Option Investor
Newsletter

Daily Newsletter, Saturday, 8/4/2012

Table of Contents

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

Market Wrap

Oversold to Overbought

by Jim Brown

Click here to email Jim Brown

Oversold conditions were met by new headlines from Europe and a stronger than expected payroll number resulting in yet another short squeeze.

Market Statistics

The Dow declined the first four days of the week with a total decline of nearly 200 points. Friday's short squeeze erased that loss in about 30 minutes and the Dow ended with a +20 point gain for the week. Four days of headline dodging ended with surprise headline on jobs that could not be ignored.

However, the S&P futures were already up +13 points when the payroll report was released. The futures spike was due to further headlines out of Europe suggesting the Mario Draghi announcement after the ECB meeting was actually more bullish than initially expected. I won't go into the details but essentially analysts are now expecting some real action from the ECB in the coming weeks.

After further review of the post meeting comments from various officials the EU could grant banking licenses to the EFSF and ESM in about three to four weeks. That would supersize those funds and allow them to greatly leverage their capital and enable far more firepower to be brought to bear as needed. Officials in Germany helped fuel the rally after making comments that seemed to suggest they would drop their objections to the ECB plan. That buoyed the markets overseas and lifted our futures ahead of the payroll report. Remember, Draghi said the ECB would do "whatever is necessary" to preserve the eurozone. He did not say he would do it "right now" but after the ECB meeting he promised changes in the "coming weeks." Time will tell if he is right.

The Nonfarm Payroll report for July showed +163,000 jobs added compared to estimates for a gain of +100,000 jobs. Prior numbers for May and June were also revised. May was revised +10,000 higher to a gain of +87,000. June was revised lower by -16,000 to a gain of only +64,000. Those revisions lowered the average job gain for the prior three months to +73,000. Odds are very good the July number will be revised as well.

This was the largest jobs gain since February but there were some negatives as well. The unemployment rate rose by a tenth of a point to 8.3% because the separate Household Survey showed a loss of -195,000 jobs in July. More people joined the labor force and drove the labor participation rate down a tenth to 63.7%. An average of 150,000 new workers are added to the labor pool every month from immigration and graduations.

Analysts were quick to point out that the report included normal seasonal adjustments for automakers shutting down to retool for the new models, which they normally do in July. That did not happen this year as regularly scheduled so the adjustment actually added as many as 20,000 jobs to the total that really don't exist. Those will be revised out at a later date.

Education and healthcare normally adds about 20,000 to 30,000 jobs per month. In June they only added 6,000 ahead of the Supreme Court ruling on healthcare. In July the number of those jobs added spiked to 38,000, which inflated the July headline number. The sudden spurt suggests the hiring delayed by the verdict was accelerated after the verdict and there will probably not be an equivalent addition in August.

Analysts agree that August hiring will probably drop back to the 100,000-120,000 range once all the adjustments and onetime events are removed.

Nonfarm Payroll Chart

There was a lot of speculation on Friday that the jump in payrolls will keep the Fed on hold until at least the mid September FOMC meeting. I am in agreement with that consensus. I did not believe the Fed was going to act. I reported last week that "some analysts believe the Fed could act as soon as Friday" or possibly delay until Monday if the Jobs report was ugly. I believe they could have been induced to act if jobs had been negative. However, I believe it will take overwhelming evidence the economy is worsening before the Fed acts this close to an election.

I think Bernanke will try to talk the equity markets up and interest rates down when he speaks at the Fed's Jackson Hole conference on August 31st. He used that speech in 2010 to tell the markets that QE was coming. He can use it again to telegraph future moves later this year if needed. With the FOMC meeting two weeks after the Jackson Hole speech there will be high anxiety surrounding that meeting if he "suggests" policy is about to change.

The Monster Employment Index did not reflect the same jobs bullishness as the Nonfarm Payrolls. The index, released on Friday, saw the headline number fall from 153 to 147 for July, a decrease of -3.9%. The index tracks the number of online help-wanted ads. Job ads always decline in the summer because of vacations so this report was ignored.

Moody's MEI Chart

Another positive report on Friday was the ISM Nonmanufacturing Index. The headline number rose slightly to 52.6 from 52.1. Analysts had expected it to be either flat or down. The new orders component rose a point to 54.3 but employment declined -3 points to 49.5 and into contraction territory. Backlogs declined -3 points to 44.5 and well into contraction territory as well. Backorders have fallen -8.5 points in just the last two months. The overall business activity component surged from 51.7 to 57.2 and possibly suggesting the index will rise again in August.

The ISM Manufacturing report from earlier last week was 49.8 and the second month in contraction territory. Services had been doing better but with auto sales declining the service business could suffer in the month ahead.

ISM Services Chart

The economic calendar last week contained some major events creating volatility in the markets but the major indexes ended flat on the week. The economic calendar for next week has nothing of importance to attract attention of traders. There is nothing on the list that I could highlight as a material event.

That means traders will be left to trade on headlines out of Europe and the slowing frequency and quality of Q2 earnings reports. That suggests stock fundamentals are going to rise to the surface again and those have not been too favorable in recent weeks.

Economic Calendar

The Q2 earnings cycle will begin to wind down next week as the majority of companies have already reported. So far in the cycle 67% have beaten on earnings and 60% have missed on revenue. More than 64% have warned on future guidance. That is not a glowing recommendation to buy stocks next week.

August has been the weakest month for the S&P over the last 20 years. Volume is going to decline even further as the summer vacation season comes to a close. Traders who have not yet squeezed in that family vacation will have only a couple weeks left before the kids are forced to pick up the schoolbooks again in late August.

Volume on Friday, with a +250 point Dow intraday move, was only 6.3 billion shares. That was on a major market move where millions of stop losses were hit and shorts forced to cover. This is very weak volume for that kind of move. Up volume was 5:1 over down volume for obvious reasons. It was a monster short squeeze just like the nine others we have seen since June 6th. If it were not for the short squeezes we would have had no upward movement in the market. That makes a pretty strong case for contrarian investing after 4-5 days of losses.

One stock that will be praying for a massive short squeeze will be Knight Capital Group (KCG). Knight is one of the largest market makers in the business. Knight cleared an average of $19.5 billion in equities every day in June. They averaged clearing 711 million shares every day.

A software error on Wednesday morning caused their computers to spew out erroneous orders for about 45 minutes before the program was halted. About 140 symbols were impacted but trades were only canceled for less than a dozen. Knight has to cough up $440 million to cover the bad trades. This compares to a net income for Knight of $115 million for all of 2011. Knight was forced to ask Goldman Sachs (GS) to bail them out of the Wednesday disaster and buy them out of all the positions they accidentally accumulated. Knight has until August 6th to complete payment for all of those transactions. Goldman has contracted with Knight to assume those liabilities and fund the shortfall. (Info based on multiple reports but still unconfirmed) Knight confirmed on Friday they had secured a short term credit line to keep them running through Friday.

Multiple names were being rumored as possible new partners or acquirers of Knight Capital. Ameritrade, Citadel and even Goldman were mentioned as well as several private equity firms. Goldman has $375 million in Knight bonds that just imploded so they have a vested interest in seeing the company succeed. In the past Knight's market cap was as high as $4.8 billion in 2000. Last week it was $1 billion and on Thursday it was $330 million and less than the amount they owed on the trades. Late Friday it was rumored that bond trading firm Cantor Fitzgerald or Jefferies Group could be the new owners or partners on Monday.

Knight shares fell from $10.38 at Wednesday's open to $1.85 late Thursday and losing 82% of their value. They rebounded 56% on Friday but that was 56% from a much lower level to only get them back to $4. So, what do you think that programmer will put on his resume when looking for his next job?

Knight Capital Chart

Earnings are still a focus with some companies posting results that surprise investors. EOG Resources (formerly Enron Oil and Gas) spiked 11% on Friday after posting earnings of $1.16 a rise of +34% and beating consensus estimates by 24 cents. EOG increased liquids production 52% in Q2 and they raised their full year guidance for +9% production growth. The company said it was going to drill 30 more wells this year than initially planned to bring the total to 330 and do it with 4 less rigs thanks to increased efficiencies. The company bragged on its Eagle Ford wells that produced 103,000 boe/pd in Q2 saying the Eagle Ford may be the largest North American oil discovery in the last 40 years. EOG shares rallied +11% on the news.

EOG Chart

Facebook did something unusual on Friday. Its shares actually posted a gain for the day. After trading below $20 on Thursday the market short squeeze rubbed off on Facebook and the shares were up +$2 at one point before closing with a gain of +1.05. Sellers were quick to pounce on that bounce with analysts beating up the stock on a daily basis. Mark Hulbert was on CNBC reiterating his price target of $13.80 based on a variety of factors including the 268 million shares coming to market on August 15th. Hulbert is not the only one with a low target price. There are plenty of detractors for Facebook today.

We also found out last week that as many as 85 million Facebook accounts are bogus. That suggests their growth numbers for new accounts could be misleading.

Facebook Chart

The Nasdaq (NDAQ) warned late Friday that is expects to be hit by "significant additional expenses" from the Facebook IPO problems. Additional costs from nine lawsuits and costs associated with implementing technical changes would lead to the expenses. Nasdaq has put aside $62 million to cover its voluntary reimbursement program. The company remains adamant that the suits are "meritless" and refuses to put aside any legal reserves for the suits. The Nasdaq CEO said the $62 million voluntary reimbursement program is the company's "final offer." Good luck with that line of thought Mr. Greifeld.

Nasdaq Chart

Jefferies Group has reportedly confirmed from a number of sources that Apple will hold an announcement event on September 12th. Jefferies believes this will be the iPhone 5 announcement with deliveries beginning almost immediately. Jefferies believes an iTV and iPad Mini announcement will be held at a later date. Jefferies has a $800 price target on Apple. Remember, Apple normally rallies into these events and then declines immediately after in a sell the news bout of profit taking. Whether that will happen this time remains to be seen.

Apple Chart

The two charts below are not some psychological brain teaser. The top one is the Euro with a whopping +1.61% gain on Friday. The bottom is the dollar index and a -1.2% decline. These are monumental moves for currency traders representing many thousands of dollars per contract. The Euro rallied on expectations the ECB could reactivate its program to buy bonds of peripheral countries to drive rates lower. It was a double whammy for currency traders. I hope you were long the euro and short the dollar and not the opposite.

Euro Chart

Dollar Index Chart

The rapidly crashing dollar plus the better than expected jobs sent crude prices roaring higher to the tune of a +5% gain. That is a monster move that I am sure had plenty to do with shorts getting crushed in the futures. The WTI contract settled at $91.39 and above the $90 resistance from the last two weeks. The Brent contract only rallied +2.6% but that was enough to push it to a new two month high at $108.71. Energy equities were soaring along with crude.

WTI Crude Chart

Brent Crude Chart

Gold rallied +1% but remained stuck in its recent congestion range under $1630. Gold has lost its luster recently as the safe haven investment because the U.S. continues to muddle along at around 2% GDP as Europe continues to kick the can down the road and it appears most days that they will resolve their problems. Obviously appearances can be deceiving but until the next major liquidity event arrives gold is probably stuck in a rut between $1550-$1630.

Gold Chart

Gold Chart - Weekly

Late on Friday AIG was halted for trading, news pending. The Treasury Dept said it was going to sell 163.9 million shares of AIG in a public offering for $30.50 each ($5 billion). Underwriters have the option to buy 24.6 million additional shares for over-allotments. The Treasury Dept currently owns 61% of AIG, down from 92% at the end of the financial crisis. This offering will reduce the government stake to 55%. AIG is still the biggest holding of the TARP program. Immediately after the announcement AIG said it would buy $3.0 billion of those shares in the offering. The government said it would like to be a minority shareholder by year end. AIG shares closed at $31.35.

AIG Chart

Bill Gross, head of Pimco, made news last week saying that stocks are dead as an investment vehicle. He wrote "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors impressions of 'stocks for the long run' or any run have mellowed as well." Gross added his name to a growing list that believe stocks as an asset class are fading. The global economic problems may be impacting them now but the real challenge is the aging of the baby boomers. As they approach retirement they are less and less acceptable to risk and will continue moving investments from stocks to bonds for the long term. They can't afford any additional 50% bear markets like we saw in the Great Recession. Time is not on their side.

David Rosenberg, economist and strategist at Gluskin Sheff, said on Monday "the equity cult is nearly over." The common terminology comes from Wharton professor Jeremy Siegel. He has used that term over the last 20 years to promote his believe in consistent returns in stocks over the long haul.

For whatever reason investors pulled $9.4 billion out of equities in the week ended on Wednesday and piled that money into high yield bond funds. TrimTabs.com CEO, Charles Biderman, went 100% bearish this week saying the Black Swan is aloft and ready to kill the Bernanke put. Biderman is an economic bear and pointed out that the government spends $100 billion a month more than it takes in and borrows the difference and eventually this debt is going to kill the stock market. Biderman Video

While I am posting links this is an interesting letter from Jeremy Grantham on the growing global crisis of food and water. Have your kids and grandkids read this. Welcome to Dystopia

The equity markets did not rally +200 Dow points on the nonfarm payroll numbers. The S&P futures were flat with Thursday's close until 2:AM Friday morning and the European markets began to rally on additional comments about the Draghi proposals. High officials in Germany suddenly started warming up to the idea of bond buying by the ECB and possibly a banking license for the bailout funds. It also appeared that Spain may be considering an official request for a bailout. Why that would be bullish I don't know but yields for sovereign debt in Europe began to fall rapidly and equities moved higher. That was translated into the S&P futures and they were up +13 points before the Nonfarm Payrolls were even released.

Investors were already in for a giant short squeeze and the positive payroll report only increased that anxiety to get out of short positions immediately at any cost.

S&P Futures - Intraday Chart

The S&P rallied to resistance at 1392 and failed. There was a short spike to 1394 but it was quickly sold, twice. The initial intraday high was at 12:00 and each succeeding peak was a lower high with a sharp sell off at the close. I guess "sharp" is relative since the S&P gained +26 points and closed only -4 points off its highs.

Intraday support appeared at 1389 and we are a long way above that 100-day average at 1359 that has been a factor several times recently. That was support on Thursday's decline and I am sure it will be a speed bump again if we have another sell off.

The next resistance level is 1406 followed by 1422.

S&P Intraday Chart

S&P Chart - Daily

The Dow returned to the scene of the crime from the prior Friday when the short squeeze lost traction at 13,125. That level also proved to be troublesome on the second try and the index is setup for a potential decline again next week.

If the Dow does move over 13,125 it would trigger additional technical buying that would probably take us to a retest of 13,300.

Dow 12,800 is initial support.

Dow Chart - 30 Min

Dow Chart - Daily

The Nasdaq rallied +2% to a screeching halt at the 61% Fib retracement level for the third time since early July. This has proved to be a major resistance level at 2,978. The next test would be 3,000 if this level breaks. Near term support is 2,900 but that is a good two days away even if the selling was moderate.

Nasdaq Winners and Sinners

Nasdaq Chart - Daily

The Russell 2000 small caps rallied +2.6% BUT they are still well below the other indexes in relative position. The Dow and S&P are trying to break out to new highs and the Russell is stuck at the 50% retracement level at 788. The small caps are telling us that the rally has no legs. The strong rebound in the Russell came from Thursday's close below 770 and very close to a five week low.

The Russell was the most heavily shorted index so it rebounded the most in percentage terms but remains weak overall.

Russell Chart - Daily

The Dow Transports are not confirming the rebound as a bullish event. Like the Russell they are seriously lagging and if it were not for short covering there would have been no rally at all. The Transports hit a critical intraday low on Thursday at 4950 before rebounding. Note the series of lower highs on the chart since early July. This is bearish.

Dow Transport Chart

Last weekend I said we would probably finish this week lower unless we got a sharply higher payroll number. I was close and as of Thursday night the prediction was on track. We did get the higher payrolls but that was not the key to the short squeeze. It was the changing outlook in Europe so I was close but not quite right.

I also said my bearish outlook was clouding my judgment. This week the facts are clouding my judgment. Disregarding the payroll numbers the economics are still weak. Europe is still lacking a plan and is very short on action. By all rights the markets should be weak. August is historically the weakest month of the year over the last 20 years.

HOWEVER, yes all caps, I am very close to an about face. When the markets refuse to acknowledge the facts we should always go with the market. I have been bearish on every bounce for the last month. Sell offs always occurred but they were followed by higher highs and higher lows. Cleverly hiding behind the poor earnings and weak economics was a market that did not want to go down. Traders and analysts are trying to push it down but they have been unsuccessful.

When in doubt follow the trend. The trend here may be hard to see but it is up. After a lot of soul searching I am applying the law of election dynamics to the current trend. This is an election year. Despite the negative economics and earnings we have a positive market where none should exist. It may be time to quit selling the rips and buy the dips.

I do NOT think the market is going to go straight up. I believe it will remain volatile and hostage to the headlines but as long as we keep making higher lows we should just plan on buying those lows. If we move higher on Monday then I would expect a temporary failure at 1406 on the S&P and eventually another dip to buy.

Since I am trading my fur coat for a pair of horns the market is sure to tank next week. I welcome any decline because it gives me a chance to test my theory. I would like to see one more decent bout of selling that ended in the 1330 range or above.

Last Monday was the ninth consecutive Monday the market posted a loss. Will this Monday make it ten in a row? The odds are good given the monster squeeze. What happens the rest of the week is up to the headlines.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Even if you’re on the right track, you’ll get run over if you just sit there."
Will Rogers


New Plays

Roasted!

by Jim Brown

Click here to email Jim Brown

Editor's Note:

Shorts were roasted in this stock last week but in the end they will have the last laugh.

Green Mountain Coffee Roasters (GMCR) has been the shorting target of quite a few high profile hedge funds and institutions. The stock traded as high as $115 last September and could trade down to $15 this December.

Shorts were roasted on Thursday when GMCR announced better than expected earnings. However, the follow on information including guidance warnings, SEC inquiries, rising inventory and negative cash flow would appear to be an invitation to reload those shorts in anticipation of lower lows.

The market squeeze on Friday elevated many heavily shorted stocks back to initial resistance where the squeeze lost traction. That is true for the market as well. The S&P rallied to prior resistance of 1392 before stalling. The Dow rallied +250 intraday but gave back -61 points before traders covered remaining shorts into the close.

I expect the markets to start off negative on Monday unless there is some new rumor from Europe. Monday's have posted losses for the last nine consecutive weeks. Eventually that trend will end but with Friday's stall at resistance we should at least begin Monday in negative territory.

James will be back from vacation on Monday


NEW BULLISH Plays

No new Longs today


NEW BEARISH Plays

GMCR - Green Mountain Coffee - close: 21.63 change: -1.03

Stop Loss: 24.35
Target(s): 18.00
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
Entry on August 6 at $ xx.xx
Earnings Date 08/2/12
Average Daily Volume = 9.7 Million
Listed on August 4, 2012
New Positions: Yes, see below

Company Description

Why We Like It:
GMCR has turned into another stock that traders love to hate. It was trading at $115 last September and $21 today and that is after a +$6 spike on Thursday. The stock traded under $18 for much of July.

The spike on Thursday was due to slightly better than expected earnings. Those earnings had been revised lower so posting a surprise was not that hard. They earned 52 cents in Q2 which was only a +6% gain over the year ago quarter. In the prior quarter they increased earnings by 33% so you can see the progression.

Revenue rose +21% to $869 million but the +37% growth rate for the prior quarter declined to +31% in Q2. That may not seem like a major decline but it gets worse. The company cut its guidance for both revenue and earnings for the rest of the year.

They now project only 15-20% revenue growth compared to the mid to high double digits of prior years when growth was over 50% or even 70%. The business is definitely declining as their competition increases and their patents on the k-cups expire.

Not commonly reported in the press the company booked $2.99 million in charges for the quarter related to an SEC inquiry into their accounting practices. There was no mention if the inquiry was completed or ongoing. I suspect if it had been completed they would have been eager to announce it and remove the cloud.

Also, inventory grew by 60% in the quarter. For a company where sales are slowing it seems strange they would let inventory increase that rapidly.

They also announced they would likely have NEGATIVE free cash flow during 2012 but generate $100-$150 million in 2013. Again, exactly how are they going to do that with the business declining so rapidly?

In a grasping at straws effort they announced a $500 million share repurchase. Makes you wonder where they are going to get that cash since they are going to be cash flow negative for 2012. Of course announcing a share repurchase and actually carrying it out are two different things. The announcement may boost your stock temporarily but if you don't buy shares it will only be a temporary bounce.

I think the spike on Thursday was a simple post earnings short squeeze and Friday's minimal loss was the result of the market squeeze.

I am recommending we enter the position on any decline from the present level at $21.63.

Trigger: GMCR must be negative to enter the trade.

Suggested Position: Short GMCR stock @ $21.60, target $18.00

OR

Buy GMCR Sept $20 Put, currently $1.51.

GMCR Chart


In Play Updates and Reviews

Friday the 13th

by Jim Brown

Click here to email Jim Brown
It was actually Friday the 3rd but it felt like the 13th with heavily shorted stocks seeing sharp rebounds.

Editor's Note:

We remain hostage to headlines from Europe and for the second consecutive Friday we saw heavily shorted stocks rebound significantly on no individual news but on rumors from Europe.

Hewlett Packard and Red Robin were stopped out and several other short positions gave up sizeable gains from the Thursday decline. Most of those positions were at or near 52-week lows at the close on Thursday and heavily shorted.

The rebound is just a trading reality that traders close positions first and ask questions later when the futures are up +20 points at the open. It is a defensive reaction called fight or flight. When you can't fight anyone you flee quickly.

The MGM play should be closed on Monday at the close due to earnings scheduled for Tuesday morning.

I dropped Focus Media (FMCN) as I warned on Thursday as it continues to creep higher despite the market. I will suggest to James that he consider it as a long position next week. When stocks fail to decline in a bad market that is a sign they will run when the market turns around.

I changed the stop losses on the stocks in yellow on the portfolio graphic.

James is on vacation this week but will be back on Monday.

Current Portfolio:


BULLISH Play Updates

Jarden Corp. - JAH - close: 47.54 change: +.69

Stop Loss: 46.50 (new)
Target(s): 49.00
Time Frame: 6 to 8 weeks
Earnings Date 07/24/12
Average Daily Volume = 652 thousand
Listed on July 26, 2012
New Positions: Yes, see below

Company Description

Update 8/04/12:
Another nice gain in Jarden. On Wednesday evening S&P announced they were adding Jarden to the S&P Midcap 400 at the close on August 7th. No complaints here. I raised the stop loss again to $46.15.

When these kind of additions take place there is typically a run up into the announcement as speculators try to front run the funds. The day after the actual addition the stocks usually sell off as excess stock bought on speculation is sold. I suggest we close the JAH position at the open on Tuesday or $49 whichever comes first.

Our multi-week target was $49.00.

Position: Long JAH Stock @ $45.55 on July 27th.

JAH Chart


Sandisk Corp. - SNDK - close: 40.75 change: -.68

Stop Loss: 40.35
Target(s): 50.00
Time Frame: 4 to 6 weeks
Entry on July 30 at $ 42.75
Earnings Date 07/20/12 (past)
Average Daily Volume = 4.5 Million
Listed on July 28, 2012
New Positions: Yes, see below

Company Description

8/04/12 update:
Sandisk still battling resistance at $42 after Monday's spike triggered the entry into the play at $42.75 followed by an immediate collapse back into a consolidation pattern. Initial support at $40.65 appears to be solid. Remember, the market was actually down the first four days of last week and Sandisk did not decline. A positive market should produce a breakout over that $42 level.

No news. No change in play.

Trigger @ 42.75 hit 7/30/12

Suggested Position:

Long SNDK stock @ $42.75

OR

Long SNDK Sept $44 Call, @ $2.28.

SNDK Chart


BEARISH Play Updates

Groupon, Inc. - GRPN - close: 6.57 change: +0.21

Stop Loss: 6.75
Target(s): 6.25
Entry on July 09 at $8.40
Time Frame: exit prior to the Aug. 13th earnings report
Earnings Date 08/13/12 (confirmed)
Average Daily Volume = 8.1 million
Listed on July 07, 2012
New Positions: No

Company Description

8/04/12 update:
After closing only 14 cents away from the exit target of $6.25 on Thursday we saw a small short squeeze on Friday but it was purely market related. That squeeze almost hit the stop loss at $6.75 but we escaped with a 2-cent margin. Maintain the exit target.

The exit target is $6.25.

Current Position: short GRPN stock @ $8.40

- or -

Long Aug $8.00 PUT (GRPN1218T8) Entry $0.80

08/02/12 lowered stop to $6.75.
07/27/12 lowered stop to $8.25.
07/18/12 readers may want to start taking some money off the table
07/12/12 new stop loss @ 9.05

GRPN Chart


MGM Resorts - MGM - close: 9.26 change: +0.26

Stop Loss: 9.65
Target(s): 8.10
Entry on July 23 at $9.69
Earnings Date 08/07/12 (confirmed)
Average Daily Volume = 8.9 million
Listed on July 21, 2012
New Positions: No

Company Description

8/04/12 update:
Big 3% short squeeze along with the market. Our time has run out on this position. They announce earnings on Tuesday before the open.

Exit this position at the close on Monday. Normally I would say exit at the open but I expect some retracement of Friday's short squeeze so we are likely to get a better fill at the close as traders flee the stock ahead of what could be an earnings miss.

current Position: short MGM stock @ $9.69

- or -

Long Aug $9.00 PUT (MGM1218T9) Entry $0.27

MGM Chart


EZCORP, Inc. - EZPW - close: 21.90 change: +0.07

Stop Loss: 22.85
Target(s): 20.05
Time Frame: 3 to 4 weeks
Entry on Aug 1st at $ 21.80
Earnings Date 07/24/12
Average Daily Volume = 381 thousand
Listed on July 26, 2012
New Positions: Yes, see below

Company Description

8/04/12 update:
The gap down on Thursday to a new 52-week low was followed by a big short squeeze on Friday right back to resistance. If the market gives back its big gains from Friday I expect EZPW to give back as well. No change in play.

Why We Like It:
You might think that with the U.S. economy struggling and unemployment still elevated that pawnshops would be doing strong business. Instead EZPW is struggling to meet its numbers. The company recently reported earnings and missed both the top and bottom line estimate. Furthermore management lowered their earnings guidance for 2012.

Now the stock is sitting on support at the $22.00 level. The June low was $21.91. I suggested a trigger to launch bearish positions at $21.80. Conservative traders can target a drop to $20.00. More aggressive traders could aim for the $18.00 level. The newsletter will plan on exiting at $20.05. FYI: The Point & Figure chart for EZPW is bearish with a long-term $10 target.

Trigger @ 21.80 hit on opening gap on Aug 2nd.

Suggested Position: short EZPW stock @ (trigger)

- or -

Long the Sep $20 PUT (EZPW1222U20) @ $0.50

EZPW Chart


CTrip.com. - CTRP - close: 12.51 change: -0.19

Stop Loss: 13.25
Target(s): 10.25
Time Frame: 4 to 6 weeks
Entry on July 30 at $ 13.15
Earnings Date 07/24/12
Average Daily Volume = 2.8 Million
Listed on July 28, 2012
New Positions: Yes, see below

Company Description

8/04/12 update:
Same story as the rest of the puts. Close at critical support on Thursday was met with a big +3.7% short squeeze gain on Friday. No news, no change in play.

The chart is really ugly and there is no real support until $10.

Trigger @ 13.15 hit 7/30/12 @ 10:40

Position: short CTRP stock @ $13.15

- or -

Long the Dec $12 PUT @ $1.10

CTRP Chart


Ingram Micro - IM - close: 14.50 change: +.05

Stop Loss: 15.25
Target(s): 12.00
Time Frame: 6 to 8 weeks
Entry on August 2nd at $ 14.60
Earnings Date 08/09/12
Average Daily Volume = 1.3 Million
Listed on August 1, 2012 New Positions: Yes, see below

Company Description

Update 8/04/12
Ingram spiked at the open on Friday but immediately rolled over to close with only a minimal 5-cent gain. I hope this lackluster performance is a preview of things to come.

Why We Like It:
Ingram is a technology company that sells all types of computer hardware and components. The hardware sector is very soft today. Companies are holding off on new purchases until they see how the election plays out and what happens to the fiscal cliff.

Ingram posted earnings this week of 39 cents that beat estimates by a penny. Revenue only rose +0.3% from the year ago quarter. Currency translation cost the company 5% of their earnings. The company used the Europe excuse for the lackluster earnings.

They also complained about product mix saying customers are buying cheaper products with lower margins. Expenses rose +2.2% and operating margin declined to 4.0%. That does not leave a lot for profit.

They guided lower for Q3 saying revenue would be flat and gross margins to decline further. They warned they would be facing an additional interest burden of $2 million for debt incurred to fund the Brightpoint acquisition.

Wednesday's close at $14.72 is last ditch support dating back to mid 2010 and again in March 2008. The stock traded lower in the recession to $10 and below. If Ingram declines below today's closing support I believe it will retest congestive support at $12.

Trigger @ 14.60 hit 8/2/12

Suggested Position: Short IM stock @ $14.60

Premiums on options are skewed so shorting is the only play.

IM Chart

IM Chart


Apollo Group - APOL - close: 26.65 change: +.62

Stop Loss: 28.60
Target(s): 21.00
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
Entry on Aug xx at $ xx.xx
Earnings Date 09/24/12
Average Daily Volume = 1.7 Million
Listed on August 2, 2012
New Positions: Yes, see below

Company Description

Update 8/4/12:
Apollo rebounded slightly on the short squeeze but failed to gain any traction after the initial gap open. Aggressive traders may want to short it at this higher level rather than wait until the trigger at 25.75 is hit.

Why We Like It:
Apollo is a for-profit education company. The companies have been trashed recently and the release of a Senate report last week was especially harsh on the group. Included in that group are APOL, BPI, COCO, DV, STRA and LOPE.

The Senate report (249 pages) said these colleges failed to give students a reasonable bang for their bucks. Since they are all taxpayer funded that means we are paying for their education.

Unfortunately 64% of students trying to get an associate's degree end up dropping out. The colleges spend nearly 25% of their revenue on marketing and basically dragging any candidate with a pulse into the program to get Federal funding for that student. Because the students are lobbied so heavily to sign up there is an inordinate number that give up quickly as opposed to those attending a regular college because they want to be there. Degrees at these for-profits cost an average of 19% more than at regular schools.

The report found that the average salary of an executive at these colleges was $7.3 million a year. This makes me want to go teach investment education somewhere but I bet teachers are closer to minimum wage.

The Federal government ends up paying 80% of the tuition bill at these colleges as a result of various student loan programs and veteran programs.

The report urged stronger rules, additional oversight and requirements for graduation in order to obtain funding. Basically these colleges have run into a buzz saw of lawmaker hostility. Odds are good there will be additional regulation and scrutiny of their admission procedures.

Apollo is trading at an 11 year low.

I am recommending a short of APOL with a trigger of 25.75. I want to see a new low as an entry point.

Trigger @ 25.75

Suggested Position: Short APOL stock @ $25.75

OR

Buy APOL Sept $25 Put, currently $1.58.

APOL Chart

APOL Chart


CLOSED BULLISH PLAYS

No closed long plays


CLOSED BEARISH PLAYS

Focus Media Holdings - FMCN - close: 19.83 change: +.56


Stop Loss: 20.10
Target(s): 15.25
Entry on July 17 at $18.40
Earnings Date 05/29/12
Average Daily Volume = 2.2 million
Listed on July 16, 2012

8/04/12 update:
FMCN rebounded again and appears to be ready to breakout over resistance at $20. I am dropping this position for no movement as I mentioned on Thursday evening.

Close the FMCN short at the open on Monday.

Position: short FMCN stock @ $18.40

- or -

Long Aug $18 PUT (FMCN1218T18) Entry $1.50

FMCN Chart


Hewlett Packard - HPQ - close: 18.25 change: +0.71

Stop Loss: 18.25
Target(s): 16.50
Time Frame: Close prior to Aug. 22nd earnings
Entry on July 23 at $18.38
Earnings Date 08/22/12 (unconfirmed)
Average Daily Volume = 18.0 million
Listed on July 21, 2012 New Positions: No

8/04/12 update:
HPQ rebounded from a new 52-week low on Thursday to trigger the stop loss at $18.25 on Friday. I still believe we will see lower numbers but we are out of this play.

Suggested Position: short HPQ stock @ $18.38, exit $18.25, +.13 gain.

- or -

Long Aug $18 PUT (HPQ1218T18) Entry $0.54, exit 0.41, -.13 loss

08/02/12 lowered stop loss to 18.25
07/27/12 lowered stop loss to 19.25
07/23/12 trade opened on gap down at $18.38. Trigger was $18.40

HPQ Chart


Red Robin Gourmet Burgers - RRGB - close: 29.59 change: +.76

Stop Loss: 29.75
Target(s): 26.00
Time Frame: 3 to 6 weeks
Entry on July 24 at $29.85
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on July 23, 2012

8/04/12 update:
After two days of nice declines to 28.66 we were stopped out with a +4% opening gap to $30. Fortunately the tight stop prevented any material losses.

FYI: The Point & Figure chart for RRGB is bearish with a $22.00 target.

current Position: short RRGB stock @ $29.85, exit $29.75, +0.10 gain

- or -

Long Aug $30 PUT (RRGB1218T30) Entry $1.60, exit $1.35, -0.25 loss

RRGB Chart