the 200-day at 1851. It is entirely possible we could see the 50-day tested over the next couple of weeks.

The Dow fell back to close under 17,000 and right on short term uptrend support. As long as this uptrend holds we could see new highs ahead. However, the Dow has traded in a narrow range since the short squeeze on the 14th and last week was actually a lower high. It would appear that the Dow is on the verge of breaking that uptrend.

Another problem with the Dow Industrials is that the Industrials ETF (XLI) is suddenly diverging from the S&P. Note in the top right of the chart the blue line (XLI) has broken below the S&P and could be signaling the Dow is about to follow the industrials lower. Obviously you can tell from the chart the industrials can underperform the S&P for long periods of time but the correlation tightened in late 2013 and a divergence now could be producing a market timing signal.

In the daily chart for the Dow the longer term rising uptrend support was pierced on Friday. While that one day is not a significant event ANY further decline to the 50-day at 16,847 or below would be a major warning. The Dow has support at just about every 100 point increment down to 16,600 but the uptrend really breaks down with a decline under 16,720.

The most bullish index remains the Nasdaq 100 ($NDX) with only a 0.45% decline of -18 points on Friday. Since Amazon was the majority of that decline the rest of the big cap techs were holding their own. The NDX closed right at the high for the day not counting the opening print. That shows investors were nibbling on the dip even on a Friday.

The Nasdaq Composite failed to make a new closing high by -12 points. The decline on Friday was not dramatic with only a -22 point loss. As long as it holds above the 4,344-4,350 level the rebound has the potential to move higher. A decline under that level would bring technical selling and a potential decline back to 4,050. Nothing is pointing to that possibility today but the lower high from last week is still a work in progress. If it appears to roll over then traders will probably become a lot more cautious.

Resistance is the recent high at 4,485 and support 4,344-4,350.

Last but definitely not least is the Russell 2000. The index has significantly underperformed its big cap brothers and closed only 13 points above its recent low. The Russell is diverging from all the other indexes and the four day rebound was almost completely erased by Friday's losses.

The Russell typically leads both rallies and declines so any further drop on the Russell is going to be a problem. Heading into the summer doldrums with 37% of companies missing on revenue and even more lowering guidance it could be a challenge for small cap investors.

Any decline below the prior week's low of 1,133 would setup a potential decline to 1,096.

I am starting to worry we may be coming to the end of the buy the dip trend. This is summer and the indexes are struggling at the highs. Once the earnings excitement fades we could be in for a slow, choppy decline into August. The next two months are typically the worst two of the year for the markets and while a rally is always possible we need to be on alert for an alternate reality. Markets don't go up forever and it has been more than two years since a 10% correction. Tiptoe lightly through the coming minefield. Reduce your long positions to only those with the best relative strength. We don't want to run from the market but simply manage our risk in case a decline does appear.

Random Thoughts

Late Saturday the news channels are showing video of artillery rockets being fired from inside Russia across the border into the Ukraine military positions. This is blatant use of force against another sovereign nation and this should bring about some significant sanctions on Monday. The market may not react well to those headlines. Putin refuses to acknowledge any involvement in the MH17 shoot down despite video of the SAM-11 weapons systems leaving the area and driving back across the Russian border. Putin appears to be immune to peer pressure and is going to pursue his goals whatever the cost. Eventually somebody in the EU will decide they have had enough and ratchet up the sanctions to find Putin's pain threshold and he will react accordingly by stepping up his attacks, both military and economic.

Last week he cancelled importation of milk from Ukraine because it was "unsanitary." On Friday the government told McDonalds they could no longer sell certain menu items because the nutrition contents on the menu, like calories, fat, sugar, etc were incorrectly labeled and were illegal. McDonalds said the content descriptions were approved in advance by Russia.

Putin has a habit of bring government regulations into play whenever he wants to takeover businesses or run companies out of the country. He has done it to several oil companies by claiming they failed to follow the EPA rules and their operating license was revoked. They are forced to leave and Russian takes over their operations. There is no rule of law in Russia. There is only rule by Putin, an ex KGB officer. This problem with Russia and the Ukraine is likely to worsen before it gets better.

To make this worse the Ukrainian government has collapsed. The UDAR and Svoboda parties said they were leaving the coalition government and would seek an immediate parliamentary election. Under the constitution the government has 30 days to form a new coalition or call early elections. Prime Minister Arseniy Yatsenyuk then resigned to further complicate the problem. With Russia chewing up the landscape and citizens pleading for a resolution, those in power are finding it no longer the fun job it once was.

Israel unanimously rejected all of Secretary Kerry's truce proposals over the weekend. Hamas is still firing rockets into Israel with more than 2,000 fired in the last three weeks. Clearly Hamas does not want a cease fire or they would quit firing the rockets. Israel said it is going to widen its incursion into Gaza until they find all the rockets and launchers. This battle is starting to take on a wider significance and it may eventually impact the global equity markets. The Palestinian death toll is now over 700.

Initial jobless claims fell to 284,000 and well below estimates for 307,000 last week. That is the lowest level since February 2006. The four week average declined to 302,000 and the lowest since May 2007. The average smoothes out weekly fluctuations due to vacations, auto plant shutdowns for restructuring for new models, etc. Analysts are now beginning to worry that the Fed may be underestimating the job market and they could be caught off guard by a sudden surge in hiring. One analyst said an unemployment number below 6% next week could really shake up the FOMC and possibly cause them to act out of character when deciding what to do with QE. The last time the jobless claims numbers were this low the Fed funds rate was 4.5%. Today the two-year note yields 0.49%. There is a huge disconnect in progress.

Don't forget this chart. We are three months away from the end of QE according to Yellen. The Fed may not be removing the punchbowl just yet but participants better get ready for the mother of all hangover headaches.

Greenspan warned last week about "false dawns" and the looming Fed exit from the stimulus market. Greenspan, now 88, was head of the Fed for 18 years. Now he is warning there may be trouble ahead. He said bubbles can't be stopped without a "crunch." He is also peddling his new book. Do you think his high profile headlines could be related? Trouble Ahead Article

Here is an interesting article pointing out all the various analysts predicting a market crash in 2016 and there are quite a few. Consensus Building for 2016 Crash

Last week the SEC approved a rule to force money funds to switch to a floating net asset value rather than the $1 in use today. The floating NAV means shares you bought for $1 could be redeemed later for something less than $1. If the NAV went down to 79 cents then you would lose 21 cents for every dollar you invested. The SEC also approved "gates" to prevent investors from withdrawing funds in a time of economic crisis. If you want your money back you have to wait until the crisis is over. Oh, by the way the NAV at that time could be significantly lower than $1 or whatever you paid to enter the fund. Lastly, they also opened the door for funds to charge a fee to withdraw your money.

To summarize, assume you have money in a fund today at a $1 for $1 entry price. A major bank announces a problem similar to Lehman. Suddenly the financial system is recoiling from the thought of another financial crisis. The money funds slam the gates shut to prevent hasty withdrawals. Twelve to 18 months later they open the gates for limited withdrawals at 75 cents per share and a 10% withdrawal fee. Considering the trillions invested in money funds this would be an economic catastrophe.

If the financial system is so sound today why is the SEC passing such draconian rules? What do they know that we don't? Do you have money in a money market account today? The pilots of our financial system are putting on parachutes while the stewardesses are telling us everything is fine.

Beware of a weaker than expected Q2-GDP on Wednesday. The anemic Durable Goods Orders and weakness in purchases of automobiles, homes, building materials, food, gasoline and retail sales in general may bite us in the backside when the GDP is announced. Retail sales for June were $438.47 billion without seasonal adjustments. That represents a -5.59% decline from May. However, once the numbers were "adjusted for seasonality" retail sales showed an increase of +0.25%. That is your government watchdogs at work. However, Walmart and other large retailers have not shown any improvement in retails sales but actually showed declines in retail sales. Apparently declines in government reports are not allowed. We have suddenly become China where the reports are constructed by the politicians rather than the accountants.

This page will definitely get your attention. The Business Insider compiled a list of the most important charts in the world from dozens of analysts, economists, strategists and portfolio managers. There is some really good data here. The Most Import Charts in the World

Argentina is about a week away from its second default in 13 years. Creditors claim Argentina will no longer communicate with them despite not having made the required payments. Argentina said it is not in default because it has not said it was in default. Apparently until you claim a default the lack of payments is immaterial according to Argentina. To that end Argentina has made it clear it will formally default in early August.

John Carlin, assistant attorney general for national security in the Justice Dept said "we are in a pre-9/11 moment, in some respects, for cyber attacks." He said it is clear because they said it." Al Qaeda leader Ayman al Zawahin recent issued a videotape statement indicating the group is planning major cyber attacks against U.S. infrastructure such as electrical grids or financial networks. Terrorists, nation states and sophisticated criminal groups "have the capability now to cause significant damage" through cyber attacks. He pointed to the example of 30,000 computers being damaged at Saudi Aramco. Those computers controlled much of Saudi Arabia's energy infrastructure. In "Game Over Zeus" cyber criminals used a botnet, a network of hundreds of thousands of hijacked computers, to steal U.S. corporate data and encrypt the information then extort payments from the companies that owned the data in order to release it back to them. Link to larger article

The AAII Investor Sentiment is now showing fewer bulls at 29.6% than bears at 29.9% and the lowest weekly sentiment reading since May 8th. This happened while the S&P was making new highs on Wednesday and Thursday. Apparently investors trapped in 2000 and 2008 are not going to let it happen to them again and they are running scared.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"There have been three great inventions since the beginning of time: Fire, the wheel, and central banking."

Will Rogers


Index Wrap

Broader Indices Trend Sideways Over Past Four Weeks

by Leigh Stevens

Click here to email Leigh Stevens

The Dow 30 (INDU) was the worst performer, down 0.8% on the week and I noted last week that just 8 of 30 INDU stocks were still in strong uptrends. Less stocks advancing equals less potential for further gains!

I had also been commenting on how the broader indexes, the S&P 500 (SPX) and the Nasdaq Composite Index (COMP), were lagging the stronger big cap S&P 100 (OEX) and Nas 100 (NDX).

SPX went to new highs for the latest move and then dipped below its prior 'breakout' point (1985), which is bearish. Most bearish so far in its chart pattern is COMP, which has formed an initial double top at 4485.

The small cap Russell 2000 (RUT) was unable to hold above its 50-day moving average for more than a couple of days and its bearish trend continues.

Bullish sentiment among options traders continues to moderate which helps prepare the ground for a future rally.

It seems my advice to take profits (I assumed you had some!) on the last advance reflected the reality that this Market wasn't ready to launch into a next up leg, especially not in the mid-July to August slower seasonal period. I hope you did in fact "take the money and run!"



The S&P 500 (SPX) Index continues bearish to mixed in its short to intermediate-term chart pattern, as the Index has trended sideways over the past 4 weeks. The latest SPX advance occurring this past week took the Index to a slight new high, but then SPX slipped to Close below its prior 1984-1982 chart support.

Looked at from a bullish perspective, SPX hasn't yet dipped below its up trendline, currently suggesting support in the 1973 area, or to any Closes below support implied by its 21-day moving average. Next lower support is at 1960. Back to back Closes below 1960, at the last downswing low, would suggest that the intermediate trend had reversed to down.

Resistance is suggested at 1990-1991 and then is seen just over 2000, at 2005. The 13-RSI continues to be 'neutral' (not overbought, not oversold) in the 55-50 area. Bullish trader sentiment has been declining gradually, suggesting that traders have a more balanced view of future upside potential and aren't just assuming every pullback is a buying opportunity.


I wrote last week that the S&P 100 (OEX) "looks like it may be poised to break out above 880 but I'm watching from the sidelines currently." I went on to say that two or more consecutive Closes above 881 would be bullish. The 2-day 'rule of thumb', on closes above prior highs as suggesting a 'decisive' upside breakout, is an expected outcome that doesn't always pan out. A bullish chart is called into question by Friday's bearish downside price gap and Close below 880 support.

Technical support next comes in at 875 and the current intersection of OEX's up trendline; support then extends to 870.

While I highlighted potential resistance on the SPX daily chart below at 881, I'd also watch the top end of the aforementioned downside 'gap', at 883.5, to see if OEX can trade through and above this zone. Next projected resistance is then seen at 886.

Two back to back daily Closes above 880-881 could resume a bullish technical outlook, especially if the 880 area acted as support on subsequent pullbacks; prior resistance, once penetrated, often 'becomes' later support.


The Dow 30 Average (INDU) had been drifting sideways and while INDU looked like it might break out to new highs above 17150 along with the S&P 100), but the Average didn't gain that traction. I noted last week that only about 8 of the 30 Dow stocks were in still-strong uptrends. And, that such a narrowly led rally wasn't typically associated with a sustained move higher.

The Dow rally coming into this past week was largely due as I noted last time 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.

This past week saw moderate to substantial weakness in AXP, BA, CAT, Dow bellwether GE, KO, MCD, TRV, and UTX. Versus the foregoing 8 weak INDU stocks, continued moderate strength, limited pullbacks and consolidations near prior highs in CVX, GS, IBM, INTC, JPM, MSFT, VZ and UNH (another 8, of the 30) have helped to hold the Dow's decline to support implied by INDU's up trendline, but isn't likely enough to pull INDU above its prior highs. Such a rally would need to broaden out to more stocks.

Immediate overhead resistance is at prior support at 17000. Highlighted as key resistance on my chart is 17152, extending to 17200.

Near support is suggested at INDU's up trendline, currently intersecting at 16950. Next support is suggested at 16847 and the Dow's 50-day moving average, extending to prior key support as highlighted at 16800.


The Nasdaq Composite Index (COMP) has formed at least an interim double top at 4485, with the 21-day moving average as near support. 4400 is a key next lower trendline support; further support then comes in at 4350.

COMP presents a mixed picture for the near-term, with a still bullish intermediate to long-term chart. Near resistance is apparent at the prior highs in the 4485 area. I've projected a next resistance not much higher overhead at 4511. 4665 is suggested as current upper channel resistance on the long-term weekly chart (not shown here).

I don't see COMP having a sizable new up leg above the current minor double top in the short-term, nor do I see big potential for a sizable pullback. I don't want the risk in taking on bullish tech positions in a broad congestion or resistance zone in COMP and don't wish to trade against the dominant Nasdaq uptrend either as this market doesn't look to have exhausted buying interest, especially in the key tech favorites. Nothing sexier than technology stocks hitting occasional home runs out of the blue!


The Nasdaq 100 (NDX) chart is bullish but mixed on a short-term basis as the rally to new highs above 3950 wasn't sustained. Friday's gap-lower day was a minor bearish aspect for the short-term trend. I wrote last week that: "It almost seems a 'likely' fate that NDX, having come near this big target, will test the 4000 level."

Test this key (4000) level it did. The immediate sell pressure that came in Thursday-Friday after 4000 was reached in NDX suggests taking a wait and see attitude regarding any near-term breakout above this key number. 4000 is obviously the next key chart resistance, with next higher resistance suggested by NDX's upper channel line, currently intersecting around 4050.

Near support suggested by NDX's up trendline comes in at 3918 currently. Next chart/technical support is in the 3850 area.

The 13-day Relative Strength Index (RSI) hasn't come down much from the extreme seen in early-July. Volatility as suggested by the VXN index, seen at the bottom of the price chart, popped up to 16 briefly, and subsequently subsided. Periods of low volatility can precede rallies but I haven't determined a definite correlation.


The Nasdaq 100 tracking stock (QQQ) is bullish but near-term mixed, in that the recent rally to new highs, above the 96.3 prior top, promptly lost ground. IF QQQ continues to find support in the 96.3 area, this bodes well for a renewed advance; i.e., prior resistance, once penetrated, often 'becomes' support on subsequent pullbacks. Stay tuned on this.

I've noted key near support at 96.3. Next support is seen in the 95.4 area and the 21-day moving average. Trendline support (but not noted on the chart) intersects at 94.3 currently.

Pivotal resistance is seen at the prior intraday top at 97.5 and extends to the upper trend channel line at 98.2.

The On Balance Volume or OBV line is trending sideways, so this key measure of trading volume is not providing ancillary support for a continued bullish outlook for the Nas 100 and its ETF tracking stock. Friday's gap lower was bearish. If the Q's rally to above 96.9 and the top end of this price gap in a minor bullish plus, the real key then is what happens if QQQ again challenges its prior (97.5) high.


The Russell 2000 (RUT) chart continues bearish, even though the retracement of the prior decline of a Fibonacci 62% at 1132, given lows at 1131, suggested that RUT might find some support above those lows going forward. While the technical retracement aspect plus the oversold RSI (when it hit 35) that suggested that RUT might stop declining, doesn't of course mean that RUT is ready to begin a sustained rebound.

It was a bullish plus that RUT gapped up this past week to Close above its 50-day moving average, but then the Index renewed it's bearish chart when it in turn gapped lower Friday below the 50-day average. It looks to me like the Russell, assuming it has found a bottom in the 1132-1131 area, has some 'base-building' to do at and above its present 1131 low (for the July decline) before it advances in any substantial way.

Near resistance is at 1156 and the current 50-day moving average, then at the highlighted (down) resistance arrows between 1162 and 1170. Near support is at 1131, extending to 1120.


New Option Plays

Transports & Health Foods

by James Brown

Click here to email James Brown


JB Hunt Transport - JBHT - close: 79.23 change: -0.49

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
According to JBHT's website the company describes themselves as, "one of the largest transportation logistics companies in North America, provides safe and reliable transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico. Utilizing an integrated, multimodal approach, we provide capacity-oriented solutions centered on delivering customer value and industry-leading service."

"Our service offerings include transportation of full truckload freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors. We also have arrangements with most of the major North American rail carriers to transport truckload freight in containers and trailers. We also provide customized freight movement, revenue equipment, labor and systems services that are tailored to meet individual customers' requirements and typically involve long-term contracts. Our customer base is extremely diverse and includes a large number of Fortune 500 companies."

Just before Q2 earnings season started Barclays upgraded their view on the transportation sector. The analyst firm felt that an improving economic picture in the U.S. would fuel significant earnings growth for the transport industry. It appears to be a good call with the transportation sector leading the market higher. The Dow Jones Transportation Average is up +13.8% year to date and hitting all-time highs.

JBHT is only up +2.5% year to date but it too is near all-time highs and looks poised to run. JBHT reported earnings on July 15th. Wall Street was looking for earnings of 79 cents a share on revenues of $1.54 billion. JBHT delivered a profit that was in-line with estimates while revenues rose +11.9% to beat estimates at $1.55 billion.

Some of the standout performances for JBHT were their DCS and ICS segments. The Dedicated Contract Services (DCS) business saw revenues up +15% in the second quarter over a year ago. Their Integrated Capacity Solutions (ICS) business reported revenue growth of +31% from a year ago. Management guided their full-year 2014 revenues in the $6.14-6.25 billion range. That's a +10% to 12% rise for the year.

JBHT's President and CEO John N. Roberts III offer this perspective on the quarter, "The slowdown in train velocity and the difficult driver recruiting environment has challenged our growth in JBI. We are pleased we were able to maintain profitability levels despite these obstacles. The worsening driver supply conditions will continue to be a headwind for DCS and JBT as well. The planned improvement in JBT is ahead of schedule and though there is more to do, we are extremely pleased with the progress thus far."

JBHT bought back 990,000 shares of its stock during the second quarter for $75 million. They still have about $263 million left in their buyback program. As of June 30, 2014 JBHT had 117 million shares outstanding.

JBHT's earnings report earned some upgrades with two firms raising their outlook on the stock. One of them was Credit Suisse who raised their price target on JBHT from $78 to $86. The Credit Suisse analyst also adjusted their earnings growth from 7% today to +22% in 2015.

Currently shares of JBHT are hovering just below major resistance at $80.00. If the stock breaks out it could see a run towards $90 or higher. The Point & Figure chart is forecasting at $95.00 target.

We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the Nov $80 call (JBHT141122C80) current ask $3.00

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

Annotated Chart:

Weekly Chart:


United Natural Foods, Inc. - UNFI - close: 59.80 change: -0.69

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = --- million
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: exit PRIOR to earnings in mid September
New Positions: Yes, see below

Company Description

Why We Like It:
Natural and organic foods are a growing business today. The consumer is choosing healthier and typically more expensive foods, which had driven long-term gains for companies like UNFI and Whole Foods (WFM). Yet all of this growth has caught the attention of competitors.

According to UNFI's website the company, "is the leading independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce, in the United States. In addition to excellent distribution services, we provide a range of innovative, value-added services for our customers and suppliers, to foster mutual success and growth. Our services include marketing and promotional tools, merchandising, category management and store support services."

UNFI's business also includes a chain of retail stores with their Earth Origins Market brand. They also do a lot of importing and processing of nuts, seeds, and fruits with their Woodstock Farms company. UNFI just recently announced the acquisition of Tony's Fine Foods.

The challenge is that grocery and food products are normally a low-margin business. The organic and natural niche has enjoyed bigger margins but those margins are contracting as more and competition tries to hop on the natural and organic bandwagon. Large regional food chains and nationwide titans like Wal-mart and Target could steal market share. It has been a serious problem for Whole Foods (WFM) and that makes it a problem for UNFI because WFM is UNFI's biggest customer. WFM accounts for over one third of the company's revenues.

If growing competition wasn't enough the grocers and processors like UNFI also face rising input costs as suppliers raise prices. Margins are getting squeezed from both sides.

Now UNFI's latest earnings report wasn't that bad. The company announced earnings on June 11th. Results were in-line with Wall Street estimates. Sales improved +13.8% from a year ago. Yet gross margins inched down from 16.8 percent to 16.7 percent. That doesn't seem like much but it confirms the trend. Furthermore, while the prior quarter's sales were up +13.8% UNFI is only expecting full-year revenues to grow 11.0%-11.6% this year.

You can see on the chart where UNFI plunged in early June on its earnings report. The oversold bounce failed near $67.00 and the stock has gone almost straight down since then. Today UNFI is flirting with a breakdown near support in the $60.00 area. Last week the stock bounced at $59.25 and $59.30. We are suggesting a trigger to buy put options at $59.00.

Please note that Whole Foods (WFM) is scheduled to report earnings Wednesday, July 30th, after the closing bell. WFM's results and their guidance will have an influence on shares of UNFI. More conservative investors may want to wait until after we see how the market reacts to WFM's results before initiating positions on UNFI.

Trigger @ $59.00

- Suggested Positions -

Buy the NOV $55 PUT (UNFI141122P55) current ask $1.95

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Prepare to Lock In Potential Gains

by James Brown

Click here to email James Brown

Editor's Note:

We want to exit our AMP and SLCA trades on Monday at the closing bell.

Friday saw our AVGO trade stopped out and GLNG hit our entry trigger.

Current Portfolio:

CALL Play Updates

Ameriprise Financial - AMP - close: 122.27 change: -0.26

Stop Loss: 119.75
Target(s): To Be Determined
Current Option Gain/Loss: +30.5%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: The stock market's widespread weakness on Friday morning sent AMP lower at the open. Shares did manage to pare their losses to just -0.2% by the closing bell.

We are almost out of time. AMP is scheduled to report earnings on Tuesday, July 29th. We are suggesting everyone exit on Monday at the closing bell to avoid holding over the earnings announcement.

- Suggested Positions -

Long Sep $120 call (AMP140920c120) entry $3.60

07/26/14 prepare to exit on Monday at the close
07/24/14 new stop @ 119.75
07/22/14 new stop @ 117.75
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: 115.47 change: -3.69

Stop Loss: 112.45
Target(s): To Be Determined
Current Option Gain/Loss: + 9.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: EMES had big gains during the week with a rally from $110 to $120. Shares hit some profit taking on Friday with the stock market's widespread pullback.

I warned readers on Thursday to take some money off the table. I'm not suggesting new positions at this time.

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*

07/24/14 new stop @ 112.45, traders may want to take profits now
07/23/14 new stop @ 107.90
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

Golar LNG Ltd. - GLNG - close: 62.79 change: +1.60

Stop Loss: 58.75
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
Average Daily Volume = 1.3 million
Entry on July 25 at $62.25
Listed on July 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: Our new trade on GLNG is now open. This stock bucked the market's down trend on Friday. Shares dipped to the Thursday afternoon low near $60.60 and then surged to a +2.6% gain. This is a new all-time high and a breakout past short-term resistance at $62.00.

Earlier Comments: July 22, 2014:
GLNG describes themselves as, "one of the world's largest independent owners and operators of LNG carriers with over 30 years of experience. We developed the world's first Floating Storage and Regasification Unit (FSRU) projects based on the conversion of existing LNG carriers. We lead the industry with committed projects. We are progressing plans to grow our business further upstream via Floating liquefaction (FLNG). Our strategic objective is to become an integrated midstream player in the LNG industry."

The big picture play here is LNG exports. The shale-gas industry in the United States is booming so there has been a surge in supply. Meanwhile demand remains strong globally and the price of natural gas in Europe is double what is in the U.S. and the price is triple in Asia. Seeing an opportunity the American gas industry is planning on exporting more natural gas. The problem is that natural gas has to be liquefied before it can be transported. Turning natural gas to liquefied natural gas means cooling the material to -259 degrees Fahrenheit. Creating an LNG export terminal is a multi-year, multi-billion project. The U.S. is currently building several LNG export terminals to be completed in the next few years.

At the same time there has been a rise in the number of LNG transport ships to move all of this natural gas. Unfortunately the timing is a bit off. At the moment there is more LNG transport ships than really needed. The current global LNG fleet is about 365 vessels. That number is supposed to grow by another 29 ships this year but several of them have been delayed. However, by 2017-2018 it looks like there could be a shortage of LNG transport ships, which will drive rates higher for the shipping companies.

GLNG has about a dozen ships. They should take deliver of several more in the next 12 to 18 months. Instead of scrapping their older ships the company has decided to turn some of them into floating storage & regasification units (FSRU). They are also working on a floating liquefaction (FLNG) project.

Long-term the company looks poised to capitalize on the natural gas transport market. Investors have taken notice with a strong rally this year. Of course a +3.2% dividend yield doesn't hurt either.

Shares of GLNG have been consolidating sideways in the $57.50-62.00 zone for the last few weeks. Today GLNG is on the verge of breaking out from this trading range. We want to be ready if it does.

We are suggesting a trigger to buy calls at $62.25. Earnings are coming up in late August (potentially around the 27th) and we will likely exit prior to the announcement.

- Suggested Positions -

Long Sep $65 call (GLNG140920C65) entry $3.32

07/25/14 triggered @ 62.25
Option Format: symbol-year-month-day-call-strike


Harman Intl. Industries - HAR - close: 113.87 change: -1.11

Stop Loss: 111.90
Target(s): To Be Determined
Current Option Gain/Loss: -40.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: I'm starting to worry about our HAR trade. After slowly drifting higher most of the week shares look like they were rolling over on Friday. HAR did bounce from its 20-dma but closed with a -0.9% loss on the session.

Friday's intraday low was $112.89. We are moving our stop loss to $111.90. I am not suggesting new positions at this time.

FYI: Earnings are coming up on August 7th.

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*

07/26/14 new stop @ 111.90
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: 75.45 change: +0.20

Stop Loss: 69.90
Target(s): To Be Determined
Current Option Gain/Loss: +24.6%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: LNG had a pretty good week with a breakout to new highs. Traders bought the dip on Friday at $74.28. More conservative investors may want to move their stop closer to $72.00 instead.

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

07/23/14 new stop @ 69.90
07/22/14 new stop @ 69.40
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: 101.60 change: +0.75

Stop Loss: 98.90
Target(s): To Be Determined
Current Option Gain/Loss: -31.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: SAFM managed to eke out a 90-cent gain for the week. Traders bought the dip on Friday at its rising 20-dma and shares rebounded to a +7% gain on the session.

Tonight we're going to try and reduce our risk by raising the stop loss to $98.90.

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

07/26/14 new stop @ 98.90
07/24/14 new stop @ 97.75
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

U.S. Silica Holdings - SLCA - close: 60.45 change: -0.54

Stop Loss: 58.75
Target(s): To Be Determined
Current Option Gain/Loss: +115.8%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: SLCA was not immune to the market's broad-based decline on Friday. Shares are resilient and bounced back from their lows of the session.

The company is scheduled to report earnings on Tuesday, July 29th. We are suggesting investors exit bullish positions on Monday at the closing bell to avoid holding over the announcement. After such a strong run from its February lows SLCA is overbought and could see some post-earnings profit taking.

- Suggested Positions -

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

07/26/14 prepare to exit on Monday at the closing bell
07/24/14 new stop @ 58.75
07/23/14 new stop @ 56.45
07/22/14 new stop @ 54.90
traders may want to take some money off the table now that our option has doubled
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: 99.84 change: -0.74

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: -25.0%
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: Many of the energy stocks were showing relative strength last week and the XLE broke out to new three-week highs on Thursday, triggering our bullish play. The market-wide pullback on Friday has dragged the XLE toward the bottom of its bullish channel, which should be support.

I would consider buying calls on a bounce from current levels or you could wait for a rally past $101.00 as an alternative entry point.

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.

- Suggested Positions -

Long Oct $105 call (XLE141018C105) entry $0.84

07/24/14 triggered @ 100.75
Option Format: symbol-year-month-day-call-strike


Entry on July 24 at $100.75
Average Daily Volume = 8.8 million
Listed on July 05, 2014

PUT Play Updates

Ross Stores Inc. - ROST - close: 63.46 change: -0.17

Stop Loss: 64.15
Target(s): To Be Determined
Current Option Gain/Loss: - 5.7%
Time Frame: 4 to 8 weeks
New Positions: see below

07/26/14: ROST produced an oversold bounce last week. It looks like the bounce might fail at the $64.00 level. Our stop loss remains at $64.15 for now. I'm not suggesting new positions.

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*

07/24/14 ROST is not cooperating and traders may want to exit early
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


Avago Technologies - AVGO - close: 69.92 change: -2.59

Stop Loss: 71.49
Target(s): To Be Determined
Current Option Gain/Loss: -49.7%
Average Daily Volume = 1.58 million
Entry on July 22 at $75.75
Listed on July 21, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

07/26/14: The three-day collapse in the semiconductor industry has been horrible and AVGO is a major casualty of the sell-off. Shares have reversed sharply lower and hit our stop loss at $71.49 on Friday.

- Suggested Positions -

Oct $80 call (AVGO141018C80) entry $2.35* exit @ 1.18** (-49.7%)

07/25/14 stopped out @ 71.49
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/22/14 triggered @ 75.75
*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