Option Investor

Daily Newsletter, Saturday, 8/23/2014

Table of Contents

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

Market Wrap

Where's the Beef?

by Jim Brown

Click here to email Jim Brown

Janet Yellen and Mario Draghi took to the microphone in Jackson Hole but neither created any market moving headlines.

Market Statistics

Janet Yellen could have been named Janet Greenspan or Janet Bernanke for all the good her speech did the market. Yellen, known for her dovish views, appeared to move to the center as she lectured on the state of the labor market. The speech was more like a lecture by a professor where she laid out the case using arguments from all sides and then ending it with a "what do you think" type of close.

Analysts did not want to be given the opposing positions and then forced to draw their own conclusions. They wanted Yellen to tell them where she stood so they could then formulate an investment thesis based on her position.

Spending 45 minutes talking around the subject without really saying anything suggests she has finally grown accustomed to the role of Fed chairman and she was channeling her predecessors Greenspan and Bernanke.

Art Cashin said it best. He called it "A speech fit for a medieval philosopher. We got everything but angels dancing on the head of a pin." Full text here.

Yellen continued to claim the job market has "yet to fully recover." Although there has been "considerable progress" there is still "considerable slack" in the labor markets. She said the unemployment rate may not be telling the right story and the Fed should consider the 35 year low in the labor force participation rate and the problem of forced part time employment along with the pace of hires and quits. She said the Fed would take a more holistic view of the labor market in determining the pace of the recovery.

One thing Yellen did do was try to explain in Fedspeak that the current method of calculating the unemployment rate was producing incorrect results. Of course everyone reading these pages for very long already knows that but the common folk are oblivious. She tried to shed some light on the reality of the broader U6 unemployment rate, currently 12.6%, but explaining it in Fedspeak is the equivalent of talking in Latin. I give her credit for trying but her education and position got in the way.

The new casino SLS Las Vegas opens this weekend and it is a prime example of Janet Yellen's unemployment quandary. The 1,600 room hotel/casino hired 3,400 people to run the business and they received 117,000 applications. The City Center development hired 12,500 people to open a couple years ago and they had 62,000 applications. There are far too many people looking for jobs than there are jobs.

Yellen said if progress in the labor market "continues to be more rapid than anticipated" a rate hike could come sooner than currently expected and further increases could be more rapid. Conversely, "if the Fed's goals of full employment and stable prices remain elusive, policy would be more accommodative." That is actually a more balanced assessment than she gave in prior quarters and suggests a move to the middle in her policy stance.

Her comments did not change the consensus view of the first rate hike in late Q1 or early Q2. However, she did not appear as dovish as in the past and that could suggest she is moving closer to a neutral position on future hikes. Since she was the most dovish person on the FOMC that means the overall view of the committee may be moving to rate hikes sooner rather than later.

In any case nobody expects hikes before Q1 with the last Fed meeting in the quarter on March 18th the first date likely. It will probably be done at an end of quarter meeting that is followed by the Chairman's normal press conference. If nothing happens at that meeting the next possibility would be June 17th. Nothing prevents them from using a non-quarter end meeting to raise rates but they will want to use the normal press conference to answer the hundreds of questions that will be raised by the decision and try to quell the worries the Fed is going to ramp up quickly. This will tame the market response rather than just drop the bomb in a post meeting announcement with no explanation.

The low key presentation on Friday did not give the market any reason to rally or to sell off. It was a confusing factor rather than an illuminating speech. Volume was very low and volatility was nonexistent.

There were no economic reports of note to move the market on Friday. The Risk of Recession declined from 15% to 12%. Yawn! The ECRI Weekly Leading Index was flat at 134.3 and Household credit rose +1.6% in July after a +1.3% rise in June. All of this data was ignored.

The economic calendar for next week starts the normal monthly series of regional Fed activity reports with the Richmond Fed Survey the first on the calendar. The national manufacturing ISM is on Friday.

The next revision of the Q2 GDP on Thursday will be closely watched by the market. The Q1 GDP showed a drop of -2.93% and the last release of the Q2 GDP showed +3.95% growth. Obviously if you average those two you get +0.51% growth year to date. However, the consensus estimate for this revision has fallen to +2.6% and averaging results in -0.33% contraction for the first half. Analysts were all bubbly after the prior 3.95% print saying continued growth at 3% or better for the rest of the year would still be on trend for a slowly growing 2% economy BUT a sharp drop in the Q2 estimates will derail those hopes. This is going to be a pothole for the market to dodge on Thursday.

The market will be closed next Monday for Labor Day and volume is going to be extremely light all week.

Mario Draghi, also speaking at the Fed's Jackson Hole conference begged central bankers and politicians to play their part in safeguarding the EU recovery. Draghi has pledged to "do whatever it takes" including QE but so far he has failed to follow through on his promise. The EU recovered from recession a year ago but is on the verge of falling back into another one. Inflation is the weakest in five years and unemployment remains near a record high. The sanctions against Russia are going to be a major drag, which will put even more pressure on Draghi to act. Eventually the markets are going to call Draghi's bluff if he does not deliver on his promise.

If it is Friday it must mean Russia is in the news. The markets opened lower after the Russian aid convoy streamed into the Ukraine without permission and without Red Cross monitors. Putin finally gave up trying to find a way around the Red Cross inspection and/or offloading onto Ukrainian trucks and instead just plowed across the border towards the rebel held area of Luhansk. Putin strongly warned the Ukraine not to interfere with their transit through the Ukraine.

Ukrainian officials did not attack the trucks for multiple reasons. Attacking trucks loaded with food and medical supplies would have been a public relations disaster. Ukraine still believes the trucks also contain military supplies but they could not be stopped and verified without incurring Putins' wrath. The government called it an invasion and a "flagrant violation of Ukraine's sovereignty" and warned Russia there would be additional sanctions if the convoy was not immediately removed. I am sure Putin was laughing about that threat.

Since the convoy of aid went directly to rebel controlled areas it was impossible to determine if other "non aid" material was on the trucks but you can bet there was an ulterior motive. Putin did not hastily repaint 280 army trucks white and rush them to the border with stops at four military bases without some ulterior motive.

NATO secretary General Anders Fogh Rasmussen said the alliance has observed an alarming buildup of Russian ground and air forces on the border with Ukraine. They also monitored transfers of large quantities of advanced weapons including tanks, armored personnel carriers, artillery and anti-aircraft missile systems to the rebels in the Ukraine. The U.S. administration said it was "very concerned" about the buildup and violation of Ukrainian sovereignty and if Russia did not withdraw there would be additional "costs." I bet Putin got a good laugh out of that wimpy warning. Putin is playing chess while the rest of the world is playing checkers.

As has been the case the prior two weeks the Russian headlines had the most impact on the markets.

In stock news Keurig Green Mountain (GMCR) scored another win on a deal with Kraft to make their coffee brands available for the Keurig brewers. This includes Maxwell House, Yuban, Gevalia and McDonald's McCafe brands. They already have deals with Starbucks, Dunkin Brands, Peet's Coffee, Nestle's Coffee-mate, Costco's Kirkland Signature, Target's Archer Farms and many others. Kraft had been a hold out and the addition of their brands is a real plus for GMCR. The company recently scored a partnership with Coke (KO) for its carbonated beverage dispenser due out in the next couple months.

With nearly 10% of GMCR shares sold short the news caused a +13% spike in the stock.

Gamestop (GME) reported earnings of 22 cents that beat estimates of 18 cents. Revenue rose +25% to $1.73 billion. Same store sales rose +21.9%. They credited the strong sales to demand for new Xbox One and Playstation 4 game consoles. Hardware sales more than doubled and sales in the mobile and consumer electronics segment were up +85%. The company forecast earnings for the current quarter between 58-64 cents compared to analyst estimates for 58 cents. Sterne Agee said 2015 is likely to be a breakout year for the industry with potential double digit growth in new software. They recommended GME because of their lead on these next generation positions. Shares of GME had been depressed since peaking in November.

Discount retailer Ross Stores (ROST) reported earnings of $1.14 compared to forecasts of $1.05-$1.09 and analyst estimates of $1.09. The gains came from aggressive cost controls and better than expected gross margins. Net sales rose +7% to $2.729 billion. Same store sales rose +2% compared to +4% in the year ago quarter. Margins improved 70 basis points to 14.3%. They opened 53 new Ross outlets and 14 discount stores. They plan on adding 95 new stores for the full year with 28 in Q3.

The Gap Inc (GPS) reported earnings of 70 cents compared to estimates of 69 cents. Revenue income rose +9.6% to $332 million and revenue rose +2.9% to $3.98 billion. Same store sales were flat system wide but the Old Navy chain rose +4% and Gap branded stores declined -5%. Online sales rose +11%. The Gap is opening its first Gap store in India in 2015 with pans to have 40 stores in the country.

Intuit (INTU) reported a loss of 14 cents, 9 cents more than the year ago quarter. The predicted a Q3 loss of 36 cents compared to -4 cents in Q3-2013. The company said the losses came from a continuing restructuring effort, acquisitions and the effort to expand its tax services business in India. Intuit shares declined on the news as shareholders are getting tired of the never ending restructuring losses.

Foot Locker (FL) posted earnings that rose +39% to 64 cents. This beat estimates of 54 cents. The company is improving performance by closing underperforming stores, revamping store layouts and merchandising and adding more running shoes, which are the best part of the athletic-footwear market. Citigroup said the restructuring was working along with strong inventory management. The analyst said Foot Locker was excelling in a "challenging mall environment." Revenue rose +13% to $1.64 billion and same store sales rose +7%. Analysts were only expecting a 5.4% gain. Shares of Foot Locker rallied to an all time high but based on the chart it may be time for a rest.

We had a major yearend estimate revision on Friday by Barry Bannister at Stifel Nicolaus. Bannister revised his yearend target for the S&P from 1,850 to 2,300, a whopping +450 point increase. That takes him from one of the three major analysts tied for the low at 1,850 to the highest estimate in the 19 analysts tracked by Bloomberg. That implies a +17% rally by yearend and +24% gain for the year.

To explain his change in the forecast he pointed to a picture of the Four Horsemen of the Apocalypse. LINK He said the market is handling the Four Horsemen much better than he expected. The Four Horsemen in his way of thinking are the Federal Reserve (conquest), war (war), economic disparity/recession (famine) and bear markets (death).

He said the absence of recession triggers such as an overheating economy and inverted yield curve should lengthen the growth cycle. He reminded that the strongest and least risky returns in the equity market occurred in the first 65% of the economic cycle. However, he believes those returns were already made since March 2009 and the +191% gain in the S&P. He still believes there are a lot of bullish stragglers that will push the market higher but it will be accompanied by an increase in volatility. Bannister said bull markets are made up of three phases, intrepid, mainstream and stragglers. We are in the straggler phase now. He said the three previous bull markets that lasted more than six years each "coalesced at this exact point before moving higher," which means the sideways market this summer appears to be following the playbook. The current bull will turn 6 in March. "Those four horsemen just can't keep up with this raging bull." He expects foreign investors to buy more U.S. equities because of the uncertainty in their home markets.

Others don't share his optimism. Jonathan Gilonna of Barclays said overseas markets are generating too little demand for the S&P to end the year any higher than current levels. Barclays recently upgraded their forecast from 1,900 to 1,975.

I updated my forecast table with the latest revisions. The shaded entries have all revised their yearend numbers. The original forecast follows the analyst name.

Note the average of all the forecasts is 1,998 and just under the psychological 2,000 level. That suggests we could see some decent selling when that level is hit.

Bank of America Merrill Lynch said there were inflows of $17.9 billion into equity funds for the week ended Wednesday. That was the most in one week since October. There was another $3.1 billion that flowed into high yield bond funds so the high yield risk is back on along with equities. This was the biggest inflow into high yield in 2014. Lipper said there were outflows of $7.1 billion the week ended August 6th and $12.6 billion over the four weeks leading up to last week.

When the Fed starts raising rates it will have to borrow "hundreds of billions" from money market mutual funds in order to anchor the federal funds rate. St Louis Fed President James Bullard said it would take "several hundred billion" in loans to keep rates from taking off. The Fed will do this with reverse repos where the Fed borrows cash overnight from counterparties like money funds. In exchange they give the funds collateral like treasuries. The next day the Fed returns the cash and reclaims its collateral.

The Fed has been testing this program with a limited number of counterparties since February. So far in August the Fed has borrowed an average of $128.1 billion a day. The Fed pays 0.05% interest for the loans. The Fed had to come up with a tool to anchor the Fed funds rate after U.S. banks increased their capital on hand after the recession. The new rules require a lot more capital and the banks no longer need to borrow from the Fed funds window.

In other words if the Fed hikes the Fed funds rate next year and nobody is borrowing from the Fed then the hike has less value. Real rates will still go up just because the Fed raises the benchmark rate but without an anchor for that rate there could be a lot of volatility.

The Fed plans to use the rate of interest it pays on excess reserves deposited at the central bank as the "primary tool used to move the Fed funds rate into its target range" with only a "temporary use" of the overnight reverse repo facility.

The Fed admits it does not know if it will need the reverse repo strategy until they actually start raising rates. Charles Plosser warned about creating a program that could become too big to manage and its unexpected impact to the financial system. "We want to be cautious about creating a facility that we can't get ourselves out of."

The volume last week was minimal but the internals were solidly positive. Friday's volume was 4.3 billion shares and the lowest day of the week. It was also the lowest volume day of the year other than the holiday shortened July 3rd session.

The new highs were rising through Thursday but the last time the S&P was at a new high back in early July the individual new highs were over 800. There is far less conviction today than there was back in early July. Volume in July was over 6 billion shares.

However, the AAII Investor Sentiment Survey last week showed that 46.11% of retail investors were bullish. That is the highest level of the year.

Next week is a holiday week. Labor Day is not until the following Monday but the entire week will have holiday volume. This is the last week of summer and very few traders will be sitting in front of their PCs. In theory we should see a melt up but the Yellen speech may have soured sentiment. The biggest economic speech of the summer was a disappointment. Yellen could have given some solid guidance but instead she reverted into Fedspeak to keep the markets off balance.

That could mean some lethargic markets for next week. We do have some important economic reports but there will not be many traders around to hear them.

Technically we saw the S&P spike over the prior resistance high at 1988 and close at 1992 on Thursday. That was not enough of a breakout to be convincing. However, Friday's decline closed right on that 1988 level, which should now be support. If that support holds on Monday we could see buyers come back into the market. I am pretty sure there are quite a few shorts that did not cover on that slight close over 1988 on Thursday. With Yellen on tap and the potential for a foot in mouth event they probably held their shorts. When the market weakened on Friday they may have even added to those shorts.

Next week could be choppy if Monday starts off bad. The dip buyers are still there but their numbers will be diminished because of the holiday week. There may not be enough buyers around to push the market to new highs and even if there are buyers there is a huge sell signal hanging on 2000. This highly visible round number, especially when it is the average analyst target for all of 2014, makes it an inviting target for sellers. I wish I could see into all the brokerage accounts this weekend to see how many have sell orders waiting at 1998-1999 in anticipation of a profit taking event.

I think putting a sell trigger on the SPY at 199.95 is a very valid strategy. The September 199 put option on the SPY had volume of 19,904 contracts on Friday against open interest of 43,033. Nearly half the open interest was traded on Friday. I can't tell without a lot of work how much of that volume was new positions but I would bet it was the vast majority.

If we get a decent bout of profit taking initial support is 1960 followed by 1940.

Like the S&P the Dow is closing in on serious resistance between 17,075-17,140. It closed at 17,039 on Thursday and gave back -38 points to close at 17,001 on Friday. This was a fingernail grip on the cliff face but it held in spite of the Russian invasion of Ukraine and Yellen's confusing speech.

The Dow is very over extended with a +640 point gain over the last two weeks. We could stand to give back a few points and then take a new run at the resistance highs. Support is 16,600 but that is -400 points from Friday's close. I doubt the dip buyers would let us slip that far before they showed up in volume.

Historically, most low volume holiday periods tend to post gains. For some reason there are fewer sellers than buyers in the days leading up to holidays. Let's hope that holds true next week.

The Nasdaq continued its climb but the rate of ascent slowed over the last several days. The NDX stuck like glue to the red uptrend resistance line. I love it when the price action reacts to the lines exactly the way it should.

Like the Dow the Nasdaq is over extended and needs at least an intraday bout of profit taking to ease the pressures. Normally a breakout to decade highs on any security does not come on minimal gains like the Nasdaq over the last four days. Normally breakouts tend to catch fire and run. However, I am encouraged there was no material dip on the Russian headlines. That suggests everyone holding longs are content with their positions and expect higher highs.

The narrow range over the last several days did establish initial support at 4515 and that give us a clear line in the sand for market direction. A break below that level could gain speed as sell triggers are hit.

The Russell 2000 is not setting the world on fire with its blazing speed but it is moving higher. The index has been really choppy since the August 1st low but the direction has been up.

The 1160-1165 level has returned as resistance but there is a pattern of higher lows that suggests that resistance will be broken.

Despite the overextended conditions the historical trend favors a continued move higher next week. I would be surprised if it was dramatic and I do expect some choppy trading due to lack of volume.

This is a week when program trading is likely. Some hedge funds like to push the market around in thin volume when they think they can trigger a significant move. Be prepared for a highly directional day. If it is to the downside I do expect the dip buyers to appear.

Random Thoughts

I am sure you have heard that ISIS is going to bring its terror attacks to the USA. You probably ignored those comments like most everyone ignores the headlines about Russia driving aid trucks into the Ukraine. However, the ISIS threat is real. If you doubt it you only need to scan the videos from Ferguson Missouri for the homemade ISIS signs and Muslim flags.

On Friday the U.S. government issued a security bulletin to all U.S. law enforcement warning them of potential ISIS threats. On Twitter (#AmessagefromISIStoUS) there is a picture of the Old Republic Building at 307 N Michigan Ave in Chicago and of the White House with a person holding up a handwritten note saying, "We are in your state. We are in your cities. We are in your streets. You are our goals anywhere." Having an individual hold the handwritten notes in front of these landmarks is proof there are individuals in the U.S. that would like to do us harm. They are just waiting for the right time and place.

Chicago has become a top target for international terrorists according to security expert Ross Rice, a former FBI agent. It is known as Obama Town and high on the list of targets as payback for President Obama's various acts against al-Qaeda and now ISIS.

With discarded Korans and prayer rugs repeatedly found along the border with Mexico it does not take a leap of faith to understand there is a growing army of terrorists in the USA. If you don't think life as we know it will change, just wait until there is a string of car bombings in the U.S. targeting our business districts and shopping centers. When that happens the resulting bear market will be the least of our worries.

One reply posted on the #AmessagefromISIStoUS thread was:

Armed, Patriotic Americans are:
In our states
In our cities
In our streets.
You are our #1 enemy. Bring it!

Relations with Russia are declining so how is the administration's pivot to Asia going. On August 19th a Chinese J-11 fighter jet flew within 20 feet of a U.S. Navy P-8 surveillance aircraft. The fighter pulled to within 20 feet of the wingtip and then lifted its wing to show that it was armed with missiles. The plane then executed a barrel roll around the U.S. plane at a distance of 45 feet. The incident took place 135 miles east of Hainan Island at the southernmost tip of China. The pentagon reported there have been several close encounters over the sea since March. The U.S. called the incident a serious provocation and complained strongly to Beijing.

In 2001 a Chinese fighter collided with a U.S. Navy surveillance aircraft on Hainan Island. The collision, caused by similar stunts by the Chinese fighter, caused the Chinese plane to crash killing the pilot and forced the U.S. plane of make an emergency landing on the island where it was impounded by China.

The Pentagon said Russian artillery units manned by Russians and previously firing into Ukraine from Russian territory have now moved into Ukraine and they are using their new location to fire deeper into Ukrainian territory. NATO said this was evidence of "direct Russian involvement" and represents a serious escalation of the conflict.

The U.S. warned Russia to immediately remove its aid vehicles and military equipment from Ukraine or face further costs and isolation. With Putin's favorability ratings now in the high 80% range the odds of him doing anything to reduce his "costs" are about zero. Like Crimea the eastern Ukraine is gone. Russia is occupying it and nobody can do anything against them. The provinces of Luhansk and Donetsk are heavily populated by ethnic Russians and they have never been fans of the Ukrainian government. Putin has given them a way to separate from Ukraine and ally themselves with mother Russia.

By sending the aid convoy into Ukraine without permission Putin has called the West's and Ukraine's bluff. Putin knew Ukraine would not fire on the convoy or risk an even larger pretext for Russia attacking Ukraine forces. Putin knew the U.S. and EU are not going to intervene because they are trying to calm the situation not escalate it. Putin has won the war against the eastern Ukraine. Now all he has to do is run out the clock.

However, Putin's goal is a land route to Crimea and the Black Sea deepwater port of Sevastopol. Even if he does get control of Luhansk and Donetsk there are still two more provinces between Russia and Crimea. Those are Zaporizhzhya and Khersonska. In the map below Russia is in gray. Crimea = Respublika Krym.

Russia closed four McDonalds stores in Moscow on Wednesday for "health reasons" in the latest retaliation against the Russian sanctions. By shutting the stores in the heart of Moscow they are making a statement to the Russian people that Putin can't be bullied and the people should refuse to be bullied by the West. There are 431 other McDonalds stores in Russia but they are not in the high profile locations like Moscow's Pushkin Square. Closing stores on the square made a public statement without making a lot of consumers mad.

Forming an inclusive government in Iraq just became even more difficult. Sunni lawmakers quite talks on forming a new Iraqi government after gunmen from a Shiite militia killed at least 73 Sunni men, women and children at a mosque in the village of Bani Wais. The slaughter came after a gathering of Shiites was targeted by roadside bombs. The odds of getting a truly inclusive government are practically zero. The odds of the Sunni-Shia violence continuing are about 100%. The Shiite militias are growing in response to the Sunni population joining with ISIS terrorists against anyone that is not Sunni. Don't expect an end to the violence in Iraq any time soon, if ever.

Bank of America, Merrill Lynch, Countrywide, et al, added another settlement to its monster penalty locker. They agreed to pay $16.65 billion for an assortment of misdeeds during the mortgage crisis. Most of the problems were related to their acquisition of Countrywide Mortgage, an acquisition that will live in infamy forever. This brings their total announced mortgage settlements to just under $70 billion according to Bloomberg's calculations. That number is mind numbing. How does a corporation pay $70 billion in fines and settlements and continue in business? Why are shareholders being penalized for "reported" misdeeds of the company instead of the people in charge of the deeds going to jail? Obviously it all has to do with penalizing Wall Street for their sins. That makes good political headlines and the results of the fines and penalties on shareholders are ignored.

The main person in the Countrywide fiasco is 75 year old "tan man" Angelo Mozilo. His constant deep tan earned him the nickname tan man. Despite him paying $67.5 million to settle a prior SEC action against Countrywide he is next up on the firing line. The Justice Department is preparing a civil case against Mozilo that is sure to strip him of many more millions. According to his lawyers Mozilo is suffering from a serious illness and may not be able to stand trial.

Apparently flat markets have been outlawed. Mike Harris at Price Action Lab produced this chart showing 10 V-shaped recoveries over the last 414 days for a net gain in the S&P of +42%. In other charts he went back to the 1990s and 2000s and illustrated the numerous periods where markets corrected and then traded sideways for weeks or months before resuming their upward moves.

He speculated this market action is due to the increased number of funds chasing alpha and causing the V-shaped dips and recoveries because they are all doing the buying and selling at the same time. I believe it is the result of the Fed and QE removing the incentive to invest in bonds and treasuries. This is the result of the "There is no alternative" or TINA trade. If equities are the only place to get a decent return on your money then all the money managers are going to buy equities. That makes any dip a buying opportunity.

This trend is going to change very soon. Once a decent yield begins to return to the bond market a lot of money is going to flee the coming post QE volatility in equities and head for the safety of treasuries.

Mike Harris at Price Action Lab Chart

Humor from Eddy Elfenbein. "The vicious bear market that rocked Wall Street for a full two weeks has finally come to an end. Measuring from close to close, the S&P 500 plunged for a massive 3.94% loss between July 24 and August 7."

Janet Yellen's move from super dovish to the middle of the Fed's outlook for rates would seem to be a step towards their eventual rate hikes. She can't go from rates will stay at zero forever to we are hiking rates next week without some gradual steps in between. This was step one towards hiking rates in early 2015. So why are treasury yields holding near 12 month lows? In theory Draghi is going to eventually launch QE to rescue the EU from the coming depression. That means rates in the EU are going lower, a lot lower. Investors moving money out of Europe are buying U.S. treasuries because our low yields are still better than no yields in Europe. The German two-year bonds recently traded with a negative yield of -0.004%. Despite the negative yield Germany sold 4 billion euros of those bonds and the demand was more than 8 billion.

The Fed is still buying massive amounts of treasuries every month and will continue to do so until at least the end of October. With the Fed buying $25 billion a month they are still the dominant buyer in the market.

Also, while some people believe the U.S. is on the road to recovery there are others that see that road leading to a cliff. The weekly economic reports are far from consistently positive and macro events are growing increasingly negative. With economic cycles typically lasting 5 years we are already overdue for an economic slump and the Fed has no ammo left in its gun. Yields are holding at the lows because the economic recovery is far from assured. Inflation is nonexistent and the GDP for the first half of 2014 could be negative. Add in geopolitical risk from multiple directions and a 2.4% yield starts to look like a good deal. Compared to the rest of the developed world that is a good yield.

109,631,000 Americans live in households that received benefits from one or more federally funded "means-tested programs" - also known as welfare - in Q4-2012. The data was released by the Census Bureau on Tuesday. That equates to 35.4% of the 309,467,000 people living in the U.S. at that time. If you add in the people getting benefits from non-means-tested federal programs like Social security, Medicare and unemployment the total rises to 150,026,000 or 48.5% of the population. 82,679,000 of the people receiving benefits lived in households where people were on Medicaid. 51,471,000 were on food stamps. 22,526,000 were on the Women, Infants and Children (WIC) program. 20,355,000 were in households where Supplemental Security Income (SSI) benefits were paid. 13,267,000 received housing subsidies or lived in public housing. 5,442,000 received Temporary Assistance to Needy Families. 4,517,000 received other forms of federal cash assistance. In Q4-2012 there were 103,087,000 full time American workers. That is 6,544,000 less workers than there were welfare takers.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"If you could kick the person in the pants responsible for most of your trouble, you wouldn't sit for a month."

Theodore Roosevelt


Index Wrap

Nasdaq At New Highs, the S&P 500 at a Slight New High

by Leigh Stevens

Click here to email Leigh Stevens

The Nasdaq is well into new high ground and the S&P 500 has eked out new high Closes. Yet to follow is the big cap S&P 100 and the Dow; the small cap Russell seriously lags.

I have nothing overarching to say this week, except that we're seeing low volume numbers and that may be a damper on the main-stream economic stocks (even slowing tech a bit) as we head into the last week of our normal 'summer'. Some last beach, lake or mountain time!

The trend picture, support and resistance and price objectives are seen in my index commentaries below.



The S&P 500 (SPX) Index is bullish and SPX has gone to new high Closes but not yet decisively so. There may be a struggle for SPX to stay at new highs in the coming week. 2000 is pivotal overhead resistance, with some further resistance at the upper end of SPX's uptrend channel. They may not be a serious challenge to 2000 until after Labor day but I see 2000 in our S&P future.

Support is at 1960, extending to 1940. I anticipate the 21-day moving average acting as support on pullbacks of that degree.

Volatility has fallen significantly in the past two week rally and VIX is again under 12, which has sometimes marked at least a temporary top.

Bullishness in terms of my 'sentiment' indicator is climbing as is the RSI but are not quite yet in high-level extremes. Look for higher levels over the next couple of weeks.


The S&P 100 (OEX) has stalled at its prior peak, which isn't surprising given the relatively low volumes. Below average volume or not, the rally has been significant since OEX's rebound from its up trendline.

Pivotal near resistance is seen at the prior top around 886, extending to 890. Pivotal intermediate resistance is seen at 900, a milestone number.

I look for higher levels over the next couple of weeks but OEX may well pull back some from an overbought condition near-term.

Near support comes in at 875-870 or the area of the 21-day average, with support then extending to 864-860. I don't anticipate that much of a dip but that's how support looks chart wise.


The Dow 30 Average (INDU) has gotten over 17000 so far which is bullish and a key number. I didn't highlight it on the chart but the prior cluster of intraday highs is an important resistance we should focus in on above 17060, in the 17140 area. Resistance then extends to 17200.

Near support is at 16900, then at 16800.

Bullish, rebounding or INDU stocks that are holding support are seen with AXP, BA, CVX, DD, DIS, GS, HD (yeah), INTC, MCD, MMM, MRK, MSFT, NKE, PG, TRV, UNH, and V.

Based on what I see in the various charts, INDU looks to be capable of going to new highs or current move and then to the 17200 area. Stay tuned!


The Nasdaq Composite Index (COMP) is bullish in its chart pattern as COMP has gone to and stayed above, it prior 4485 peak. Look for support in fact at what was resistance in this area. Next lower support is at 4400. I don't current anticipate this area being retested.

Next resistance is projected in the 4575 area, extending to the 4650 area at the top end of COMP's uptrend channel.

COMP is nearing the lower end of its 'typical overbought zone in terms of the 13-day Relative Strength Index (RSI) but that won't necessarily stop some further upside progress. Over time, 4800 appears on weekly charts (not shown) as a key resistance, followed by 5000 looking out even further.

Everyone is bullish on tech it seems but this doesn't tell us much about when the current run will end. That seems more in the hands of the Fed.


The Nasdaq 100 (NDX) chart is bullish. Lower volumes have contributed to less of a charge higher compared to the rally up to 4000, a big milestone number.

I project next possible resistance coming in around 4070, extending to 4115. This area (4070-4115) is at the top end of NDX's weekly chart uptrend channel currently.

On the daily chart here you can eyeball NDX's current uptrend slope. Prices in the 4100 area gets us back to the prior June-July rate of gain. We'll see if September-October brings another acceleration higher. The March 2000 highs suggest resistance around 4400; there was even a spike up to the 4800 area in March of that year. 2014 could bring a retest of 4400. Stay tuned!

Near support is at prior resistance in the 4000 area, with support extending to 3950.

Low volatility is back as seen with the VXN at the bottom of the chart, which sometimes has meant a slowing of a steep rate of gain or occurred around the time of a correction. It's not an exact correlation by any means. Nor is the RSI extreme a sign that NDX will see a pullback but a sideways to lower pause does happen often enough that 'throws off' such an extreme.


The Nasdaq 100 tracking stock (QQQ) is bullish but the Q's are nearing the upper end of its broad uptrend channel, which may SLOW the rate of gain higher in September. Key resistance is at 100, extending to 100.6

Near support is highlighted at 97.5, extending to the area of the 21-day moving average intersecting currently at 96.5

Speaking of low late-summer volumes, daily trading activity has been below average on this last spurt higher. On Balance Volume (OBV) still pointed strongly higher. Look for a key resistance test at 100, a milestone number.


The Russell 2000 (RUT) chart is mixed and the latest advance has slowed in the area of the 50-day moving average. Next resistance in RUT comes in at 1170-1180. Technical/chart support is highlighted at 1140, extending to 1130.

RUT has now retraced half, 50% of its prior downswing. 1170 represents a 62 Fibonacci retracement and is about as high as I see RUT going near-term, if that. A 50 per cent retracement is often about as much as we see in a weak stock or in this case, weak index.


New Option Plays

Struggling Industrials & Major Milestones

by James Brown

Click here to email James Brown


Pentair Plc - PNR - close: 69.40 change: -0.62

Stop Loss: 70.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on August -- at $---.--
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

Trigger @ 68.90

- Suggested Positions -

Buy the Nov $70 PUT (PNR141122P70) current ask $3.50

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

Annotated Chart:

Weekly Chart:

SPDR S&P 500 ETF - SPY - close: 199.19 change: -0.31

Stop Loss: 202.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 99 million
Entry on August -- at $---.--
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The U.S. stock market has delivered one of the longest bull markets in recent history and it's still going. The large cap index has gone more than 1,050 days without a normal -10% correction. Typically the market sees a correction about twice a year. What are the chances that tagging major milestone might spark some sell orders?

The S&P 500 is currently at all-time highs but the 2,000 mark might be major round-number, psychological resistance. It would not surprise us to see the index tag 2,000 and then retreat.

Tonight we're suggesting a trigger to buy puts on the S&P 500 ETF (SPY) at $199.95. We'll start this trade with a stop loss at $202.25.

(NOTE: We picked the normal September $199 puts that expire on the 20th. The current open interest is over 43,000.)

Trigger @ $199.95

- Suggested Positions -

Buy the Sept. $199 PUT (SPY140920P199) current ask $2.31

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

Annotated Chart:

In Play Updates and Reviews

Raise Your Stop Loss

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index is nearing what could be major resistance at the 2,000 level. Now would be a good time to double check your stop loss placement.

We have raised several stop losses tonight.

We also want to exit our IYT and PANW trades on Monday morning.

ISIS hit our new stop loss on Friday.

Current Portfolio:

CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 70.16 change: +0.79

Stop Loss: 65.75
Target(s): To Be Determined
Current Option Gain/Loss: +45.0%
Average Daily Volume = 1.26 million
Entry on August 14 at $66.55
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: BMRN ended the week on an up note with shares rising +1.1% on Friday. The stock is now up five weeks in a row. Tonight we’ll raise the stop loss to $65.75. More conservative traders may want to move their stop closer to the simple 10-dma instead (currently about $67.70).

Earlier Comments: August 11, 2014:
BMRN is in the healthcare sector, specifically the biotech industry. According to the company's press release they "develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. The company's product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates."

The company's strategy is "providing first-in-class or best-in-class treatments for patients with serious unmet medical needs, optimizing powerful biology with demonstrated potential and development clarity, accelerating approval process, strategic pipeline development."

BMRN's current product portfolio looks like this: VIMIZIM™ for Morquio A syndrome (MPS IVA), Naglazyme® for MPS VI, Aldurazyme® for MPS I, Firdapse™ (currently approved in the EU only) for LEMS, KUVAN® Tablets for PKU.

BMRN lists their current clinical pipeline as follows: PEG PAL for PKU, BMN 673 for genetically defined cancers, BMN 701 for Pompe disease, BMN 111 for achondroplasia, BMN 190 for late-infantile neuronal ceroid lipofuscinosis (CLN2), a form of Batten Disease, BMN 270 for hemophilia A and BMN 250 for Sanfilippo Syndrome or MPS IIIB.

The company is developing a trend of beating Wall Street's earnings estimates. Back in February they reported results that bested analysts' estimates by a wide margin. They did it again in May. Wall Street was looking for a loss of 44 cents on revenues of $145.1 million. BMRN reported a loss of just 1 cent with revenues rising +18.5% to $151.6 million. Their most recent earnings report was July 30th. Analysts were expecting a loss of 41 cents on revenues of $159.2 million. BMRN announced a loss of 23 cents with revenues soaring +40.1% to $191.7 million. Furthermore BMRN management raised their 2014 guidance following the July 30th report.

The stock peaked back in February this year. When the market corrected in March most of the high-growth and momentum names were crushed. BMRN was in that group that saw their stock hammered lower. Shares fell from almost $85 to $55.00. Fortunately the $55.00 level has been solid support. Shares have been building a significant base in the $55-65 zone for over three months.

Currently the rebound from its July lows is pushing the stock up against major resistance in the $65.00-66.00 area. This is where BMRN has resistance with its simple 200-dma and its trend line of lower highs. If the stock breaks out it could spark a significant move higher.

Tonight we're suggesting a trigger to buy calls at $66.55. We're not listing an exit target tonight but I will share that the point & figure chart is bullish with a $77.00 target.

- Suggested Positions -

Long Oct $70 call (BMRN141018C70) entry $2.55*

08/23/14 new stop @ 65.75
08/20/14 new stop @ 64.75
08/14/14 triggered @ 66.55
*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


Concur Technologies - CNQR - close: 100.46 change: +0.17

Stop Loss: 96.90
Target(s): To Be Determined
Current Option Gain/Loss: -12.8%
Average Daily Volume = 576 thousand
Entry on August 19 at $100.50
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: CNQR has spent the last three days consolidating sideways near round-number resistance at $100.00. I suspect that if the market dips shares could see a dip toward what should be support near $98.00 and its simple 200-dma.

Earlier Comments: August 16, 2014:
CNQR is in the technology sector. The company provides travel and expensive management solutions. The company was founded back in 1993. Their focus is helping companies control travel costs. The business has been growing over 23,000 customers and over 25 million users.

The company press release describes Concur as "the leading provider of spend management solutions and services in the world, helping companies of all sizes transform the way they manage spend so they can focus on what matters most. Through Concur's open platform, the entire travel and expense ecosystem of customers, suppliers, and developers can access and extend Concur's T&E cloud. Concur's systems adapt to individual employee preferences and scale to meet the needs of companies from small to large."

There is no denying that it has been a rocky year for CNQR investors. The stock struggled with resistance near $130.00 for over a month earlier this year. When the momentum names corrected lower in March shares of CNQR were crushed. The stock produced a two-month retreat down to $75.00.

Meanwhile earnings continued to improve. When CNQR reported earnings on April 29th they beat estimates by six cents and guided higher for the second quarter. Their most recent earnings report was August 4th. Wall Street expected a profit of $0.16 on revenues of $175.1 million. CNQR delivered a profit of $0.25 with revenues rising +28.6% to $178.4 million. Management also raised their 2014 guidance.

Stocks analysts are starting to notice and a few of them have upgraded their price targets on CNQR into the $110-115 region. If shares of CNQR can breakout past resistance near $100 and its 200-dma then it might sprint towards $110. That's because the stock has a significant chunk of short interest.

The most recent data listed short interest at 12.2% of the relatively small 55.5 million share float. Since the $100 mark is significant resistance a breakout could definitely spark some short covering. The point & figure chart is already bullish and projecting at $108 target.

Tonight we are suggesting a trigger to buy calls at $100.50.

- Suggested Positions -

Long NOV $105 call (CNQR141122C105) entry $5.05*

08/19/14 triggered @ 100.50
*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


CVS Caremark Corp. - CVS - close: 79.24 change: +0.26

Stop Loss: 77.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.1 million
Entry on August -- at $---.--
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/23/14: CVS did not see any follow through on Thursday’s bearish reversal candlestick pattern. The stock remains under the $80.00 level so we're still on the sidelines. Our suggested entry point is $80.25.

Earlier Comments: August 19, 2014:
Where can a company lose $2 billion in annual sales, voluntarily, and be rewarded for it? Evidently the answer is CVS Caremark Corp. Back in February 2014 the company announced they would stop selling cigarettes in all of their 7,700 stores by October this year. That accounted for $2 billion in sales a year. Management felt selling cigarettes didn't line up with the company's mission - to help people with their health.

It makes sense. About 480,000 people die from smoking every year in the United States. 16 million people already have at least one disease from smoking. Investors may have been concerned initially but CVS' most recent earnings report should remove any worries. CVS is focusing on building out their MinuteClinic busniess, their specialty pharmacy services, and capturing their share of the millions of new healthcare members through Obamacare. It seems to be working. CVS' MinuteClinic sees four million visitors a year. The company has 64 million pharmacy benefit plan members.

According to a company press release, "CVS Caremark is dedicated to helping people on their path to better health as the largest integrated pharmacy company in the United States. Through the Company's more than 7,700 retail pharmacy stores; its leading pharmacy benefit manager serving nearly 65 million plan members; and its retail health clinic system, the largest in the nation with more than 860 MinuteClinic locations, it is a market leader in mail order, retail and specialty pharmacy, retail clinics, and Medicare Part D Prescription Drug Plans. As a pharmacy innovation company, CVS Caremark continually strives to improve health and lower costs by developing new approaches such as its unique Pharmacy Advisor program that helps people with chronic diseases such as diabetes obtain and stay on their medications.

CVS is in a good position if you consider the demographics of the U.S. Right now there are 10,000 people a day turning 65 years old. An older population needs more healthcare services and more prescriptions. CVS plans to capitalize on this growing trend.

The company's most recent earnings report was August 5th. Analysts were expecting a profit of $1.10 a share on revenues of $33.52 billion. CVS reported earnings of $1.13 a share. That beat estimates and represents +16.5% growth from a year ago. Revenues were up +11% to $34.6 billion. Same-store sales in the second quarter were +3.3%, which beat rival Walgreen's (WAG) +2.2% growth. CVS management sees this bullish momentum continuing and raised their 2014 earnings guidance.

In their earnings press release CVS was pretty optimistic:

President and Chief Executive Officer Larry Merlo stated, "I'm extremely pleased with our strong performance this quarter. With Adjusted EPS increasing 16.5%, we came in two cents above the high end of our expectations. This was fueled by solid results across the enterprise, as both the PBM and retail businesses exceeded revenue expectations while delivering strong gross margins. Operating profit in the PBM increased 30%, exceeding expectations, while operating profit in the retail business grew 6.5%, at the high end of our expectations." Mr. Merlo continued, "Additionally, we have generated significant free cash flow through the first half of this year. Between dividends and share repurchases, we have returned $2.6 billion to our shareholders year-to-date, and remain on track to achieve our goal of returning more than $5 billion in 2014."

Following this earnings report Wall Street applauded. Several firms updated their outlook on the stock. Many were raising their CVS price targets in the $85, $86 and $88 range. The point & figure chart is a lot more optimistic and currently forecasting a $102.00 target.

Currently shares of CVS are hovering just below resistance at $80.00. We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the NOV $80 call (CVS141122C80)

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


Expedia Inc. - EXPE - close: 87.24 change: +0.25

Stop Loss: 83.95
Target(s): To Be Determined
Current Option Gain/Loss: - 2.2%
Average Daily Volume = 2.3 million
Entry on August 18 at $86.25
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: Traders bought the dip in EXPE near $86.00 on Friday morning and the stock rebounded to close at a new all-time high. Tonight we are moving our stop loss up to $83.95. More conservative investors may want to use a stop loss closer to $85.00 instead.

Earlier Comments: August 16, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a serious trend of beating analysts' estimates with strong profit and revenue growth. EXPE last reported earnings on July 31st. Analysts were expecting a profit of $0.75 a share on revenues of $1.44 billion. EXPE blew those numbers away with a profit of $1.03 a share. Revenues soared +24.0% to $1.49 billion. That's up from $1.2 billion the prior quarter. EXPE has now delivered double-digit year over year revenue growth for six quarters in a row.

EXPE's bookings continue to soar. Gross bookings were up +29%. Domestic gross bookings were up +35% and international gross bookings rose +21%. Both hotel revenues and air travel revenues were up more than +20% each.

Last time we traded EXPE we noted that Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014. In the second quarter Appaloosa added another 201,000 shares of EXPE.

The stock popped on its earnings results but have since spent the last two weeks digesting gains in a sideways consolidation. Now it looks like EXPE is poised to breakout and could make a run towards the $95-$100 area. The point & figure chart is bullish and forecasting at $105 target.

Tonight we are suggesting a trigger to buy calls at $86.25.

- Suggested Positions -

Long NOV $90 call (EXPE141122C90) entry $4.40

08/23/14 new stop @ 83.95
08/18/14 triggered @ 86.25
Option Format: symbol-year-month-day-call-strike


Gilead Sciences, Inc. - GILD - close: 103.96 change: +1.69

Stop Loss: 99.95
Target(s): To Be Determined
Current Option Gain/Loss: +177.0%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: Let's see, another week, another round of new all-time highs for GILD. It didn't hurt that shares garnered bullish analyst comments on Friday and a new $115 price target. Shares spiked up to $105.16 intraday before paring its gains. The stock does look short-term overbought here. GILD is up ten weeks in a row.

Investors may want to consider taking some money off the table right now. If the S&P 500 reverses at the 2,000 mark it could spark some serious profit taking across the market and GILD would be a target.

Tonight we are upping our stop loss to $99.95. I am not suggesting new positions at this time.

Earlier Comments: July 28, 2014:
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.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

08/23/14 new stop at $99.95
08/16/14 new stop @ 93.45
Investors will want to seriously consider taking profits now with GILD testing potential resistance at the $100.00 mark.
08/14/14 new stop @ 89.95
Investors may want to consider taking money off the table as GILD nears the $99-100 zone.
07/29/14 triggered @ 92.25
*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


Transportation ETF - IYT - close: 151.09 change: +0.12

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: +26.0%
Average Daily Volume = 276 thousand
Entry on August 11 at $146.03
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: The transportation ETF has seen a strong two and a half week bounce from technical support at its rising 100-dma to resistance at its 2014 highs. Now the rally is stalling at this resistance. Given the coincidence that the S&P 500 index is also nearing what could be major resistance at the 2,000 mark we are turning more cautious on the IYT.

Tonight we're suggesting investors exit positions immediately on Monday morning to lock in potential gains. The current bid/ask on our 2015 Jan. $150 call is $5.80/6.60.

- Suggested Positions -

Long 2015 Jan $150 call (IYT150117C150) entry $4.60

08/23/14 prepare to exit on Monday morning
08/20/14 new stop @ 144.75
08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike


LyondellBasell Industries - LYB - close: 112.14 change: -0.16

Stop Loss: 108.75
Target(s): To Be Determined
Current Option Gain/Loss: +20.0%
Average Daily Volume = 2.5 million
Entry on August 15 at $110.50
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: LYB spent the last three days consolidating sideways near $112.00. The stock is also up five out of the last six weeks and near all-time highs.

I would hesitate to launch new positions here. Wait for a dip or a bounce near $110.00 before considering new positions. We will adjust our stop loss up to $108.75.

Earlier Comments: August 4, 2014:
One way to play the shale-gas boom in the U.S. is plastics. The bloom of natural gas production has been a huge blessing for LYB. According to the company's website, "We participate in the entire petrochemical value chain, from refining to specialized petrochemical product end uses. We are the largest producer of polypropylene and polypropylene compounds; a leading producer of propylene oxide, polyethylene, ethylene and propylene; a global leader in polyolefins technology; and a producer of refined products, including biofuels. Additionally, LyondellBasell is a leading provider of technology licenses and a supplier of catalysts for polyolefin production."

The recent spike in LYB's stock price was a reaction to better than expected earnings results. Wall Street was looking for LYB to deliver a profit of $1.93 a share on revenues of $11.5 billion. LYB surpassed expectations with a profit of $2.22 a share with revenues rising +9.1% to $12.12 billion.

The stock has been an earnings machine with rising earnings the last four years in a row. Analysts are now estimating LYB will see earnings rise 11% in 2014 and 16% in 2015. Jefferies recently raised their price target on LYB from $120 to $125 as they upgraded their EPS estimates on the company.

After a strong rally from $100 to $110 in mid July the stock was short-term overbought and due for a pullback. Traders jumped in to buy the dip near LYB's simple 10-dma last week. Now LYB is rebounding higher.

More aggressive traders may want to buy the bounce today. We are suggesting a trigger to buy calls at $110.50 since the July high is $110.38.

FYI: For more background on the LYB story Forbes.com has a great article that you might find interest. You can read it here.

- Suggested Positions -

Long DEC $115 call (LYB141220C115) entry $2.50*

08/23/14 new stop at $108.75
08/15/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 adjust the stop loss to $107.40 (trade not open yet)
08/14/14 LYB almost hit our trigger but failed at $110.49
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 85.01 change: +0.07

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +28.1%
Average Daily Volume = 1.3 million
Entry on August 04 at $80.50
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: see below

08/23/14: The last several days have been frustrating for PANW bulls. The S&P 500 has broken out to new highs but the rally in PANW has stalled. The stock has failed multiple times under resistance near $88.00. The last three days have seen the sideways consolidation narrow near $85.00.

Big picture the trend is up but PANW is not acting that healthy. Tonight we are suggesting an immediate exit on Monday morning. We can re-visit PANW on a correction or a breakout.

The current bid/ask spread is $4.10/4.50.

FYI: Keep in mind that earnings are coming up on Sept. 9th.

- Suggested Positions -

Long SEP $85 (PANW140920C85) entry $3.20*

08/23/14 prepare to exit on Monday morning
08/13/14 new stop @ 79.90
08/04/14 triggered @ 80.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/02/14 Strategy update: Move the entry trigger from $84.55 to $80.50 and move the stop loss from $79.65 to $76.75.
Adjust the option strike from Sep $90 call to Sep $85 call
Option Format: symbol-year-month-day-call-strike


Schlumberger Limited - SLB - close: 109.03 change: -0.41

Stop Loss: 107.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.5 million
Entry on August -- at $---.--
Listed on August 20, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/23/14: SLB has spent the last few days consolidating sideways between short-term overhead resistance near $110 and short-term support at its 10-dma and 20-dma. Currently we are waiting on a breakout higher. Our suggested entry point to buy calls is $110.50.

Earlier Comments: August 20, 2014:
Consistent earnings growth is what investors like to see. SLB has done it eleven quarters in a row. The company is considered best in breed for the oil services industry. This past weekend Barron's ran a story on SLB and suggested the stock has +50% upside (or more) from current levels. That's because SLB has made several acquisitions in North America and is now a major player in the U.S. hydraulic fracking boom.

According to the company's website, "Schlumberger is the world's leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Employing approximately 126,000 people representing over 140 nationalities and working in more than 85 countries, Schlumberger provides the industry's widest range of products and services from exploration through production."

As mentioned above SLB has beaten Wall Street's bottom line earnings estimates eleven quarters in a row. Their most recent earnings report was July 17th. Analysts were expecting a profit of $1.35 a share on revenues of $11.95 billion. The company reported a profit of $1.37 a share, up +19% from a year ago, with revenues up +7.8% to $12.05 billion for the quarter.

Management noted margin improvement. SLB said every geographic area saw growth. On the conference call SLB's CEO said, "Our second quarter results were strong and fully in line with our expectations as international activity rebounded in Russia, Norway and Australia and North American activity grew in both offshore in the U.S. Gulf of Mexico and on land in spite of the Canadian spring breakup."

Looking ahead the company issued a mixed outlook. Management said, "Turning our focus back to the remaining part of 2014, we continue to see a relatively constant mix of headwinds and tailwinds in the global economy and in our industry, which leads us to maintain our already established outlook for the year. The slow and steady recovery in the global economy is continuing and the global oil market remains relatively tight with a solid demand outlook, continued supply uncertainty related to geopolitics and with Brent prices holding steady above $100 per barrel, which should encourage oil directed investments in both the North American and international markets."

Their relatively cautious outlook and falling oil prices in the last several weeks have sparked some profit taking in SLB's stock price. The pullback could be a significant entry point. Long-term SLB is forecasting almost +20% earnings (compound annual growth rate) through 2017.

Wall Street has been very bullish the last couple of months. Several firms have upgraded their price targets on SLB with a few recent upgrades coming in at $132, $138, $140 and $150 a share for SLB.

SLB did make headlines earlier this month regarding Russia. The U.S. and the EU have leveled sanctions against Russia. This is impacting international companies like SLB who do business in Russia and with Russian companies. Fortunately, SLB estimates that any impact from the sanctions will be limited. Management expects a decline of 3 cents per share due to the sanctions. Wall Street hates uncertainty so having SLB actually come out and offer some guidance on the sanctions impact is bullish.

Another potential challenge could be Iraq. SLB does a lot of business in Iraq but most of the oil production is in southern Iraq. Right now the hot zones with fighting between ISIS, the Iraq military and the Kurds, are all in the northern half of Iraq. As long as the violence stays in the northern half of Iraq then the Islamic State terrorists are unlikely to impact SLB's operations in the country.

Shares of SLB hit all-time highs in late June. Since then the stock experienced a six-week correction from $118 to $105. That's a -11% pullback. The stock has begun to bounce and looks poised to break through resistance near $110. Tonight we are suggesting a trigger at $110.55. More conservative investors may want to wait for SLB to rally past its 50-dma before initiating positions (50-dma is currently at $111.30).

Trigger @ $110.50

- Suggested Positions -

Buy the NOV $115 call (SLB141122C115)

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


U.S. Silica Holdings, Inc. - SLCA - close: 64.50 change: +1.72

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: +16.6%
Average Daily Volume = 1.42 million
Entry on August 19 at $62.05
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: The relative strength in shares of SLCA continued on Friday with a +2.7% gain and a new all-time high. I also noticed strength in a rival sand producer, EMES, which hit new highs.

I would not chase SLCA at current levels. We will raise our stop loss to $59.45, just below the simple 30-dma.

Earlier Comments: August 13, 2014:
We are bringing SLCA back after some post-earnings volatility.

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

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

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

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

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

SLCA's most recent earnings report was July 29th. Wall Street expected a profit of $0.47 a shares on revenues of $189.7 million. SLCA beat estimates with a profit of $0.55 and revenues soaring +58.5% from a year ago to $205.8 million.

The company said sales were up sharply both from a year ago and from the first quarter. Management raised its 2014 earnings guidance.

Currently shares of SLCA are hovering just below resistance in the $61.75 area. Tonight we're suggesting a trigger to buy calls at $62.05. We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long DEC $65 call (SLCA141220C65) entry $4.20*

08/23/14 new stop at $59.45
08/19/14 triggered @ 62.05
*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


United Rentals, Inc. - URI - close: 117.23 change: +0.96

Stop Loss: 109.45
Target(s): To Be Determined
Current Option Gain/Loss: -7.1%
Average Daily Volume = 1.0 million
Entry on August 19 at $115.25
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/23/14: URI extended its rally to three weeks in a row and ended Friday at a new all-time high.

Keep an eye on the S&P 500 index. If the index retreats from resistance at 2000 it could spark some market-wide profit taking and URI would likely pullback.

Earlier Comments: August 18, 2014:
URI is a company that is gaining market share. Traditionally equipment rental has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. URI's most recent earnings report was July 16th. Wall Street was looking for a profit of $1.50 a share on revenues of $1.36 billion. URI delivered $1.65 a share with revenues hitting $1.399 billion. URI's earnings results were up +47% from a year ago. Margins hit a second quarter record at 47.4%. URI management then raised their 2014 guidance.

In URI's earnings press release their CEO offered a bullish outlook:

Michael Kneeland, chief executive officer of United Rentals, said, "Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high water mark for second quarter EBITDA margin. The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we're seeing, and the benefit of secular penetration, we've raised our full year outlook - and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014."

URI said their rental revenue was up +16.8% for the quarter. They're also see super growth in their specialty segment. Their trench safety rentals were up +21%. Their power and HVAC rentals were up +54%. URI purchased National Pump on April 1st this year. Now they've renamed it United Rentals Pump Solutions and they're using it as an opportunity to cross sell pumps to their broader customer base.

URI is also on track with their stock buyback program. In October 2013 they announced at $500 million repurchase program that's expected to be completed by April 2015. Thus far URI has bought back $228 million in common stock this year ($185 million of that was in the second quarter).

Technically the post-earnings depression for URI is over. Traders bought the dip near its long-term up trend of higher lows. Now URI is testing resistance at its all-time highs and resistance at the $115.00 level.

We are suggesting a trigger to buy calls at $115.25.

- Suggested Positions -

Long DEC $120 call (URI141220C120) entry $5.60*

08/19/14 triggered @ 115.25
*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


PUT Play Updates

Currently we do not have any active put trades.


Isis Pharmaceuticals - ISIS - close: 34.33 change: +0.16

Stop Loss: 33.85
Target(s): To Be Determined
Current Option Gain/Loss: -24.3%
Average Daily Volume = 1.5 million
Entry on August 13 at $35.25
Listed on August 12, 2014
Time Frame: 12 to 15 weeks
New Positions: see below

08/23/14: The pullback in shares of ISIS continued on Friday morning. The stock hit our new stop loss at $33.85 before bouncing.

We still like the story on ISIS but I would wait for a strong close above its 200-dma and the $38.00 level before considering new bullish positions.

- Suggested Positions -

2015 Jan $40 call (ISIS150117C40) entry $4.10 exit $3.10* (-24.3%)

08/22/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
08/21/14 new stop @ 33.85
08/13/14 triggered @ 35.25
Option Format: symbol-year-month-day-call-strike