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Daily Newsletter, Monday, 7/14/2014

Table of Contents

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

Market Wrap

Transport Average Makes New High

by Thomas Hughes

Click here to email Thomas Hughes
Better than expected earnings from Citigroup helped catapult the market to a new all time highs.

Introduction

The global markets continued to rebound this week with the start of trading in Japan. Asian indices powered their way close to 1% higher and were then surpassed by EU indices and an average 1.5% gain. The ripple of fear that sent the markets seeking support last week has run its course. For now, the focus is back on earnings and Citigroup gave impressed the market with its. The report was a nice surprise for the markets and helped to send the cash markets higher, indicating an opening for the SPX about ten points above last weeks close. At the open the indices quickly found today's highs, a new all time high for the Dow Jones Industrial and Transportation Averages, before settling down for a mild day of trading.


This is the first big week of earnings. It's not the biggest week in terms of numbers, there only about 150 companies reporting, but the bulk of the banks will report this week along with some other important names. Today Citi, tomorrow Goldman Sachs and JP Morgan, Wednesday is Bank of America's turn with Morgan Stanley on Thursday. In between those reports are dozens of small and regional banks as well as other top names. Even though this week is well known as big for banks it is also big for tech, the internet, consumer products, healthcare and others. Names on the list that popped out at me include Intel, Advanced Micro Devices, Yahoo, Ebay, Johnson & Johnson, Abbott Labs, Yum Brands, Google Class A and Whirlpool.

Earnings Calendar 7/15/2014

On top of the rosy earnings news there was other business news for the market to chew on. Sotheby's and Ebay are in talks for teaming up to provide live streaming auctions worldwide. Whiting Petroleum is buying Kodiak Oil and Gas, making the largest single player in the Bakken Shale formation of North Dakota. Alibaba has updated its IPO filing to raise an estimated $130 billion in the initial offering. Shire PLC has received a new bid from Shire that it is considering at this time. Mylan has acquired its tax inversion through the purchase an Abbot Labs international division.

No Economic data was released today but this week is important. There are roughly 20 releases this week, some monthly some weekly. Early in the week is Retail Sales, Empire Manufacturing, Import/Export prices and the Fed's Beige Book. Mid week is dominated by PPI, TIC flows and Industrial Production. Thursday is the usual jobless claims with the addition of housing starts, building permits and the Philly Fed followed up on Friday by Michigan Sentiment, Leading Indicators and CPI.


Even though there is no numerical data for us to ponder today there is always the weekly survey of Business Confidence put out by Moody's. Mark Zandi reports that “US business confidence surged to a record high last week” and that hiring is still strong. In addition to a similar statement in last weeks report he also says that “hiring intentions are especially robust”. This is in line with the last few months of semi robust NFP/ADP numbers and the down trend in jobless claims. There still hasn't been a surprising or marked jump/spike/improvement or what have you in jobs but does there need to be when it keeps going steady the way that it is? And with the number of millenials that will be reaching employment age over the next few years to a decade there are people to keep that trend going for a long time.

The Banking Index

It's bank week so let's start off with the banks. Citigroup reported earnings that beat on the top and bottom lines. The bank also said that it would pay $7 billion to settle charges filed against it in regards to mortgage backed securities. Both revenue and earnings were down from the prior period but not as much as expected. Revenue of $19.3 billion resulted in adjusted earnings per share of $1.24, just a penny of shy of the previous year. Expectations were for earnings to be around $1.08 per share. Interest margins increased to 2.87%, credit losses declined 16%, deposits increased by 3% and loans increased by 8%. Shares of Citigroup jumped more than 3.5% in the pre market but sold off from the opening high. Shared closed up by 3% on high volume. The stock is still well within a long term trading range but indicators support some near term strength and a stochastic buy signal that could take it to the upper end of said range. Current resistance is around $50 with support just below at $47.50 and the short term moving average.


JP Morgan reports tomorrow and is scheduled to release at 7AM. The bank is expected to report earnings of about $1.30 per share, down from the year ago period of $1.45 per share. This is due to an expected 5% decline in revenue. If Citi can be any kind of an indicator then we can now expect JPM to at least meet the expectations as Wells Fargo did last week or beat them as Citigroup did to today. JPM also popped at the open, climbing about 1.25%, but was capped at the 30 day EMA. Current prices are likewise suspended between near term support and resistances around $55 and $57.50. The indicators are bearish at this time but in the process of rolling over. A test of resistance at least could be possible, provided the report tomorrow is not a disappointment.


The Banking Index also jumped but opened inside a potential resistance zone. The index pushed into the zone but was repelled, falling back beneath it before the close. The index has been wrangling with this zone for about a month now, the third time it has been at this level since the first of the year and has yet to break above it. The indicators are not looking good at this time but could be setting up for a break out; if the banks report well, and the index can maintain the current levels, and economic data is good. Current support and resistance are around the $70 and $72.50 levels, with the index right in the middle. A good report from JPM and others could go along way toward helping the index to move up to resistance.

 


The Gold Index

My fears of a bull trap were not misplaced. The rising tide of stocks, boosted today by Citigroup, and the underpinning steadiness of the economic situation pulled the rug out from under gold prices today. Gold fell so hard and so fast at the open of trade this morning that I had to double and triple check to make sure I wasn't hallucinating. Prices on my charts were way ahead of prices on the TV which caused about 5 minutes of confusion, CNBC indicated gold at Friday's close while my charts did not. Price settled just over $1307 per ounce after moving down as much as $35 during the day. Gold is now sitting just above the $1300 long term support/resistance line and what I think could be a pivotal point on the charts. A break below this level could easily take gold down to $1250.

The Gold Index fell as well and a little harder. The Gold index lost over 2.75% in today's action falling from resistance and my suspected bull trap. The index is still above another near/short term support line at $100 but I think it will fall under pressure. There is growing divergence in the MACD with momentum about to turn bearish while stochastic is also diverging and now showing the bearish crossover. In terms of the underlying down trend in the index this looks like a strong trend following signal. Supports are at roughly $5 increments upon a break of $100 with near term possibilities around the 30 day EMA and the March/April bottom. Risk at this time as always is gold price and earnings outlook. A break below $1300 for gold could be a catalyst for a break below $100 in the index. The major miners report earnings around August 7th .


The Oil Index

Oil prices traded in a tight range around $100.75 before ending the day near $101. Prices hovered as traders weigh the possibilities of supply disruptions in Libya even as Libyan production increases. Last week's reports, and updates over the weekend, have current production at Libya's main oil terminal up by roughly 300% to about 450,000 barrels per day. At the same time new violence sprang up in Tripoli and there were renewed protests from rebel factions impeding the operation of the LIbya's other oil port. Also, the possibility that economic rebound could expand/is expanding is on everyone's mind as well.

The Oil Index traded higher today and moved just above the 30 day EMA. The index is making a small, quiet bounce from long term support with early sign of possible entry from the indicator. Bearish momentum has peaked and stochastic is making an early/weak trend following crossover. The index may consolidate along this level until economics, politics or earnings can move oil prices again. A break below 1650 would find support around 1625 and 1600 with up side targets for resistance at 1700 and 1725.


The USD/JPY

The Bank Of Japan meets again this week for its monthly policy meeting. The bank is largely expected to do nothing and even with the recent weak data and poor 1st quarter GDP I tend to agree with that. For one, the yen is well above the original target rates of Abenomics which were around 95. For another the BOJ has said many time that they are happy with the current recovery and see no need to adjust rates. The USD/JPY has been trading in a tight range since February, basically since the BOJ started being firm on current policy, and is near the bottom of that range now. The indicators are very weak and point to a neutral and quiet market.


The Indices

Today the Dow Jones Transports led the way higher. The index climbed close to 0.7% in today's session and making a new all time high. The index also moved above the high of the bull flag I have been tracking in possible confirmation of that pattern. If so this would give the index a target near 8,750 in the short term. The indicators are firing a trend following signal but very weakly. MACD and stochastic are both just crossing their respective signal lines after a short period of flattish movement. This could be just random fluctuation ahead of more substantial earnings or a precursor to expectations from the sector this quarter. Tomorrow JB Hunt, an index component, reports earnings. Today the stock rose about a half percent.


The Dow Jones Industrial Average was runner up today with a gain of 0.65%. The blue chips set a new intra day high but did not manage to hold it into the close. The index is making a bounce from the 30 day moving average with similarly weak indicators. MACD is again right at the zero line while stochastic is basically ranging sideways and with %K and %D not yet even touching, much less crossing. It looks like the index wants to rally again but just needs a push across the line.


The tech heavy Nasdaq Composite took third spot today with a gain of 0.56%. This index is also in mid bounce, from the 30 day EMA and a longer term area of support. Today's action was a lot less decisive than the blue chips or the trannies, forming a spinning top candle stick. Traders are likely waiting for the earnings report from Intel, world's largest chip maker, before making any decisions about market direction. The indicators here are bearish in the near term but have peaked and/or rolled over in the near term. A retest of resistance at the current 14 year high just shy of 4,500 looks probable even without earnings season but I think there is no coincidence here. Intel is scheduled to report after the bell tomorrow, along with Yahoo!, so trading in this index may be muted until late day or after the close, at which time I think things will heat up considerably. Current support is along the moving average near 4,440.


The SPX was today's laggard with a 0.46% gain. The broad index is also bouncing higher from the 30 day EMA but with a little conviction. The index formed a white bodied candle, not remarkably large but big enough to be more than a spinning top. The indicators are also bearish in the near term with momentum peaking but stochastic is not yet rolling over. In the short term there is some divergence between the indicators and price but the sell off last Thursday helped to relieve overbought near term conditions. With the bounce in play I would expect to see the index at least retest resistance at the current all time high with the chance of it gaining momentum for a break through. Earnings, and data, hard to say which will be more important, maybe the way the two combine for future out look, will be key. A failure to break above this level could result in a near to short term double top, based on earnings or economic outlook, with a target at or near the long term trend line around 1900/1925.


The indices appear to be in synch, at least in the near term to short term. This doesn't happen as often as you might think and could prelude a sharper than normal movement, in either direction. All four that I track are bouncing from the short term moving average with indicators that are in early stages of rolling into a trend following signal. This is all happening while they are facing long, short or near term resistance in the form of an all time or long time high. Except for the Dow Jones Transports which set a new high today. The transports are a historical leader of the markets and have been doing a fine job of it recently as well. If earnings, guidance and economic data point to continued growth then I expect to see new highs for all the indices.

Until then, remember the trend!

Thomas Hughes


New Plays

Out Of Fashion

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Coach, Inc. - COH - close: 33.99 change: -0.26

Stop Loss: 34.60
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 14, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
Coach started in a Manhattan loft back in 1941. Their focus on high-quality leather goods has expanded to handbags, men's bags, women's and men's small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry and related accessories. As of last year COH had almost 1,000 stores with more than 500 in North America and more than 400 in Asia.

It used to be that COH was the big brand in luxury items. It seemed like they could do no wrong with strong growth. It appears they out grew their exclusivity. It did not help that rival Michael Kors (KORS) was beginning to hits its stride and steal the spotlight from Coach.

It has been a tough year for retail companies. 2014 started with a very harsh winter that kept consumers indoors. COH was not immune to this effect. However, normal retailers could lay blame at the rising cost of gasoline or food items. That shouldn't apply to COH, which was always seen as a retailer to the higher-end consumer.

Desperate to stop the slide in sales COH resorted to promotions and discounts. This seemed to backfire. While the promotions may have increased foot traffic in their stores it helped sully their appearance as a luxury brand. Today COH is trying to turn things around. They're going to revamp their stores and go back to full luxury pricing. This could be expensive and pressure their margins as they try to turn things around.

COH held an investor day on June 19th. They told analysts that Coach would close 70 underperforming stores in North America as part of the turnaround plan. Many analysts leaving the meeting with COH turned bearish. In the three weeks following the analyst day shares of COH were downgraded six times.

Analysts have been reducing their earnings estimates on COH and that's never a good sign. Yet that could set up for an upside surprise when COH does report earnings on August 5th. Thus we do not want to hold over the announcement.

The June 2014 low was $33.60. I am suggesting a trigger to launch bearish positions at $33.45. Short-term traders may want to target a drop toward $30.00, which might be round-number support.

Trigger @ 33.45

Suggested Position: short COH stock @ (trigger)

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

Buy the AUG $33 PUT (COH140816P33) current ask $1.00

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

Annotated chart:

Weekly chart:




In Play Updates and Reviews

Bulls Continue To Push Stocks Higher

by James Brown

Click here to email James Brown

Editor's Note:
Better than expected earnings news from Citigroup helped fuel widespread gains in the U.S. market on Monday.


Current Portfolio:


BULLISH Play Updates

Microsoft Corp. - MSFT - close: 42.14 change: +0.05

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: + 0.7%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

Comments:
07/14/14: The stock market's early morning rally pushed MSFT to new multi-year highs near $42.50. Gains faded by the closing bell but the short-term trend is up.

In other news MSFT said they are planning to launch super-cheap Windows powered devices to compete with Google's Chromebook. One of MSFT's newest products will be a $199 HP Windows laptop called "Stream".

Keep in mind that MSFT is due to report earnings on July 22nd.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike



SoftBank Corp. - SFTBY - close: 37.82 change: +0.72

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +3.1%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

Comments:
07/14/14: The Japanese stock market was up today (+0.8%) and that helped boost SFTBY at the open. Shares gapped higher and outperformed the U.S. indices with a +1.9% gain. SFTBY is still facing overhead resistance in the $38.50 area.

Keep in mind that Alibaba is still expected to IPO this summer. There has been some speculation it could happen later this month. Others believe Alibaba wants to IPO on the "lucky" date of August 8th. The number eight is considered a lucky number is Chinese culture.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

07/11/14 News hits that SFTBY might buy T-Mobile soon.
06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.



Steris Corp. - STE - close: 54.19 change: -0.19

Stop Loss: 52.65
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 246 thousand
New Positions: Yes, see below

Comments:
07/14/14: Monday proved to be a quiet day for STE. Shares spent most of the session in a 50-cent range. I do not see any changes from our new play description from the weekend newsletter below.

Earlier Comments: July 12, 2014:
The company website describes STERIS as a global leader in infection prevention, contamination control, surgical and critical care technologies, and more. STERIS is the world's pre-eminent infection prevention, decontamination, and surgical and critical care company, with a long list of first-to-market products and industry-leading service innovations and thousands of customers in more than 60 countries.

While the corporation was founded as Innovative Medical Technologies in 1985 and renamed STERIS in 1987, our history dates back to 1894 with the founding of American Sterilizer Company, a long-time, global leading innovator of sterilization products. Today, through a series of strategic acquisitions and continual innovation of new products, STERIS holds one of the broadest portfolios of products in the industry. It stands at the forefront of efforts to prevent infection and contamination in healthcare and pharmaceutical environments, and is broadening its reach with products to meet the needs of defense and industrial markets (source: www.Steris.com).

The infection prevention industry is expected to hit global sales of $109 billion in 2017. This area of healthcare is growing at more than 5% a year. STE is growing three times faster than the industry due to acquisitions and strong organic growth.

STE recently purchased Integrated Medical Systems International, Inc. (IMS) for $165 million. IMS has sales of $150 million a year in the sterile processing, surgical instrument management, and endoscope repair. This particular industry is fragmented and STE believes they can grab market share as well as capitalize on synergies with IMS.

STE's recent earnings report in May was very encouraging. Analysts were looking for a profit of $0.86 a share on revenues of $455.9 million. STE beat estimates with a profit of 91 cents on revenues of $465.3 million.

Revenues were up 9% for the quarter with 7% of that as organic growth. STE saw strong revenue growth in consumables (+17%) and its service business (+23%). Even with the Obama administration's new medical device excise tax STE managed to grow its gross margins 30 basis points to 41.5%. Its healthcare sterilization business saw margins jump 410 basis points. STE also reported growth in its backlog of business.

They expect double-digit top and bottom line growth in 2015 and boosted their revenue estimates into the +15% to 17% range.

Technically shares have been consolidating sideways the last few weeks. That's not surprising after the big spike higher following its earnings report in May. Now STE appears to be almost done with this consolidation phase. Shares look poised to breakout past resistance near $55.00 and hit new record highs.

The May 12th high was $55.36. Tonight I am suggesting a trigger to open bullish positions at $55.50 with a stop loss at $52.65, just under last Thursday's low. We are not setting an exit target tonight but I will point out that the Point & Figure chart is bullish and suggesting at $74.00 long-term target.

Trigger @ $55.50

Suggested Position: buy STE stock @ (trigger)



BEARISH Play Updates

DSW Inc. - DSW - close: 27.40 change: -0.21

Stop Loss: 29.15
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Comments:
07/14/14: DSW continued to underperform the market as we expected. However, shares did not hit our suggested entry point at $26.90. More aggressive traders might want to consider launching positions now.

Earlier Comments: July 12, 2014:
DSW Designer Shoe Warehouse runs over 400 company-owned stores. They also participate in hundreds of other shoe departments in regional department stores through their Affiliated Business Group.

There appears to be a bear market in designer shoes. At least that is the picture if you're looking at shares of DSW Inc. The stock has actually been a big winner for investors if you have owned it the past few years. On a post 2-for-1 split adjusted basis DSW traded down to $3.33 in 2009. It peaked in 2013 with a close at $47.22 in November last year. That's a huge run (more than 1,400%). Unfortunately last November was indeed the peak. DSW has been stuck in a bearish trend of lower highs and lower lows since then.

DSW lowered its earnings guidance back in February 2014. Of course back then just about all of the retail companies were warning about lack of sales and blaming it on the extremely cold winter weather. That was after weeks of worry over the 2013 holiday shopping season.

The U.S. economy is slowly recovering but consumer spending has not. There are still large chunks of the consumer who continue to struggle. The sharp rise in food prices this year combined with elevated gasoline prices has not helped. There seems to be a bifurcation in the consumer spending. There has been strong demand for big ticket items like housing and cars. Yet smaller discretionary spending is just not there.

The overall retail industry saw some improvement in May. There was hope that June same-store sales would come in better than expected. Analysts and investors were a bit disappointed when the retail industry delivered June numbers that were only in-line with estimates.

Meanwhile DSW continues to struggle. The company reported earnings on May 28th. Wall Street was expecting a profit of $0.48 per share on revenues of $622.9 million. DSW announced earnings of 42 cents on revenues of $599 million. A miss on both counts. Management then lowered their 2015 guidance. The company blamed the weather (again) and said they were facing an intense promotional retail environment. The Container Store (TCS) has a completely different product mix but recently mirrored DSW's troubles and said they were experiencing a retail "funk" (i.e. lack of sales).

Shares of DSW dropped from $32.50 to $23.60 on its earnings miss and earnings warning late May. Since then the stock has bounced but it has found new resistance in the $28.50 area. Now DSW looks like it is rolling over again.

Friday's low was $27.20. I am suggesting a trigger to open bearish positions at $26.90. If triggered I'm expecting DSW to at least test its May lows if not breakdown to new lows.

We will plan on exiting prior to DSW's late August earnings report.

Trigger @ $26.90

Suggested Position: short DSW stock @ (trigger)

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

Buy the OCT $25 PUT (DSW141018P25) current ask $0.95

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