Option Investor

Daily Newsletter, Tuesday, 9/2/2014

Table of Contents

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

Market Wrap

S&P 3000?

by Jim Brown

Click here to email Jim Brown

A major analyst made that prediction today but we have to conquer 2,000 before targeting 3,000.

Market Statistics

Morgan Stanley's Adam Parker, normally one of the most bearish analysts on the street was making headlines again on Tuesday. Several weeks back he upgraded his forecast from the high 1,800's for the S&P at year end to 2,014 at the end of 2014. That was good for a couple days of headlines and appearances on several stock TV shows. This week he made headlines again calling for S&P 3,000. While that sounds outrageous there was a catch. As with most self promoting market calls there was a qualification. He is predicting 3,000 by the year 2020.

While that sounds crazy today it is not that big of an accomplishment. That assumes a 6% annual gain on the S&P and that is easily obtained. I have to hand it to Parker. He has figured out how to attract attention without straying too far off the beaten path. Now the wealth managers at Morgan Stanley have something to pass on to their clients to encourage them to put some more money away for the long term.

Parker was the first to admit the market is not going straight up and will probably see some severe bouts of volatility along the way. However, long term the market should continue to grow from 6-8% per year, which is the historical norm, and S&P 3,000 is the natural outcome.

Unfortunately we need to get convincingly past 2,000 before we can start making plans for 3,000. Traders coming back from their vacations took profits this morning as geopolitical events weighed on the market along with a sharp drop in crude prices. The energy sector had been recovering from the July decline but the drop in crude prices hit energy equities hard this morning.

The drop in crude prices came on the rising dollar because of stronger economics in the U.S. and weaker economics in Europe. Purchasing Managers Indexes in Germany, Italy, the U.K. and China all came in below estimates for August. Add in the future impact for the sanctions on Russia and the European economy is going to be even weaker in the months ahead. Weak overseas economies also suggest weaker demand for crude oil. It all added up to a sharp decline in crude prices.

Crude prices fell -$3 by early afternoon to erase the gains made last week.

The negative economic in Europe and the strong ISM in the U.S. caused a monster +3.2% spike in U.S. yields. This tended to rattle the equity market.

The only material economic report this morning was the ISM Manufacturing Index. The headline number rose sharply from 57.1 to 59.0 and well over the expectations for a decline to 56.9. This was the second monthly increase but more importantly this is the highest level since April of 2011.

The new orders component rose from 63.4 to 66.7 and backorders rose from 49.5 to 52.5. This was the first time in 3 months the backorders have risen above contraction territory. The production component rose from 61.2 to 64.5. The employment component was flat with a minor decline from 58.2 to 58.1.

This was a bullish report suggesting activity in the manufacturing sector is accelerating. Customer inventories rose from 43.5 to 49 with 72% of respondents saying their customer inventories were about right. Customer inventories are used as an indicator of future demand. If inventories are low the manufacturers anticipate future reorders.

The bullish manufacturing report is encouraging after seeing the Citigroup Timbuk2 ad on TV a lot lately claiming from 2001-2011 an average of 17 manufacturers a day closed their doors.

Construction Spending in July rose +1.8% compared to a decline of -0.9% in June. That was originally a -1.8% decline in June but it was revised to only -0.9%. The headline gain was the largest since May 2013. Residential construction rose +0.7%, non-residential rose +2.1% and public construction spending rose +3.0%. This was a pretty good report.

The next three days all have important events that could roil the market. The Fed's Beige Book is expected to show improvement and not be a market drag. If the Fed's outlook changed that could cause some volatility but based on the other reports I don't see that as a potential event.

The ECB meeting is a wildcard and it is tough to draw many conclusions about post meeting results. Suffice to say it is important for market direction over the next month. If Mario Draghi does launch a new QE program it would further depress the euro and spike the dollar. This would make dollar denominated investments like equities move higher.

The ADP Employment and Nonfarm Payrolls are both expected to show gains of more than 200,000 jobs and with weekly jobless claims slipping under 300,000 a week those employment reports are likely to meet the consensus estimates and be market positive.

Tesla Motors (TSLA) hit a new high at $284 with a gain of +$14.42 after Stifel Nicolaus said it could rise to $400. Stifel said their accelerating production capability has allowed it to develop a niche where they would be safe from competition for years to come. The analyst said they had a sizeable head start on production and it was increasing rapidly. He said Tesla was on track to boost production to 1,000 Model S cars per week before the end of the year. This could double again in 2015. Stifel raised the stock from a hold to buy with a target of $400. Tesla is on track to add the Model X SUV in 2015 and the Model 3, a smaller more affordable premium sedan by 2017.

Dollar General (DG) raised its bid for Family Dollar (FDO) from $78.50 to $80 per share or $9.1 billion. DG said it was willing to sell as many as 1,500 locations, up from 700, to obtain regulatory approval. They also offered to pay $500 million as a breakup fee if the deal did not close.

Dollar General is trying to fend off Walmart as that company adds to its smaller-format stores. FDO said its board was reviewing the DG offer. Dollar Tree (DLTR) is also reconsidering its last offer. Analysts believe DLTR could match of even exceed DG's $80 offer because they would face fewer regulatory hurdles. However, DG could afford to offer even more to guarantee it wins the bid. Without a counter offer from DLTR the FDO board may have a hard time turning down the DG bid. FDO has called DG an "unserious suitor" in the past but increasing the number of stores it is willing to sell and offering the $500 million breakup fee kills that argument.

Halliburton (HAL) agreed to pay $1.1 billion to settle most of the lawsuits over the Deepwater Horizon oil spill in the Gulf. Halliburton was blamed for doing defective work on the well before it exploded. The cement job that was supposed to keep the high pressures in the bottom of the well was defective according to the various reviews of the data. Halliburton used an untested cement formula in a rush to get the well completed and move on to the next location.

Settling the majority of the liability is a major cloud off the stock. The judge in the case is scheduled to rule on the liability of the major parties over the next several weeks and a finding of "gross negligence" for Halliburton would have made them liable for billions more in damages. This settlement was a good deal for Halliburton. Shares had moved up over the last six months in anticipation of some resolution.

Apple (AAPL) fought off claims of iCloud being hacked only a week before their big product announcement. Over the weekend nude pictures of actress Jennifer Lawrence and others were posted on the Internet. They were reportedly hacked from iCloud, which is operated by Apple. The company spent the last 48 hours tracking the hack backwards and late in the afternoon they revealed it was not a general hack but was a brute force attack against specific accounts. The brute force attack attempts to discover passwords by constantly trying to log on with all versions of personal data they can come up with. Sara Palin's Yahoo account was hacked once before by a college student that used information on a Wikipedia page to get her birth date and other personal information.

This is a clear reason why you should never use personal info of any kind as part of your username and password. Using some form of your initials, birth date, social security number, street address, middle names, kids names, phone numbers, etc, is extremely unsecure.

However, the easiest way of not having your nude pictures spread all over the web is to NOT put them in the cloud. If you are going to take nude selfies use an actual camera not your smartphone.

Everyone should realize by now that ANYTHING you put on the web or in the cloud is NOT secure. It will eventually show up in places you would rather not see it.

The daylong hack attention did not keep Apple shares from making another new high.

Home Depot (HD) shares declined -$2 after news broke the company was cooperating with law enforcement to investigate a possible data breach of the company website and confidential credit information. HD said "we are looking into some unusual activity" and "if we confirm a breach occurred we will make sure customers are notified immediately."

The same investigative reporter that discovered the Target (TGT) breach in 2013 reported that a "massive batch" of stolen credit and debit card information went on sale this morning. Brian Krebs, KrebsOnSecurity.com, said the cards appeared to be linked to Home Depot stores. The stolen cards were marketed online by hackers in two groups called "American sanctions" and "European sanctions." This suggests the hack may have been perpetrated by Russian hackers.

Helen of Troy (HELE), a maker of brand name consumer products, warned their fiscal 2015 outlook would be lower than previously forecast. They blamed it on acquisitions of Healthy Directions, which was completed on June 30th. They also warned they would not be giving future quarterly guidance. Full year earnings are now expected in the range of $3.70-$3.80 compared to prior guidance of $4.30-$4.40. Shares plunged after the close.

Concur Technologies (CNQR) spiked from $101 to $125 in afterhours before dropping back to $113. The company said it was exploring a sale to companies including SAP and ORCL. CNQR has a market cap of $5.7 billion and is working with an investment bank on a potential sale. Shares pulled back slightly after CNQR said ORCL had decided not to pursue a sale.

On the international scene another American journalist, Steven Sotloff, was beheaded on camera by an ISIS fighter. The English speaking terrorist said "I am back, Obama. I am back because of your arrogant foreign policy toward the Islamic State." The journalist was apparently killed several days ago and probably at the same time as Foley. The video was just released to correspond with the end of the U.S. holiday.

Apparently the U.S. has increased its airstrikes and there are German and U.S. Special Forces fighting on the front lines against ISIS. Like the Russian soldiers in Ukraine all identifying insignias have been removed from their uniforms. Story Here

Ukrainian officials claim there are now more than 15,000 Russian troops in the Ukraine and the defense minister said "defenses must be strengthened" in the face of a "full scale" invasion of Ukraine. Numerous headlines cited the comment from Putin that Russia could "take Kiev" in a matter of weeks if it so desired. Putin did not deny the comment but said it had been made in a confidential setting. He reportedly made the threat to the EU Commission president during talks on the Ukraine crisis. It was made in the context of "I can take all of Ukraine if the EU continues to increase its sanctions."

President Obama is reportedly going to warn Putin to back off in a trip to Estonia this week ahead of the NATO summit. NATO officials are said to be preparing a 4,000 man quick reaction force that could be mobilized in 48 hours to defend against any Russian aggression against a NATO country. It would be a delaying force until larger numbers could be delivered to the battlefield.

The geopolitical headlines did not appear to worry the equity markets. There was a dip at the open with the Dow down -88 points but the majority of the indexes returned to positive territory before the close. The Dow closed down -31 points and the S&P down only -1 after being down -8 intraday. The buy the dip strategy still appears to be working.

The S&P closed at 2002 and appears poised for a breakout this week if the headlines cooperate. The next three days each have something to worry about but boots on the ground in Iraq and threat of war with Russia had no material impact on the markets so weak jobs numbers may have no impact either.

Today was a paperwork day. Fund managers coming back from the last holiday of the summer probably spent the day answering emails and cleaning up the pile of paper that accumulated on their desk. They slowly immersed themselves back into the job and the market and they should be ready to begin adding to or restructuring their portfolios on Wednesday. New money end retirement contributions will be put to work.

The intraday dip on the S&P confirmed support at 1195 and resistance is now the 2003 closing high from Friday.

The Dow is the trouble maker this week with multiple levels of converging resistance from 17,075 to 17,150. Until the Dow builds up enough steam to break through that logjam the rest of the indexes may be lackluster.

The Nasdaq Composite closed in on the uptrend resistance at 4,600 and is showing no indications of a potential collapse at that level. Unfortunately sometimes there is no indication of strong resistance until the tripwire is triggered.

The Nasdaq gained +18 points to close only half a point below the high for the day at 4598.64. It is hard to say the market had a bad day when the Nasdaq closed at a new high by +18 points. There were a lot more big winners than sinners in the table below.

Support is now 4,550 and resistance 4,600.

The Russell 2000 shook off the early morning weakness to gain +5 points and a two month high. Not a bad gain when the Dow started off -88 in the hole.

The Dow Transports gained +108 points or +1.3% to close at a new high at 8,516. This is a clue for where the Dow industrials are headed. The positive ISM Manufacturing was bullish for transports and it will be bullish for the Dow once the minor profit taking is over.

Historically the month of September is negative. Dating back to 1950 the average September loss is -0.5%. Dating back to 1990 it is -1.1%. However, four of the last five Septembers have been positive with an average +2% gain. While history is a guide and not a guarantee this is encouraging. Historically when August is positive September is normally positive.

The cloud over September will be the midterm elections. The mudslinging has already begun and it will grow progressively worse over the next ten weeks. However, with the economic reports improving and earnings growth expected to approach double digits in Q3 the market should be positive. I know proclaiming that in print is the kiss of death for any rally but those are the facts as I see them today.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Relative Strength In The Financials

by James Brown

Click here to email James Brown


Morgan Stanley - MS - close: 34.55 change: +0.24

Stop Loss: 32.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
MS is in the financial sector. They're one of the biggest players in the financial services industry. The stock has been outperforming its peers by a significant margin. Citigroup (C) is still down -0.8% for 2014. Goldman Sachs (GS) is only up +1.0%. JP Morgan (JPM) is up +1.6% and BAC is up +3.3% in 2014. The XLF financial ETF is up +6.8% year to date. Yet MS is up +9.4%.

The company has managed to build its revenues on stronger wealth management business. The company has beaten Wall Street's earnings estimates four quarters in a row.

Their most recent earnings report was July 17th. Analysts were expecting a profit of 55 cents a share on revenues of $8.18 billion. MS delivered $0.60 a share with revenues coming in at $8.61 billion. The company's profit has more than doubled from a year ago.

The stock has spent months consolidating sideways under resistance near $33.50. This past month has seen a bullish breakout higher. Now broken resistance near $33.50 should be new support. MS is currently testing short-term resistance near $34.50.

Tonight we're suggesting a trigger to open bullish positions at $34.75.

Trigger @ $34.75

- Suggested Positions -

Buy MS stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $35 call (MS150117C25) current ask $1.61

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Early Gains Fade

by James Brown

Click here to email James Brown

Editor's Note:
Tuesday's early morning gains faded and the major indices closed with minor losses. The NASDAQ is the one exception.

Our UBNT trade has been triggered.

I've adjusted the entry point strategy on OIH and RIG.

Current Portfolio:

BULLISH Play Updates

Delta Air Lines - DAL - close: 40.93 change: +1.35

Stop Loss: 38.65
Target(s): To Be Determined
Current Option Gain/Loss: +0.4%
Entry on August 21 at $40.75
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11 million
New Positions: see below

09/02/14: A sharp drop in crude oil prices helped the airline stocks soar on Tuesday. DAL rallied +3.4% to close at new two-month highs. A rally past $41.00 could be used as a new entry point.

Earlier Comments: August 20, 2014:
Delta is the world's second biggest passenger airliner on the planet. They serve almost 165 million customers a year. Believe it or not but they started back in 1924 as an aerial crop dusting company called Huff Daland Dusters. Now they have almost 80,000 employees and a fleet of more than 700 planes that fly to 334 destinations in 64 countries on six continents.

A lot of investors look at the airline stocks as value plays. That's easy to see given their cheap multiples. DAL has a P/E of 3.1. Yet the company is seeing growth as well. Last year the airlines were big winners with the market's 2013 rally. This year could be another strong one thanks to falling oil prices. There has been a lot of geopolitical headlines but none of them seem to be pushing oil prices higher. Instead crude oil prices are falling. That's a huge deal for the airline companies because fuel is their largest expense. DAL has the lowest fuel costs in the business because they own their own refinery. The company expects that their fuel hedging and refinery operations should cut their fuel costs by $350 million this year.

More than 60% of DAL's business is in the U.S. The country's slow economic improvement has helped fuel gains for DAL. The airline has beaten Wall Street's bottom line estimates four quarters in a row. Back in June they raised guidance. Their most recent earnings report was July 23rd where they delivered a profit of $1.04 a share, one cent above estimates. DAL management that said their pre-tax profit was $1.4 billion, which is a +70% improvement from a year ago. They ended the second quarter with debt at less than $8 billion, which is a 20-year low. DAL's margins have been improving. Management expects margin improvement to continue and should see a jump from 13.5% to 15-17% in the third quarter.

Technically DAL saw a correction from $42 to $35 (-16%) from its June highs. Investors bought the dip again near $35.00 in early August. Now DAL has built what appears to be a bullish double bottom. The current bounce from its August lows is breaking through resistance.

If this trend continues we want to hop on board. Tonight we're suggesting a trigger at $40.75. The 2014 high near $42.50 could be short-term resistance but longer-term DAL looks poised to breakout.

- Suggested Positions -

Long DAL stock @ $40.75

- (or for more adventurous traders, try this option) -

Long 2015 Jan $45 call (DAL150117C45) entry $1.70*

08/30/14 new stop @ 38.65
08/21/14 triggered @ 40.75
*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

Green Plains Inc. - GPRE - close: 44.68 change: -0.01

Stop Loss: 42.25
Target(s): To Be Determined
Current Option Gain/Loss: +9.6%
Entry on August 11 at $40.77
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: see below

09/02/14: GPRE continues to bounce off short-term technical support at its 10-dma. Unfortunately the bounce didn't make it very far and the stock closed almost unchanged on the session. I'm not suggesting new positions at this time.

Earlier Comments: August 09, 2014:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

- Suggested Positions -

Long GPRE stock @ $40.77

- (or for more adventurous traders, try this option) -

Long Dec $45 call (GPRE141220C45) entry $2.95*

08/30/14 new stop @ 42.25
08/27/14 new stop @ 41.85
08/23/14 new stop @ 40.95
08/14/14 GPRE announces $100 million buy back and doubles dividend to 8c.
08/13/14 new stop @ 39.25
08/11/14 trade opens on gap higher at $40.77, trigger was $40.75
*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

Microsoft Corp. - MSFT - close: 45.09 change: -0.34

Stop Loss: 42.90
Target(s): To Be Determined
Current Option Gain/Loss: +2.3%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

09/02/14: It was a frustrating day for MSFT bulls. There was no follow through on Friday's show of strength. The stock reversed with -0.74% decline. MSFT did have some negative headlines. One of them is a growing antitrust probe in China. The story claims that Chinese officials raided MSFT offices in China. Plus China has given MSFT 20 days to explain some of their software compatibility issues and bundling practices (which mimics the very old complaint against MSFT during the browser wars of the 1990s). In other news MSFT refused to comply with a U.S. judge's order to turn over customer emails currently stored in Ireland.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

- (or for more adventurous traders, try this option) -

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike

Oil Services ETF - OIH - close: 54.44 change: -0.72

Stop Loss: 53.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.8 million
New Positions: Yes, see below

09/02/14: A surge in the U.S. dollar pushed the price of oil lower. A rising dollar means it takes fewer dollars to buy the same barrel of oil. The sharp drop in crude oil today helped drag some of the oil stocks lower. The OIH lost -1.3%.

We suspect that this weakness is temporary and want to take advantage of it. Tonight we'll move the entry point open bullish positions down to $54.75. I'll adjust the stop loss to $53.45. I'm also adjusting the option strike to the 2015 Jan. $55 call.

Earlier Comments: August 30, 2014:
The Market Vectors Oil Services ETF (exchange traded fund) tries to mimic the Market Vectors US Listed Oil Services 25 index. The top ten holdings for this ETF are SLB, HAL, NOV, CAM, BHI, SDRL, WFT, ESV.L, RIG, and HP. SLB and HAL are by far the biggest two components.

A multi-week decline in the price of crude oil has not stymied the industry's interest in drilling. The number of oil rigs in the U.S. hit an all-time record of 1,588 rigs about two weeks ago. That's the highest number since Baker Hughes started counting back in 1987.

Meanwhile crude oil prices appear to peak in late June this year but after a two-month decline oil is starting to rebound. As geopolitical tensions continue to rise in the Middle East (with ISIS growing in Iraq and Syria) and tensions with Russia and Ukraine, it could put a floor under energy prices, especially as we get closer to winter. Oil tends to show strength in the fall.

Technically the OIH produced a correction from its July highs but has started to bounce after a 38.2% Fibonacci retracement (shown on the weekly chart below). Tonight we're suggesting a trigger to open bullish positions at $55.75, which is just above the simple 50-dma.

The $58.00 level is short-term resistance but our long-term target is higher. Currently the point & figure chart is forecasting at $61 target.

Trigger @ $54.75

- Suggested Positions -

Buy the OIH ETF @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $55 call (OIH150117C55) current ask $2.00

09/02/14 adjust entry strategy: move the trigger from $55.75 down to $54.75, adjust the stop loss to $53.45.
Adjust the option strike to the 2015 Jan $55 call
Option Format: symbol-year-month-day-call-strike

Skyworks Solutions - SWKS - close: 56.29 change: -0.37

Stop Loss: 52.45
Target(s): To Be Determined
Current Option Gain/Loss: +6.9%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

09/02/14: SWKS saw some profit taking after Friday's rally to new highs.

I am not suggesting new positions at this time.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

- Suggested Positions -

Long SWKS stock @ $52.65

- (or for more adventurous traders, try this option) -

Long Nov $55 call (SWKS141122C55) entry $2.86

08/30/14 new stop @ 52.45
08/13/14 new stop @ 49.95
08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike

Tekmira Pharmaceuticals - TKMR - close: 20.12 change: -1.28

Stop Loss: 19.70
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.5 million
New Positions: Yes, see below

09/02/14: TKMR did not see any follow through on Friday's bounce. Aggressive traders might want to consider bullish positions if TKMR trades above $20.75 (based on the action on the intraday chart today). Officially we'll stay with a trigger at $22.30 for now.

Earlier Comments: August 30, 2014:
Biotech stocks have been some of the market's best performers this year. The BTK biotech index is up +34.3% year to date. The IBB biotech index is up +21.8%. Big name players like GILD and their $84,000 Sovaldi cure for hepatitis C has captured the imagination for investors. Meanwhile another story is making big waves in the biotech industry and that is the world's worst outbreak of Ebola.

Ebola is an extremely deadly virus. The virus is one of several Viral Hemorrhagic Fevers. According to the CDC, this virus was discovered back in 1976 "in what is now the Democratic Republic of the Congo, near the Ebola River." There are a handful of subspecies of the virus, which can have a 50% to 90% fatality rate. There is no known effective cure. Another challenge is the time frame. A person can be infected for eight to 21 days without showing any symptoms. Once they start showing symptoms they become contagious. Unfortunately, the early symptoms are pretty common like headaches, sore throat, a fever, muscle soreness.

Right now four countries in Africa are facing a serious crisis. Guinea, Liberia, Nigeria, and Sierra Leone have all reported deaths from the current outbreak that has killed over 1,750 confirmed cases and suspected cases of more than 3,000. The U.N. just warned that the outbreak is accelerating beyond control and cases could surge to more than 20,000. TKMR has been getting a lot of trader attention because the company is working on a potential Ebola treatment.

According to the company website, "Tekmira Pharmaceuticals Corporation is a leading RNA interference (RNAi) therapeutics company. With more than 14 years of industry experience, Tekmira is a global leader in the RNAi field. We are developing novel drugs in areas where there is a significant unmet medical need and commercial opportunity. We also license our leading lipid nanoparticle (LNP) delivery technology to partners around the world."

Right now investors are looking at TKMR for its potential Ebola drug (TKM-Ebola). In March this year the U.S. FDA gave TKM-Ebola fast track status to develop and test this new treatment. TKMR has cautioned that this is still in development and they want to work with W.H.O. and the F.D.A. and the emergency labs currently working to develop some kind of treatment for the African Ebola Outbreak. It could be weeks or months before we know more.

As traders we should consider this an aggressive, higher-risk trade due to TKMR's volatility and the nature of headline risk.

The stock bounced near round-number support in the $20.00 area on Friday. Aggressive investors may want to jump in right now at current levels. We're suggesting a trigger to open small bullish positions at $22.30, just above last week's high.

Trigger @ $22.30 *small positions*

(this is an aggressive trade)

- Suggested Positions -

Buy TKMR stock @ $22.30

Ubiquiti Networks - UBNT - close: 46.68 change: +1.32

Stop Loss: 43.90
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Entry on September 02 at $46.75
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 902 thousand
New Positions: see below

09/02/14: The early morning market rally helped shares of UBNT soar to new multi-week highs. The stock hit our suggested entry point at $46.75 before paring its gains. Traders did buy the dip midday near $45.80, which is a good sign. I would still consider new positions now at current levels.

Earlier Comments: August 26, 2014: UBNT is in the technology sector. The company operates in the wireless technology and networking industry. According to the company press release, "Ubiquiti Networks is closing the digital divide by building network communication platforms for everyone and everywhere. With over 20 million devices deployed in over 180 countries, Ubiquiti is transforming under-networked businesses and communities. Our leading edge platforms, airMAX, airFiber, UniFi, UniFi Video, UniFi VoIP, mFi and EdgeMAX combine innovative technology, disruptive price performance and the support of a global user community to eliminate barriers to connectivity."

The company has been consistently beating earnings estimates. They just wrapped up their fiscal year 2014 with the earnings report on August 7th, 2014. The company managed to beat estimates all four quarters. Their 2014 Q4 numbers showed sales up +54% from a year ago while EPS were up +70%.

It has been a rocky year for the stock price in spite of the company's earnings track record. If you recall the stock market suffered a pullback in March this year. The high-growth stocks and momentum names were hit pretty hard. UBNT was one of those that was punished and shares collapsed from $55 to $30 over the next several weeks. Since then UBNT has been slowly recovering.

Right now the stock is on the verge of breaking through resistance. A new breakout could spark some short covering. The most recent data listed short interest at 32% of the small 26.6 million share float.

We are suggesting a trigger to open bullish positions at $46.75.

- Suggested Positions -

Long UBNT stock @ $46.75

- (or for more adventurous traders, try this option) -

Long OCT $48 call (UBNT141018C48) entry $2.10*

09/02/14 triggered @ 46.75
*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

WhiteWave Foods Co. - WWAV - close: 35.32 change: +0.30

Stop Loss: 32.90
Target(s): To Be Determined
Current Option Gain/Loss: +1.2%
Entry on August 19 at $34.91
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

09/02/14: WWAV displayed relative strength with a +0.85% gain and a new all-time closing high.

Tonight we'll raise the stop loss to $32.90. I am not suggesting new positions.

Earlier Comments: August 16, 2014:
Consumer tastes and buying habits are changing and more people are opting for more natural and organic foods.

WWAV is in the consumer goods sector. You might not recognize the name but they're behind brands like Silk, Horizon Organic, Land-O-Lakes, International Delight, Alpro, and Earthbound Farm Organic.

WWAV considers themselves "a leading consumer packaged food and beverage company that manufactures, markets, distributes, and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce throughout North America and Europe. The Company is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products. The Company's widely-recognized, leading brands distributed in North America include Silk plant-based foods and beverages, International Delight and LAND O LAKES* coffee creamers and beverages, Horizon Organic premium dairy products and Earthbound Farm' certified organic salads, fruits and vegetables. Its popular European brands of plant-based foods and beverages include Alpro and Provamel" (The Land-O-Lakes brand is licensed from the owners).

If you're looking for a company that is growing then keep an eye on WWAV. They have beaten Wall Street's estimates on both the top and bottom line at least four quarters in a row. The last three quarters management has been raising their guidance. In Q4 2013 WWAV's revenues were up +11.5%. The first quarter of 2014 saw revenues soared +36.5%.

Their latest report was August 7th. Analysts were looking for a profit of $0.22 on revenues of $815.6 million. WWAV delivered a profit of $0.23 with revenues climbing +39.5% to $837.9 million.

The natural and organic retailers might be facing tougher margins and stronger competition (WFM, SFM, TFM, NGVC) but that doesn't seem to be the case for a producer and distributor like WWAV.

You can see the big surge in the stock price on August 7th as traders reacted to the bullish earnings news and guidance. After consolidating gains the last few days shares of WWAV have started to push higher again. They have been outperforming the major market indices and WWAV closed at a new all-time highs on Friday.

We believe the rally continues but I am labeling this a more aggressive, higher-risk trade due to WWAV's recent volatility. The last several weeks have seen some significant swings.

Friday's intraday high was $34.06. We're suggesting a trigger to open bullish positions at $34.15.

- Suggested Positions -

Long WWAV stock @ $34.91

- (or for more adventurous traders, try this option) -

Long OCT $35 call (WWAV141018C35) entry $1.70*

09/02/14 new stop @ 32.90
08/19/14 trade opens on gap higher at $34.91, suggested entry point was $34.15.
*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

BEARISH Play Updates

Mobile Mini, Inc. - MINI - close: 38.71 change: -0.46

Stop Loss: 41.40
Target(s): To Be Determined
Current Option Gain/Loss: + 0.2%
Entry on August 28 at $38.80
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 265 thousand
New Positions: see below

09/02/14: The weakness in MINI continues with a -1.1% decline. I would consider new positions at current levels.

Earlier Comments: August 27, 2014:
The mobile storage space might be facing some headwinds. MINI provides commercial storage, construction storage, residential storage, and mobile offices. According to the company's website, "Mobile Mini, Inc. is the world's leading provider of portable storage solutions through its total lease fleet of over 213,000 portable storage and office units with 135 locations in the United States, United Kingdom and Canada. Mobile Mini, Inc. went public in 1994 and trades on NASDAQ under the symbol MINI. Mobile Mini offers customers a wide range of portable storage and office products in varying lengths and widths with an assortment of differentiated features such as: proprietary security systems, multiple door options and 100 different configuration options."

Sales are growing but MINI is developing a trend of missing earnings or delivering lackluster results. MINI missed Wall Street's EPS estimates back in February and April. The latest earnings report was July 30th. Revenues were almost +10% from a year ago but earnings were down. MINI reported a 23-cent profit, which was in-line with estimates but down from 25 cents a year ago. Investors crushed the stock following the late July earnings report. MINI was already weak through most of July and then got hammered from $43 to under $38 on its earnings news.

The stock's long-term up trend might be in jeopardy. The company is not growing fast enough to justify its P/E above 40. The stock's oversold bounce from the post-earnings sell-off has stalled at technical resistance at the exponential 200-dma. Now it appears that MINI is beginning to roll over.

Today's low was $38.93. I'm suggesting a trigger at $38.80 to open bearish positions.

- Suggested Positions -

Short MINI stock @ $38.80

08/28/14 triggered @ 38.80

Natural Grocers by Vitamin Cottage - NGVC - close: 18.54 chg: +0.09

Stop Loss: 20.10
Target(s): To Be Determined
Current Option Gain/Loss: +4.7%
Entry on August 12 at $19.45
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 209 thousand
New Positions: see below

09/02/14: Tuesday was a relatively quiet session for NGVC. I am not suggesting new bearish positions at this time.

More conservative investors might want to lower their stop loss again.

Earlier Comments: August 11, 2014:
The last six to nine months have not been good for the natural food and organic-related retail chains. Whole Foods (WFM), The Fresh Market (TFM), Sprouts Farmers Market (SFM), and Natural Grocers have all underperformed the market by a wide margin.

According to NGVC's press release the company was "founded in Colorado by Margaret & Philip Isely in 1955, Natural Grocers was built on the premise that consumers should have access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has since grown into a successful national chain with locations across Colorado, Texas, Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona and Oregon, and employs over 2000 people. Although the company went public in July 2012, Isely family members continue to manage the company day to day, building on the foundation of their parents' business."

The good news is that the natural food and organic food craze is reaching a wider audience and more and more consumers are making healthier choices. The bad news is that this previously higher-margin business, in a notoriously low-margin industry, has drawn tons of competition. That has been the biggest challenge. Big players like Wal-mart and Target in addition to major regional grocery chains are all starting to offer more natural and organic wares. Meanwhile those already in the space are competing with each other as well. Margins are shrinking as competition heats up.

Shares of NGVC plunged back in May after the company lowered its same-store sales forecast for 2014. The stock dropped again on August 1st following its earnings report. Earnings were in-line with estimates but guidance was soft.

The path of least resistance is down and NGVG looks headed for its all-time lows in the $17.00 area.

The biggest risk with this bearish positions on NGVC is the crowd. There are a lot of investors already bearish on this stock. The most recent data listed short interest at 33.3% of the very, very small 5.1 million share float. That significantly raises the risk of a short squeeze.

We are suggesting bearish positions with a trigger to short NGVC at $19.45 but I am labeling this an aggressive, high-risk trade. NGVG does have options but most of the option spreads are too wide. We will try and limit our risk with a stop loss at $21.05.

*Aggressive Trade* Use small positions. - Suggested Positions -

short NGVC @ $19.45

08/21/14 new stop @ 20.10
08/12/14 triggered @ 19.45

Papa John's Intl. Inc. - PZZA - close: 39.89 change: +0.29

Stop Loss: 40.25
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Entry on August 25 at $39.56
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 368 thousand
New Positions: see below

09/02/14: Shares of PZZA are not cooperating so we're taking a more defensive approach. Tonight we're moving the stop loss down to $40.25.

Earlier Comments: August 23, 2014:
Papa John's was founded back in 1985 and headquarter in Louisville, Kentucky. They have grown into the planet's third largest pizza delivery company. There are over 4,400 Papa John locations in all 50 U.S. states and 35 countries. The good news for PZZA has been their international growth. They're growing in the U.S. as well but international growth has been outperforming.

Last year was a banner year for the stock price. Shares virtually doubled from their 2013 low to their December 31st close. The rally kept going in 2014. However, momentum reversed in March when many of the momentum names were crushed. PZZA suffered a multi-week hammering with a drop from $55 to $40. Since then stock has struggled.

One of the biggest challenges for restaurant stocks has been food inflation. Food prices have been climbing sharply the past several months. In the U.S. food inflation is running about +20%. A lot of that is due to surging prices in meat, eggs, and dairy. Guess who uses a lot of cheese? PZZA does.

PZZA's earning trend has been shaky. They missed earnings last November. February's report was only in-line with estimates. May's announcement missed estimates. Their most recent earnings report was August 5th. Wall Street expected a profit of $0.42 a share on revenues of $384.8 million.

PZZA delivered a profit of $0.40 with revenues up +9.1% to $380.9 million. That's a miss on both counts. The company said same-store sales in North America were up +6% and overseas up +8.6%. That looks healthy. Yet their 40-cent profit lines up with a 39-cent profit a year ago. Sales are up but profits are flat? The biggest culprit is probably rising ingredient costs. Management did raise their 2014 guidance but even after they raised guidance it was still below Wall Street's consensus.

The company is still expecting relatively decent sales growth but it doesn't seem to be fast enough to satisfy Wall Street. The recent breakdown under support near $40.00 is bearish. The point & figure chart is bearish and forecasting a $32 price target.

Tonight we are suggesting bearish positions immediately. We're not setting an exit target yet. I will point out potential support on the weekly chart (see below). The path of least resistance for PZZA definitely looks lower.

FYI: PZZA does have options but the spreads are too wide to trade them.

- Suggested Positions -

Short PZZA stock @ $39.56

09/02/14 new stop @ 40.25
08/25/14 trade begins. PZZA gaps higher at $39.56

Transocean Ltd. - RIG - close: 37.98 change: -0.67

Stop Loss: 40.01
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: Yes, see below

09/02/14: It would appear that the bounce in RIG is rolling over after failing multiple times under the $39.00 level. We want to take advantage of today's relative weakness (-1.7%) and launch new bearish positions immediately at the opening bell tomorrow.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

- Suggested Positions -

Short RIG @ (at the opening bell, Sept. 3rd)

- (or for more adventurous traders, try this option) -

Buy the OCT $35 PUT (RIG141018P35)

09/02/14 remove the trigger ($37.25) and short RIG now at current levels.
Option Format: symbol-year-month-day-call-strike