Option Investor

Daily Newsletter, Monday, 7/28/2014

Table of Contents

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

Market Wrap

Stocks Falter

by Thomas Hughes

Click here to email Thomas Hughes
US equity indices faltered today as traders await a massive round of economic data and earnings reports.


The US equity markets dipped early today as traders await the month end macroeconomic data, an FOMC meeting and upwards of 700 earnings reports. The drop, which began after the open, was slow to start but accelerated after the 10AM release of pending home sales. The SPX found near term support just above the short term moving average, as did the other majors, and was able to reclaim most of the early losses. During the afternoon trading picked up a little, pushing the major indices into the green but after some mild late day volatility the markets closed mixed, with some above and some below Friday's closing prices.

Market Statistics

All eyes are on the week ahead. This is a real whopper of a week in terms of data and earnings with the added possibility of numerous geopolitical situations impacting the markets. Today alone there were about 80 earnings reports with about 700 or more scheduled for the rest of the week. On the economic front it is the end of the month which means monthly macroeconomic data in the form of jobs numbers and several other important data points. We will also get the first estimate for Q2 GDP and an FOMC meeting. Ordinarily Friday's NFP and unemployment report would top my list of important market moving days for the week but I think Wednesday may take that spot this time. Wednesday morning the ADP number will be released at 8:15AM followed by the GDP estimated at 8:30AM, both before the FOMC announcement later that same day. The ADP isn't too important but can foreshadow NFP which is more important, the GDP is going to be closely watched as will the Fed.

Economic Calendar

The Economy

There was one data point released today, Pending Home Sales. Pending sales dropped by -1.1%, slightly more than expected. Analysts had expected an average drop close to -0.8%. This is of course depending on which estimates you are reading. At least one report I read had the expected number at +0.3%. Regardless the drop was not what the market wanted to hear and helped to send the indices to the day's low. Last month's number was revised lower by a half percent to +6%. On a year over year basis the number of homes under contract is only down -4.5%, better than the expected -5%. Other housing related data this week includes the Case-Shiller 20 City Index and Construction Spending. Case-Shiller is expected to rise nearly 10% while spending is predicted to drop by at least -0.5%.

Also on Tuesday new Consumer Confidence numbers are scheduled for release. Wednesday the calendar heats up as I've already described with that bubble of data spilling over into Thursday. The weekly jobless claims figures are accompanied by Challenger Job Cuts, Employment Cost Index and Chicago PMI. Friday wraps the week with Construction Spending, ISM, Michigan Sentiment, Personal Income/Spending, auto/truck sales, unemployment and NFP.

This weeks summary of Moody's Survey Of Business Confidence starts of on a somber note. Mark Zandi begins by saying that “business sentiment outside the US has softened”. This is the first mention of this or anything negative in some time but he goes on to reiterate previous reports by saying “U.S. business confidence remains strong, as it has all year, consistent with an economy that is expanding well above its potential. . . Responses to the survey questions are strong across the board, but hiring intentions are especially robust; more than half of respondents are hiring.” Hiring has been an underlying theme for many weeks now and is in line with last weeks drop in initial claims for unemployment.

The Oil Index

Oil prices remain weak. WTI traded down by nearly a dollar on an intraday basis, dipping down to $101.00 before bouncing back in the afternoon session. Lack of supply disruption and large stockpiles are pushing prices lower while increased sanctions and continuing violence in global hot spots is keeping the fear factor in play. In Libya fighting sparked a fire in a fuel plant that is feared to be out of control. The Libyan government has asked for international assistance in putting it out. In the Ukraine fighting is ongoing while in Iraq focus has shifted from ISIS to the dispute between Iraqi and Kurdish officials over ownership of Kurdish oil. Newly emerging in the headlines is another round of fighting in Syria which may threaten regional stability.

The Oil Index traded lower today, in line with the broader market, and found support along the short term moving average. The index traded lower by about -0.25%, finding bottom within one point of the 30 day EMA. The index has been firing off some weak trend following signals over the past week or so but has yet to move higher with conviction. Today's move is another retest of support and sign that traders are waiting for either the FOMC, earnings, economic data or a combination. Most of the big oil companies report this week and could provide catalyst through revenue, EPS and/or guidance. The indicators are neutral to bullish on the daily chart following the aforementioned series of weak signals; MACD right at the zero line, stochastic is rising in the longer term and falling in the shorter. There is support along the 1,650-1,675 level with resistance at the current all time high near 1726.

Exxon Mobil is scheduled to report earnings on Thursday. The largest oil company is expected to earn $1.91 versus last quarters $2.10. Today the stock rose more than 1% from the short term moving average to approach a new all time high. The stock has been in a consolidation range for 3 months and is now moving up toward the upper end of that range. The indicators are bullish but not strong, consistent with a stock approaching the top of a range. The longer term charts are a little more bullish but a break to new highs is a requirement with prices at the current level. This quarter's earnings could provide the catalyst but I think it will be guidance, future outlook and economic data that carry the trade.

The Gold Index

Gold traded exactly flat for today. After an initial pop of $2 that took prices briefly above $1305 gold retreated to close UNCH for the day. There is risk in the market due to global conflict and that risk is causing some to seek safety but the underlying trend of improving economics is still present as well. For now they are balanced just above $1300. Conflict could escalate at any time but so could the economic outlook and the prospect for rising Fed interest rates. The combination of the two, especially with so much of both on the table, may have gold traders on edge. It is not hard for me to imagine one with an eye on mainstream news and the other on CNBC, watching for any kind of sign while having their fingers poised above the buy/sell button in anticipation of whatever this week may bring. I would not be surprised to see some volatile gold trading because of it.

The Gold Index traded in line with the broader market today, moving lower in the early part of the session and then higher in the after noon. The index is bouncing off the short and long term EMA's but is still trapped inside a longer term resistance zone. The prevailing trend is still down as are the indications but there are some signs of longer term buying around the 150 day EMA. Earnings are going to be important as is guidance and outlook for gold prices. The big names in the sector are scheduled to report toward the end of this week. The gold companies were able to boosts earnings in the past quarter through cost reductions but those can only go so far in the face of low gold prices.

Barrick Gold is expected report earnings on Wednesday after the close of trading. The miner is expected to report EPS of $0.14, roughly 50% below last quarters results. Shares of the stock traded down from Friday's close, testing support at the long and short moving averages. Current price action is firmly in the middle of a long term range with the possibility of growing support. The indicators are bearish at this time but prices have been able to hold above $18 with multiple tests of support. A break below $18 could take the stock back to the low end of the range near $17 or lower. Resistance is just above the current level near $19. Earnings will be crucial, but so will gold prices and economic data affecting gold prices.

In The News, Story Stocks and Earnings

Earnings. Today there were only about 80 reports and not too many names of big interest on the list that I noted. Herbalife was one that caught my eye, if only because of the battle raging over it. The company reported earnings below expectations for the first time in many quarters and sent the stock down by more than 7% in after hours trading.

Merger Monday was more in the spotlight than earnings today even though there are so many reports this week. Big in the news is the purchase of Trulia by Zillow. The deal is worth over $3.5 billion in stock and sent shares of Zillow lower, intitially, and Trulia higher. Trulia gained close to 20% on an intraday basis while Zillow fell at first only to find support later in the day. Shares of the stock did not gain so much as the target company but did manage to climb more than 1.5%. The candles and indicators are strong and in line with higher prices over the long term.

Also in the news is an offer from Dollar Tree to buy competitor Family Dollar in a cash and stock deal worth $74.50 a share. Shares of both stock gapped up at the open but only Family Dollar was able to hold the higher prices. Shares of FDO climbed higher than the offer price raising speculation the deal would go higher and that other players could get involved.

The Indices

While most of the market was able to trade higher for at least part of the day the Transports were under pressure from the start of trading to the end. The Trannies lost more than a full percent in today's session, making the fourth day of decline since an all time high four day's ago. The index is just above support at the 8,250 level and the short term moving average. The indicators are bullish but showing weakness in the nearer term, weakness that could result in a test or break of support. The long term trend is still up so I will be looking for support to kick in during the week as earnings and data are released.

The Nasdaq also closed in the red today but by a much smaller margin, only -0.10%. The index dropped after a mildly weak open, approached the short term moving average and then moved back up to the closing level. The candle formed is not overly large but big enough not to be considered another spinning top like the previous 5 candlesticks. This is a small but positive sign of support along the moving average and in line with the prevailing trends. Support is currently at the 4,400 level, just below today's low and a hairs breadth above the 30 day EMA, with a previous all time high just below that.

The indicators are mixed on face value with the MACD in the red and stochastic showing a weak buy. The MACD peaks are bearish but also consistent with support, convergent with stochastic and in line with the trend. The risk at this time is for earnings to disappoint, economics to falter and/or geo politics to take hold of market direction. A break below support would confirm a potential double top that has been forming and put a downside target near the long term moving average. This move would be equal to roughly 10-15%.

The Dow Jones Industrial Average traded closed in the green after a morning spent testing support. Today the blue chips managed to eke out a gain of +0.13% after moving below the 30 day EMA. This is a good sign of near term support at least as we wait for the week to unfold. This index has been bobbing along the moving average since mid February and looks like it could keep on doing the same. The indicators continue to trend at/near the midpoint/equilibrium levels respective for to each. MACD is bearish now, but very weak as it has been, and peaking and in line with past bounces. Stochastic is overbought in the near term (%K) while in the longer term (%D) it is still in the middle of the range and apparently going nowhere fast. This combination leaves the up trend intact and in control with the appearance of slow, steady buying. A drop below support, currently indicated at the short term moving average, would find next support around 16,750.

The SPX made a move very similar to the blue chips. The broader market opened mildly weak, moved lower to test support at/near the moving average, and then moved back to set a new intraday high and close in the green. The index found resistance at the all time high set at the beginning of July but looks set to bounce higher provided nothing spooks the market. The indicators are moving lower in the near term but also setting up for a possible follow up signal to the weak signal I noted last Thursday. The SPX has basically been moving sideways all month, consolidating between previous and current all time highs, and pressured from beneath by the short term moving average. The forming pattern is taking on an upward bias and is poised for a potential break out.

The market tried to get scared today but in the end decided to wait and see what the fed and the data and the earnings have to say. There are a lot of reasons to worry but in the end the trends are still up and there is no reason to suspect change just yet so waiting for the data is only the right thing to do.

In the nearest terms, geopolitcal concerns have the power to cause a sharp movement but one that is likely short lived. There are at least four hot spots flaring up now including Iraq, Libya, Ukraine and Israel/Gaza. In the short term earnings and earnings growth are a concern and then longer out is the economic outlook.

Political turmoil or earnings may cause a correction but the economics dominate the long term trend. On an individual basis no one sector of the economy is carrying the recovery but as a whole everything is getting better a little bit at a time. Housing is not booming, but it is steady. Jobs creation isn't booming but it is also steady. The consumer isn't spending like crazy but is spending. As the one grows in turn does the other and sooner or later I think they will start to grow in tandem. For now be prepared for whatever may happen.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Earnings Blowout & Bullish Outlook

by James Brown

Click here to email James Brown


Gilead Sciences, Inc. - GILD - close: 91.46 change: +1.62

Stop Loss: 87.99
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 14.1 million
Entry on July -- at $---.--
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

Trigger @ $92.25

- Suggested Positions -

Buy the Oct $95 call (GILD141018C95) current ask $3.60

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

30-Dma Support

by James Brown

Click here to email James Brown

Editor's Note:

Both the S&P 500 and the NASDAQ composite bounced near their simple 30-dma on Monday.

We closed our AMP trade tonight.
EMES, SLCA, and ROST hit our stop loss.
UNFI hit our entry trigger.

Current Portfolio:

CALL Play Updates

Golar LNG Ltd. - GLNG - close: 62.16 change: -0.63

Stop Loss: 58.75
Target(s): To Be Determined
Current Option Gain/Loss: -6.6%
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

07/28/14: GLNG delivered a relatively quiet session, hovering about the $62.00 level. If the market opens positive tomorrow then I would consider new positions here. Otherwise we may want to wait for another dip and buy a bounce closer to $60.00.

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 delivery 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: 112.85 change: -1.02

Stop Loss: 111.90
Target(s): To Be Determined
Current Option Gain/Loss: -43.3%
Time Frame: 8 to 12 weeks
New Positions: see below

07/28/14: We had a close call on our HAR Trade. The market's morning weakness pushed HAR toward support near $112.00. The intraday low was $111.95. Our new stop is $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

JB Hunt Transport - JBHT - close: 79.08 change: -0.15

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

07/28/14: The transportation stocks saw some profit taking today after hitting record highs last week. JBHT drifted sideways on either side of $79.00. There is no change from the weekend newsletter's new play description. Our suggested entry point is $80.25.

Earlier Comments: July 26, 2014:
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)

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

Cheniere Energy, Inc. - LNG - close: 74.28 change: -1.17

Stop Loss: 71.95
Target(s): To Be Determined
Current Option Gain/Loss: + 7.2%
Time Frame: Exit PRIOR to earnings on July 31st
New Positions: see below

07/28/14: Our time frame on this LNG trade has unfortunately changed. The company is now scheduled to report earnings on July 31st. While we like the story on LNG we do not want to hold over the announcement. Traders need to plan on exiting prior to Thursday.

With only a couple of days left we're moving the stop loss up to $71.95.

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

07/28/14 new stop @ 71.95, prepare to exit before July 31st
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: 101.87 change: +0.27

Stop Loss: 98.90
Target(s): To Be Determined
Current Option Gain/Loss: -32.7%
Time Frame: exit PRIOR to earnings on Aug. 26th
New Positions: see below

07/28/14: Most of the market was spiking lower at the open. Shares of SAFM moved the opposite direction with a rally toward short-term resistance at $104.00. SAFM failed to breakout and spent the rest of the day fading lower.

Please note that our time frame has changed. SAFM is now scheduled to report earnings on August 26th and we will most likely exit prior to the announcement.

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

Energy SPDR ETF - XLE - close: 99.60 change: -0.24

Stop Loss: 97.95
Target(s): To Be Determined
Current Option Gain/Loss: -39.2%
Time Frame: 8 to 12 weeks
New Positions: see below

07/28/14: The XLE was also a victim of the market's morning weakness. Shares dipped to short-term support at $99.00 and its simple 40-dma before trimming its losses.

A bounce from here could be used as a new entry point 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

United Natural Foods, Inc. - UNFI - close: 59.09 change: -0.71

Stop Loss: 62.05
Target(s): To Be Determined
Current Option Gain/Loss: -8.2%
Average Daily Volume = 443 thousand
Entry on July 28 at $59.00
Listed on July 26, 2014
Time Frame: exit PRIOR to earnings in mid September
New Positions: see below

07/28/14: The sell-off in UNFI continues and shares hit our suggested entry trigger at $59.00. I would still consider new positions now at current levels.

Earlier Comments: July 26, 2014:
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.

- Suggested Positions -

Long NOV $55 PUT (UNFI141122P55) entry $2.07

07/28/14 triggered @ 59.00
Option Format: symbol-year-month-day-call-strike


Ameriprise Financial - AMP - close: 121.50 change: -0.77

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

07/28/14: Stocks started Monday's session on a weak note. AMP dropped to its 30-dma before bouncing. Our plan was to exit today at the closing bell to avoid holding over the earnings report tomorrow.

- Suggested Positions -

Sep $120 call (AMP140920c120) entry $3.60 exit $4.20 (+16.6%)

07/28/14 planned exit at the closing bell
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: 111.30 change: -4.17

Stop Loss: 112.45
Target(s): To Be Determined
Current Option Gain/Loss: - 7.7%
Time Frame: 8 to 12 weeks
New Positions: see below

07/28/14: It has been a tough couple of days for EMES. After a three-day rally from $110 to $120 the stock has made the round trip back to $110 in just two days. The intraday low today was $109.00.

I don't see any company-specific news behind today's plunge. The longer-term trend of higher lows remains in place for now but a close below the 40-dma (near $107.00) would suggest the trend has reversed and turned bearish.

I cautioned readers last week near $120 to start taking money off the table. Our stop loss was hit at $112.45.

- Suggested Positions -

Sep $115 call (EMES140920C115) entry $6.50* exit $6.00 (-7.7%)

07/28/14 stopped out
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

U.S. Silica Holdings - SLCA - close: 59.25 change: -1.20

Stop Loss: 58.75
Target(s): To Be Determined
Current Option Gain/Loss: + 87.3%
Time Frame: 8 to 12 weeks
New Positions: see below

07/28/14: We were planning to exit our SLCA trade today at the closing bell. Unfortunately the market's widespread weakness this morning pushed SLCA from $60.50 to $58.27. Our new stop loss was hit at $58.75.

SLCA is scheduled to report earnings tomorrow night.

- Suggested Positions -

Sep $55 call (SLCA140920C55) entry $3.15* exit $5.90** (+87.3%)

07/28/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
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


Ross Stores Inc. - ROST - close: 63.95 change: +0.49

Stop Loss: 64.15
Target(s): To Be Determined
Current Option Gain/Loss: -15.3%
Time Frame: 4 to 8 weeks
New Positions: see below

07/28/14: The oversold bounce in ROST refuses to die. Shares traded above short-term resistance at $64.00 and hit our stop at $64.15 before paring its gains. The next level of overhead resistance should be the $65-66 area.

- Suggested Positions -

Nov $62.50 PUT (ROST141122P62.5) entry $2.60* exit $2.20** (-15.3%)

07/28/14 stopped out
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