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Daily Newsletter, Saturday, 5/17/2014

Table of Contents

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

Market Wrap

Lots of Smoke, No Fire

by Jim Brown

Click here to email Jim Brown

A flurry of short covering just before the close rescued the week.

Market Statistics

After the indexes failed to drop below Thursday's lows traders decided to take profits ahead of the weekend prompting a late day rebound. The morning dip came to a dead stop at 1,865 and just below the 50-day at 1,867. The 1,865 level has been prior support and it held firm on Friday. The morning rebound failed as sellers tried to push the market lower again. They were unsuccessful and the higher low at 1,868 convinced sellers to take profits ahead of the weekend. Anyone riding shorts down from the 1,895 level on Wednesday made a nice profit and with the potential for another short squeeze Monday it made sense to go home flat.


Even with the markets at new highs over the last couple weeks Consumer Sentiment declined sharply from 84.1 to 81.8. That erased more than half of the +4.1 point gain in April. The present conditions component declined from 98.7 to 95.1. The expectations component declined from 74.7 to 73.2.

Analysts have been telling us that once the winter weather went away all the economic reports would surge higher. Apparently they forgot to tell the consumers. This drop in sentiment appears to be matching up with the shortfall in retail sales for April and the weakness in home sales. This suggests the Q2 GDP could be another disappointment.


On the home sales front the Housing Starts for April surged +13.2% from 947,000 to 1.072 million. While that sounds great in the headline the components told another story. Single family starts rose only +0.8% while multi-family starts surged +39.6%. Single family permits rose only +0.3% and down -3.2% from the year ago period. Builders are focusing on apartments and condos where there is strong demand due to the inability for consumers to finance a house. Builders interviewed said they were focusing on multi-family because single family homes were no longer selling. That is not the trend the government or analysts want to see.

Starts surged 78% in the Northeast, 40% in the Midwest, 18% in the South and 13% in the West. Housing completions declined from 881,000 to 847,000 for a -3.9% drop.



The economic calendar for next week is light once again. The most important event will be the FOMC minutes on Wednesday. This could roil the markets if there was a lot of discussion between members about accelerating the QE Taper process. After the economic reports of the last two weeks there are some analysts that believe the Fed should be extending the stimulus rather than ending it.


The recent updates of economic data for Q1 are now pointing to a contraction in the GDP of -0.5% and you have to go back to Q2-2009 to see another quarter of contraction. However, analysts keep telling us that growth will snap back hard in Q2 to something in the +3.5% range. Personally I would be very surprised given the recent reports but time will tell. Full year estimates have now declined to about +2.4% growth.

There were just enough earnings left to almost fill my graphic but very few are mainline companies. SalesForce.com, Home Depot, Staples, Lowes, Target, Hewlett Packard, Best Buy and Sears are the highlights.


On Friday the big earnings winner was JC Penny (JCP). Shares rallied +16% after the company reported a jump in same store sales of +6.2%. Of course their comps from 2013 were horrible but it does appear they are finally turning the company around. That is the first time in more than two years that April sales have risen. Sales rose +6.3% to $2.8 billion.

They still lost -$350 million but the -$1.15 per share was better than the -$1.26 analysts expected. The company said it had secured a $2.35 billion line of credit that will add $500 million of incremental liquidity during seasonal peaks. JC Penny may have come back to the land of the living but they have a long way to go to regain consistent profitability.

There were plenty of shorts in JCP shares and they were expecting another earnings miss. Volume on Friday was a whopping 304 million shares.


Autodesk (ADSK) shares rallied +8% after they posted earnings that beat estimates and raised revenue guidance. The company posted earnings of 32 cents compared to estimates of 21 cents. They raised Q2 revenue estimates to a range of $595-$610 million. That was above estimates for $576 million. They expect to add 150-200,000 net new subscriptions.


Nordstrom (JWN) exploded higher with a 15% gain after reporting earnings of 72 cents compared to estimates of 68 cents. Revenue of $2.93 billion beat estimates of $2.86 billion. The company performed well despite winter weather and increased competition. Don't you just love it when some companies actually perform while others stand behind the "weather ate my earnings" excuse? The company also said it was looking for a partner to take over its credit card unit. Nordstrom currently has more than $2 billion in outstanding customer charge accounts. Getting somebody like GE Credit or Citigroup to take over their cards will infuse needed cash into Nordstrom.


Competitor Dillard's Inc (DDS) also jumped +15% after reporting earnings of $2.56 compared to estimates of $2.41. Revenue was light at $1.55 B compared to $1.6 B. Same store sales rose +2% when most retailers were reporting declines. This was the 15th consecutive increase in sales for Dillard's. I guess there was no winter weather around their stores. They purchased $65.9 million in shares (1.7%) during the quarter with $224 million still outstanding in purchase commitments.


Not having a fun day was World Wrestling Entertainment (WWE). Shares imploded for a -43% drop after the company said it had signed a new contract with Comcast NBC Universal (CMCSA). The multiyear deal will continue to broadcast WWE Raw on the USA Network and Smackdown on the Syfy Network. The terms of the deal were not disclosed but analysts concluded they signed for a smaller amount than was anticipated. Investors had expected a big rise in the $100 million a year they earned from the prior contract. The company warned on guidance suggesting profits could be in a range of $125-$190 million by 2015. The wide guidance range spooked investors and the stock was slammed for a huge loss.

Another factor was the poor performance of the WWE Network. The online streaming service is cutting into pay-per-view revenue and the expected subscriber growth has slowed. They now have 700,000 viewers but need over one million to hit their profit targets. WWE said the service will lose $45-$52 million in 2014 "if it reaches its goals." That assumes a bigger loss if those goals are not reached.

After shares collapsed the company announced a hastily scheduled conference call with analysts for Monday to discuss the events. Apparently reality is much more difficult to deal with than make believe.


Shares of Darden Restaurants (DRI) took a beating after they said they sold the Red Lobster chain to the private equity group Golden Gate Capital for $2.1 billion in cash. Shares declined -4% because shareholders were against the sale. Two activist hedge funds, Starboard Value and Barington Capital, that had targeted the company called the sale "unconscionable" and "unbelievable." The funds had been trying to halt any sales saying splitting off Red Lobster would hamper the restructuring of the entire company. The Red Lobster chain was a material portion of the company and had a lot of premium real estate. There are 705 stores and had $2.62 billion in sales in 2013.

Last month Starboard collected votes from 55% of the shareholders demanding a special meeting to discuss the different plans for selling assets. The company continually delayed the meeting by not setting a date. On Friday Darden said it would now hold the meeting but the Red Lobster sale would go on. It does not require shareholder approval. The founder of Barington's said "it is unconscionable that the Darden board would enter into an agreement to sell the Red Lobster business for what amounts to a 'fire sale' price after shareholders clearly indicated they did not want the company to enter into any transaction unless it received shareholder approval."

Golden Gate plans to immediately sell the real estate for $1.5 billion in a leaseback deal with American Capital Properties. This further incensed the shareholders against the deal. Darden officials said the sale would bolster the cash position and allow the company to focus on a faster restructuring of the Olive Garden brand.


Verizon (VZ) shares moved higher after quarterly 13F reports from hedge funds showed a sudden interest in the company. Warren Buffet bought 11 million shares, Hank Paulson 8.7 million and Dan Loeb 3.5 million. Lansdowne Partners added a stake of $641 million for the biggest new bet on Verizon. The reason everyone is buying Verizon is the company's competitive position, 4.4% dividend and low PE of 11. The massive Verizon 4G network is much larger than any competitor and that allows them to charge a fair price for their plans. Sprint and T-Mobile are fighting it out in the price war for the remaining customers and that means smaller margins. AT&T is in the middle with a decent network and infrastructure.

There are efforts in progress to allow Sprint (S) and T-Mobile (TMUS) to merge. The idea is to have three large competitors that can really compete rather than the duopoly of VZ & T comfortable in their respective areas with the crumbs left for the smaller companies. Quite a few people believe the merger could happen.

Apparently the billionaires believe whatever happens it will be good for Verizon since the barrier to entry for a similar sized network is nearly insurmountable. It took Verizon a decade and billions of dollars to build out the current 4G network they are now releasing a new 4G network called XLTE that has twice the capacity. XLTE has been going live around the country for the last seven months but Verizon has been quiet about its capabilities. Verizon bought $3.9 billion worth of 4G spectrum from a group of cable operators in 2012. The company gained between 20-40 Mhz of Advanced Wireless Licenses (AWS) to supplement its existing network. In New York, where a lot of this spectrum came online, researchers are seeing reports of up to 80 Mbps connections, which are significantly faster than most 4G connections. The billionaire investors evidently caught wind of the Verizon progress and wanted a piece of the action. This XLTE ad just popped up on YouTube this week. XLTE Video

They still have a long way to go because I don't have cell service at my home in Colorado and I am a Verizon customer.


Remember the Great Rotation? This year was supposed to be the year of the Great Rotation as money flowed out of bonds and into stocks. That is not working out quite like everyone expected. Analysts and market reporters were talking about the yields on the ten-year treasury all week. The low yield on Thursday was 2.473% and would have been a 10 month low had it closed there. Back in October we saw 2.471% intraday but the closing low was 2.485%.

There are as many theories about why treasuries are so hot right now as there are analysts. Some believe it is a reflection of the deterioration in the economy. Others believe it is in preparation for a crash in the equity markets. Still others believe it is a flight to quality from overseas investors as a result of economic conditions in Europe and the worry over Ukraine.

All of those reasons are probably valid to some extent. However, the biggest reason, in my opinion, is the lack of treasuries for sale. The Fed is buying them all. Despite the taper process the Fed is still buying $45 billion in treasuries and mortgage backed securities every month. With the number of treasuries being sold declining because the deficit is temporarily smaller it means there is a shortage of new supply on the market. Now add in all those reasons listed above and suddenly treasuries are in short supply.

That is also causing a short squeeze. Nearly every major hedge fund thought the trade of the decade would be to short treasuries once the Fed began to taper QE. With the Fed out of the market rates would rise and shorts would profit. Guess what, it is nearly a year since Bernanke started the taper conversation and crashed the equity markets last spring and yields are falling not rising. Anyone holding treasuries since the December high over 3% is losing a lot of money. With the economy sluggish, equities in turmoil and war in Ukraine we could see yields a lot lower. That means funds are being forced to cover their shorts in a very tight market. Some analysts were projecting yields in the 2.25% range later this year. If you own treasuries you are celebrating but if you are short the outlook is not good.


The Dow had multiple triple digit intraday declines last week but the Volatility Index ($VIX) stubbornly refuses to rally. On Monday it dipped to a five-month low of 11.88. Thursday's equity dive lifted it briefly over 13.50 but the decline on Friday was equally as fast. Despite the volatility in the indexes there is no volatility in the VIX.

This is a result of complacency by investors. Very few investors are buying puts to protect their positions because almost nobody believes the big cap market is going lower. The S&P is only about 20 points below its closing high at 1,897. The 50-day average has been support on the last three dips and it was support again on Friday. As long as the index remains above the 50-day the VIX will remain low.



Eventually this complacent market is going to end badly. Traders seem to forget the sharp decline in April and the major decline in January. They are only focused on the new highs made last week. Markets are supposed to pause for profit taking after new highs and that is what traders believe is happening.

Friday's close was right back in the congestion zone between 1,865 and 1,885 with strong resistance at 1,897-1,900. Eventually we are going to see a directional move and it could be strong. We just don't know which direction it will take. With earnings and economics weak there does not seem to be much reason to surge higher. However, as long as analysts keep talking about a 3.5% GDP in Q2, investor hope is alive. If that estimate suddenly begins to decline we could see a race to the exits.


We have an interesting setup on the Dow. Despite the decline from the breakout highs we have a nice pattern of higher lows. That is a signal for dip buyers to keep on doing what they have been doing. Until the Dow declines below 16,300 to break that pattern the technical uptrend is alive and well.

The 16,400 level has been support for the last two weeks but it was only touched once intraday last week and that was on Thursday. Support just above that level was strong. The Dow drop on Thursday came to a dead stop just above 16,400 on the opening decline and it held there for the rest of the week. Like the S&P the Dow has honored the 50-day average most of the time over the last three months. There have been two penetrations but both recovered quickly. The 50-day and uptrend resistance have formed a tight channel that is begging to be broken. Markets don't normally trend so clearly and that means a breakout/down is due.




The Nasdaq rebounded at the close on Friday to gain +19 points for the week. After topping at 4,155 on Tuesday the index declined to 4,035 on Thursday a -120 point drop. At that point it looked like it was all over for the bulls and the next stop would be a retest of 4,000 or even lower. The index declined again at the open on Friday but was unable to reach the Thursday lows. This emboldened traders and worried the shorts enough they were forced to cover. The memory of last Monday's monster short squeeze was still vivid in their minds.

I would not confuse the short covering at the close with a rally. This was simply account protection ahead of the weekend. The Nasdaq has major resistance at 4,150 and 4,180 and it will take more than a little effort to push through those levels. We are approaching summer with the Memorial Day weekend just ahead and summer is typically a weak period for the Nasdaq.

The one chart that should concern tech traders the most is the weekly chart. Since November 2012 the Nasdaq has been moving straight up with barely a blip in the trend to gain +56% from that 2,800 low. The decline this year has only brought it back to uptrend support. The long gain is being supported by the 4,000 level but the odds of this uptrend breaking are growing stronger every day. Stocks don't grow to the sky without periodic pauses and a break in the trend. We could argue that the decline from the 4,371 high back to 3,946 in April was that break. It was after all a -9.7% decline and took the Nasdaq right to correction territory. However, the rebound lasted only 4 days and it has been weak ever since. Last week's high at 4,155 was a lower high and suggests more selling ahead.


On the daily chart the 50-day average has crossed over the 100-day average and is now downward sloping. In a couple weeks we could be talking about a death cross of the 50 through the 200-day currently at 4,002. That is a very strong sell signal for managed equity funds.


The Nasdaq only had 12 stocks making new 52-week highs on Friday and 75 stocks making new lows. That is the smallest number of new highs this year. That was only slightly better than the 13/117 ratio on Thursday. Despite the small gain for the week the Nasdaq is not well. A decline next week below 4,030 could signal trouble.



The Russell 2000 remains the weakest link. The Russell hit a three-month low on Thursday at 1,082 and below the 1,087 level for a -10% correction. It did not close there and recovered to end at 1,095. On Friday the opening decline hit 1,088 and right at correction territory before rebounding at the close to 1,102 on short covering. Do not let that short covering bounce fool you. The path of least resistance is still down.

The Russell has declined to critical support. If there is going to be a goal line stand this is where it should appear. Clearly there are some buyers waiting at the 1,087 correction level but we don't know how much firepower they have. We could say the Russell is oversold but that does not mean it can't get more oversold. A break below that February low of 1,082 should see selling accelerate.


The NYSE Composite is still bullish. The uptrend support from the last two months is still intact and barely tested. The 50-day at 10,502 is now support and 10,670 is still resistance.


The Russell 3000 ($RUA), the top 3,000 stocks in the U.S. market, is struggling. That is because 2,000 of those stocks are the Russell 2000. However, thanks to the strength in the top 1,000 stocks the index is holding its own near the highs. This shows how much more influence the big cap stocks have over the small caps. If the R3000 declined to close under the 1,100 mark it would signal a negative change in the trend.


In summary I think the rebound at the close was short covering ahead of the weekend. I don't think anything has changed for the Russell 2000 or the Nasdaq. The biotechs have weakened again and the airwaves are full of comments on the negative influence of the Russell. While the big caps are range bound the small caps are slipping lower. Eventually one of the opposing forces will win. Either the negativity of the small caps or the positive sentiment in the big caps. Divergences like this don't last forever. Eventually one side will give up and join the other. The closer we get to summer the better chance the negative sentiment wins.

Friday was option expiration and we barely managed 5.7 billion in volume. It is only going to get worse as we head into summer. Ships can sink in a quiet sea and stocks can decline on low volume. It is a lot harder for them to rise on low volume. It has long been said that volume is a weapon used by the bulls.

Random Thoughts

Russia played a trump card in the Ukraine sanctions game last week. They said they would no longer help the U.S. launch astronauts to the International Space Station starting in 2020 and they would no longer allow the U.S. to use Russian rockets to launch military satellites. Karma is a killer. On Thursday a Russian rocket launching "Russia's most advanced communication satellite, the Express-AM4R" blew up 540 seconds into the flight. Russia said it was halting all further flights of the Proton rockets until the problem could be determined. The last crash of a Proton rocket was in July when a rocket carrying three Russian GPS satellites failed on takeoff and crashed into the cosmodome.

There was a slight inference that the U.S. may have had something to do with Thursday's failure. Did the CIA interfere in some way to cause the failure? Was the CA testing some secret anti-missile weapon? While I seriously doubt it that won't stop the Russians from blaming us to keep from admitting the rocket failed on its own.

Also last week we found out that Russia dumped a record $26 billion in U.S. treasuries in March to bring its post March total to just over $100 billion in inventory and the lowest since the Lehman crisis. With Putin on the prowl and sanctions about to bite it is no surprise that Russia began liquidating U.S. treasuries to raise cash and keep those assets from being frozen. Their holdings are now down -35% year over year. I strongly suspect April will show further declines in their holdings.

We all know that Russia pulled their troops back from the border because Putin said so. Unfortunately U.S. satellites showed no movement. Putin also said he would not attempt to influence the "illegal" presidential election on the 25th. However, just in case the "massive nuclear attack" military readiness drill last week did not get the point across Russia is holding an even larger drill on election day. The drill, called Avidarts 2014, will involve nine different types of military aircraft and 71 fighter jet crews rehearsing "Countering of enemy air defenses, destruction of ground targets and carpet bombing enemy territory." The drill will take place close to the Ukraine border.

NATO Secretary General Anders Fogh Rasmussen said "Don't believe Putin." He said he has no plans to pull back from Ukraine and he will impact the May 25th election. Read it here

France is going to ignore the U.S. call for sanctions against Russia and will deliver two warships to Russia for 1.2 billion euros. To Heck With Sanctions

Josh Brown gathered a list of things you don't want to see if you are long stocks. This list was a hot topic at the SALT Conference in Vegas last week.

They are all happening at once:

1. Collapsing home builder stocks and fading real estate data.

2. A US dollar on the verge of ripping to the upside.

3. Treasury bonds refusing to back down, nudging their way higher daily.

4. A deteriorating number of new highs for individual stocks as the indices flirt with record levels.

5. Influential managers who’ve been bullish for most of the rally starting to turn cautious (Einhorn, Cooperman, Tepper, etc)

6. Stalling earnings growth.

7. Defensive stock leadership

8. Huge divergence between small caps and large caps.

All of these things are blatantly occurring now. None of them are positives.

Mish Shedlock is convinced we are about to see a major slowdown in the German economy. He said the coming rebalancing of the Chinese yuan will be a challenge as well as the sanctions against Russia. Here are his points.

• The China rebalancing will cost Germany export volume.
• Germany has the most expensive energy policy in Europe – a drive away from atomic power dependency to a less obvious dependency on Russian gas.
• The Ukraine crisis impacts Germany. According to the Federation of German Wholesale, Foreign Trade and Services (BGA) about 6.200 German companies are doing business in Russia.
• The coming Chinese devaluation of the Yuan will significantly lift Chinese import prices.
• More than 300,000 German jobs depend on exports to Russia.
• Russia is Germany's 11 biggest export market.
• Germany imports 25% of its energy from Russia.

Despite the slowdown in some of our economic indicators the latest rail traffic data showed record gains in intermodal traffic and the highest 12 week average gain since 2011 at 8.5%. Intermodal traffic in April totaled 1,316,176 containers and trailers, up +9% or 108,485 units over April 2013. It was the 53rd month of consecutive increases. The weekly average in April was 263,235 units and the highest for any April in history and the second highest month ever. Carload originations totaled 1,481,586, up +6.4% in April. Commodities with the biggest carload increases including coal, up 34,502 carloads, or 6.4 percent; grain, up 22,683 carloads, or 27.6 percent; crushed stone, sand and gravel, 10,194 carloads, or 9.5 percent; and petroleum and petroleum products, up 5,316 carloads, or 7.6 percent.

Along the same line of thought orders for trucks have surged to an 8 year high. Eaton raised its forecast for North American truck output in 2014 by +5.7% to 280,000 units. That is an 11% increase over 2013. The average truck today is 9.6 years old and near a record. Active truck utilization since November has been 99%. That is up from less than 96% in 2012 and less than 86% in 2009. Manufacturers are suggesting we could see a truck shortage that raises shipping rated by 6% annually over the next several years. Engine maker Cummins (CMI) forecast sales growth of +10% in 2014. Paccar, maker of Kenworth and Peterbilt trucks is expected to grow by +12%. FTR Starks estimates there was a driver shortage of 236,000 in the first quarter. That was 43% higher than Q1-2013 and the largest shortfall in a decade.

Bespoke Investment Group tracks earnings and guidance for the S&P. They reported last week that forward guidance delivered with Q1 earnings rose by 0.03%. While that is a miniscule number it was the first time in ten quarters that forward guidance did not decrease expectations.

Bespoke Chart

China is upping the ante in its bid to control the South China Sea. They moved a giant oil rig to within 120 miles of Vietnam and well within Vietnam's continental shelf and Exclusive Economic Zone (EEZ). In order to support and protect this drilling rig China sent more than 80 ships and foreign ships have been warned to stay away from the rig for "safety." The 1982 UN Convention on the Law of the Sea established "that a coastal state has sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources in its EEZ." There is no interpretation of sovereign rights that gives China the right to drill in Vietnamese waters. The U.S. warned that this was a serious provocation but the mainstream press ignored it. If China remains unchallenged in this blatant land grab they will continue to press their advantage against other neighbors in the South China Sea. This is eventually going to be a major problem. At least 21 were dead in Vietnam as protest riots over the rig turned deadly. 21 Dead in Vietnam   China's Big Mistake

In a little over a year 60 high ranking Chinese officials have died of unnatural causes, with most being suicide. There is strong suspicion this epidemic of mysterious deaths among China's elite is likely tied to the anticorruption campaign of General Secretary Xi Jinping. The anticorruption drive has reached higher in the bureaucracy than any such effort in decades. The epidemic is so strong that Chinese newspapers have been told in a secret order from Beijing to stop reporting on suicides by top government and party officials. Last year the anticorruption campaign led to the punishment of 180,000 party officials for abuse of power and corruption according to the official party numbers.

Thanks to China’s economic boom, and the very corruption that Xi now sees as threatening the future of Communist rule in China, many members of the elite have managed to smuggle a massive amount of wealth out of the country. Members of the elite have sent their children to college in the West, especially in the United States and the United Kingdom, and are purchasing real estate in Manhattan, London, and elsewhere in increasingly large numbers. Now may be the time for these officials to abandon China entirely and flee to the West. Read full story here.

European growth sank in the first quarter just like it did in the USA. The ECB has been trying to talk up Europe by warning of impending economic stimulus for months. The constant talk worked in the beginning but it is now being ignored. In Q1 Finland, Holland, Portugal and Italy fell into contraction. The Netherlands were already there with a -4% print. France fell to zero. This prompted a new threat of promised stimulus in June. Analysts are saying that after a couple years of promises the ECB needs to launch "shock and awe QE" to shake up the markets. This makes June's ECB meeting a potential inflection point for the European markets and that will hit the U.S. markets as well.

Walmart reported lower sales for the fifth consecutive quarter. Walmart sales are a reflection of the status of the working class consumer. While Dillard's, Nordstrom and Michael Kors are seeing sales gains the Walmart crowd is suffering. I don't know how many customers those three upscale stores see per week but 140 million people shop at Walmart every week. I believe we can easily say that Walmart sales reflect the U.S. economy and not be wrong. That suggests the economy is getting weaker

Piper Jaffray, one of the most bullish firms on Wall Street, warned clients last week that a major correction could be just ahead. "The S&P could tumble to 1,650 or even 1,600 before reversing higher. That is a 15% decline after a +184% gain over the past five years." Stealth correction coming

Michael Batnick reported last week, "The Russell 2000′s current 10% peak-to-trough decline (its first since November 2012) is small caps' 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1%. Of the first thirty-five corrections, every one of them were accompanied by large-caps also falling, with an average decline of 12.8%." Let's see 35 out of 36. The odds are definitely against us.

The S&P's current bull market streak of 955 days is nearly twice the average number of days without a correction.

The energy sector has been leading the market. Click the advertisement below for a free trial to the OilSlick.com newsletter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think."
Jesse Livermore

 


New Plays

Airlines & Healthcare

by James Brown

Click here to email James Brown


NEW BULLISH Plays

American Airlines Group Inc. - AAL - close $38.53

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. I am suggesting a trigger to launch bullish positions at $40.25. We'll start with a stop loss at $37.25, just under this past week's low. I'm not setting an exit target yet but probably somewhere in the $45-50 zone.

Trigger @ $40.25

Suggested Position: buy AAL stock @ (trigger)

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

Buy the Aug $40 call (AAL140816C40) current ask $2.30

option format: symbol-year-month-day-call-strike

Annotated chart:

Weekly chart:



CONMED Corp. - CNMD - close: 49.61

Stop Loss: 47.40
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 17, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 236 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
CNMD is in the healthcare sector. The company provides surgical devices and equipment for minimally invasive procedures. CNMD's most recent earnings report was a bit disappointing. They beat the bottom line estimate by two cents but missed the revenue estimate. Management lowered their Q2 revenue guidance but reaffirmed their full year guidance. Shares plunged on the news but it proved to be a one-day drop as traders have been buying the dips.

The question is why are investors buying the dips in CNMD? The stock soared back on April 15th when Reuters reported that CNMD had asked its advisors to find potential bidders to buy the company. This decision from CNMD might be a response to activist investors pushing the company to do more for shareholders. One analysts firm is estimating the company could go for $59 a share of acquired.

The stock is currently trading near all-time highs but it's also sitting just below round-number resistance at the $50.00 mark. We are suggesting a trigger to launch bullish positions at $50.25. We're not setting an exit target yet but we'll start with a stop loss at $47.40.

Trigger @ $50.25

Suggested Position: buy CNMD stock @ $50.25

Annotated chart:

Weekly chart:




In Play Updates and Reviews

No Follow Through On Thursday's Drop

by James Brown

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Editor's Note:
The U.S. market did not see any follow through on Thursday's widespread decline.

Prepare to exit our MDSO and PEIX trades on Monday morning.


Current Portfolio:


BULLISH Play Updates

Delta Air Lines - DAL - close: 37.86 change: -0.27

Stop Loss: 36.45
Target(s): to be determined
Current Gain/Loss: + 0.6%

Entry on May 05 at $37.65
Listed on May 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.5 million
New Positions: see below

Comments:
05/17/14: DAL's momentum might be slowing down a bit. Shares underperformed on Friday with a -0.7% decline. DAL has closed below its simple 10-dma for the first time in about three weeks. More conservative traders may want to adjust their stop higher. I am not suggesting new positions at this time.

Current Position: long DAL stock @ $37.65

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

Long Sept $40 call (DAL1420i40) entry $2.20*

05/12/14 new stop @ 36.45
05/07/14 new stop @ 35.75
05/05/14 triggered @ 37.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:



Oasis Petroleum - OAS - close: 47.78 change: -0.29

Stop Loss: 46.75
Target(s): to be determined
Current Gain/Loss: - 2.3%

Entry on May 13 at $48.91
Listed on May 12, 2014
Time Frame: 6 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
05/17/14: OAS is testing the next level of support at its rising 20-dma. We are raising our stop loss to $46.75. More conservative investors might want to raise their stop closer to Friday's low ($47.18). I am not suggesting new positions at this time.

Earlier Comments:
More conservative investors may want to wait for a close above the $50.00 level as an alternative entry point. We're not setting a bullish exit target yet but the Point & Figure chart for OAS is bullish with a $65.00 target.

current Position: Long OAS stock @ $48.91

05/17/14 new stop @ 46.75
05/13/14 trade opened on gap higher at $48.91

chart:



BEARISH Play Updates

Financial Engines, Inc. - FNGN - close: 39.29 change: +0.89

Stop Loss: 42.25
Target(s): to be determined
Current Gain/Loss: - 1.4%

Entry on May 14 at $38.75
Listed on May 13, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 567 thousand
New Positions: see below

Comments:
05/17/14: FNGN erased Thursday's loss with a +2.3% gain on Friday. Shares got a boost Friday morning with a new analyst upgrade. FNGN should still find resistance near $40.00 and its 10-dma. Readers may want to wait for FNGN to fail near $40 before initiating new bearish positions.

Earlier Comments:
FYI: The most recent data listed short interest at about 13% of the 50.4 million share float.

current Position: short FNGN stock @ $38.75

05/14/14 triggered @ 38.75

chart:



Jacobs Engineering Group - JEC - close: 53.28 change: -0.57

Stop Loss: 56.15
Target(s): to be determined
Current Gain/Loss: + 2.2%

Entry on May 15 at $54.48
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
05/17/14: JEC continues to sink. The stock is down six out of the last seven sessions. It is starting to look short-term oversold. JEC tried to bounce on Friday but failed at the $54.00 level. I am moving our stop loss down to $56.15.

current Position: short JEC stock @ $54.48

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

Long Jun $55 PUT (JEC140621P55) entry $1.65**

05/17/14 new stop @ 56.15
05/15/14 trade opened at $54.48
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.
symbol-year-month-day-put-strike

chart:



Medidata Solutions - MDSO - close: 35.84 change: +0.49

Stop Loss: 36.55
Target(s): to be determined
Current Gain/Loss: - 4.0%

Entry on May 15 at $34.45
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
05/17/14: MDSO is not performing as expected. The stock has outperformed the market two days in a row. Friday's move is a close above the 10-dma. We're suggesting an immediate exit to cut our losses early.

current Position: short MDSO stock @ $34.45

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

Long Jul $35 PUT (MDSO140719P35) entry $3.30**

05/17/14 prepare to exit on Monday morning
05/15/14 trade opened at $34.45
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.
symbol-year-month-day-put-strike

chart:



Noodles & Co. - NDLS - close: 31.63 change: +0.94

Stop Loss: 33.25
Target(s): to be determined
Current Gain/Loss: -1.8%

Entry on May 09 at $31.25
Listed on May 08, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 288 thousand
New Positions: see below

Comments:
05/17/14: NDLS found support near $30.30 two days in a row. When shares started to bounce on Friday it looks like there could have been some short covering. NDLS surged +3.0% before stalling at technical resistance at its 10-dma. More conservative traders may want to lower their stop closer to the $32 level. I am not suggesting new positions.

Earlier Comments:
There are already a lot of bears in the name with the most recent data listing short interest at 27% of the 21.2 million share float. That does raise our risk of a short squeeze and investors might want to buy puts instead of shorting the stock.

current Position: short NDLS stock @ $31.08

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

Long Jun $30 PUT (NDLS14R30) entry $1.55*

05/09/14 triggered on gap down at $31.08, suggested entry point was $31.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:



Pacific Ethanol, Inc. - PEIX - close: 11.65 change: +0.58

Stop Loss: 13.05
Target(s): to be determined.
Current Gain/Loss: +12.1%

Entry on May 05 at $13.25
Listed on May 01, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
05/17/14: We are pulling the plug on this PEIX trade. Shares have spent over a week now consolidating sideways near its 100-dma. This could be a new short-term bottom.

We're suggesting an immediate exit on Monday morning.

*small positions*

current Position: short PEIX stock @ $13.25

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

Long Jun $12.50 PUT (PEIX1421R12.5) entry $1.15*

05/17/14 prepare to exit on Monday morning
05/09/14 1st target hit to sell half at $10.50
PEIX exit (1/2) at $10.50 (+20.7%)
PEIX Jun $12.50 PUT exit (1/2) at $10.50, option $2.65 (+130.4%)
option exit price is an estimate since the option did not trade at the time our play was closed.
05/07/14 new stop @ 13.05
We want to exit HALF of our position(s) at $10.50
05/06/14 new stop @ 13.75
05/05/14 triggered @ 13.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:



500.com Limited - WBAI - close: 31.14 change: +0.10

Stop Loss: 34.05
Target(s): to be determined
Current Gain/Loss: - 0.1%

Entry on May 16 at $31.10
Listed on May 15, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 389 thousand
New Positions: see below

Comments:
05/17/14: Friday proved to be a quiet day for shares of WBAI. The stock opened at $31.10 and spent most of the session drifting sideways. I do not see any changes from our Thursday night newsletter's new play description and would still consider new bearish positions at current levels.

Earlier Comments:
Technically the stock is sinking in a bearish pattern of lower highs and lower lows. I am suggesting small bearish positions at the opening bell tomorrow morning. We'll try and limit our risk with a stop loss at $34.05 but that's a relatively wide stop loss. Readers should consider this an aggressive, higher-risk trade.

I am not setting a bearish target just yet but the Point & Figure chart for WBAI is bearish with a $26.00 target.

*Small positions*

Suggested Position: short WBAI stock @ $31.10

05/16/14 trade begins. WBAI opened at $31.10

chart:



Youku Tudou Inc. - YOKU - close: 20.60 change: -0.34

Stop Loss: 21.75
Target(s): 18.50 or exit on Tuesday at the close
Current Gain/Loss: +12.2%

Entry on April 28 at $23.45
Listed on April 26, 2014
Time Frame: exit PRIOR to earnings on May 22nd.
Average Daily Volume = 4.1 million
New Positions: see below

Comments:
05/17/14: YOKU continues to underperform. The stock lost -1.6% on Friday but it's worth noting that the $20.00 level is still holding up as support.

We only have a few days left. YOKU is scheduled to report earnings on May 22nd. More conservative investors may want to exit now to lock in potential gains. We will plan on exiting Tuesday at the closing bell unless YOKU hits $18.50 first (new exit target).

Due to our limited time remaining I am moving our stop loss down to $21.75.

Earlier Comments:
I would consider this an aggressive trade because YOKU can be a volatile stock and the most recent data listed short interest at 8% of the 80.6 million share float. FYI: The P&F chart is very bearish and forecasting at $10 target.

*small positions*

current Position: short YOKU stock @ $23.45

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

Long Jun $20 PUT (YOKU1421R20) entry $1.05

05/17/14 new stop @ 21.75, new target @ 18.50, plan on exiting on Tuesday at the closing bell if YOKU does not hit our stop or target first.
05/10/14 new stop @ 22.40
05/08/14 new stop @ 22.60
05/07/14 testing the $20.00 level, readers may want to take profits right here!
05/05/14 new stop @ 23.60
04/28/14 triggered @ 23.45

chart: