Option Investor
Newsletter

Daily Newsletter, Thursday, 7/17/2014

Table of Contents

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

Market Wrap

Another Flight To Safety

by Thomas Hughes

Click here to email Thomas Hughes
The possible shooting down of a Malaysian Air flight on the border between the Ukraine and Russia sparked another flight to safety.

Introduction

An early day of quiet trading turned sour when reports a crash was possibly an attack from unknown sources along the Ukrainian/Russian conflict zone. The crash happened but the details remain murky. What matters is that the chance it was an attack or mistaken attack raised the possibility of escalation in the region and sent traders seeking safer havens. Backing up to the start of the day Asian indices were mixed on profit taking and earnings. European indices were impacted by action in Asia but also by renewed tensions with Russia following President Obama's increased sanctioning. Early indications here at home had the indices down about a half percent with that moderating somewhat before the opening bell.


There was quite a lot going on today even without the airline crash. Of course earnings are in full swing, economic data was on the heavy side as well. Earnings are coming in steady with more companies meeting or beating expectations than not. A few companies are not meeting the expectations and some of them and others have also lowered expectations. Three additional reports on top of the weekly jobless claims reveal that things are still the same. Slowly growing but not as strong as we would like to see and no sign of any surprise surge in growth could be on the way. Jobless claims remain steady in the near term and continue to decline in the longer terms. Housing permits, a sign of planned construction, fell last month along with housing starts. Regional manufacturing data rose more than expected and suggest that some momentum is building.


The early signs were that the SPX would open down about 9 points. This moderated as the data was released and earnings were reported. The index opened down only a few points and found early support above 1975. By the end of the first half hour the index, along with the other majors, had bounced back to break even. I thought reports from the Philly Fed would help to get us into positive territory but I was wrong. The indices drifted sideways for the next hour and half with no real indication of market intentions until the first whispers of the plane crash started coming in. At that time the SPX sank close more than 15 points to the intraday low. The news caused sharp movements in some of the safe haven plays like the yen and gold. After the initial drop in equities the news tempered a little and the markets were able to find some support.

The Economy

First up on the economic calendar today was jobless claims. Initial claims for unemployment fell by -3,000 from an upward revision of 1,0000 for a net drop of -2,000 from last weeks reported figures. This is against expectations of a rise near 10,000. The four week moving average also fell, to 309,000, the lowest level since June of 2007. On an unadjusted basis claims rose by 47,000 or 14.6%. State by state Michigan led with a gain of nearly 10,000 new claims while California had the biggest drop in claims with -4,008. Based on the graph provided by the Bureau of Labor Statistics initial claims have been trending near the bottom of the range for some time now and look ready to break below 300,000. Regardless, claims are trending at the low end of the range and holding steady, enough to help other data points trend lower.


Continuing claims fell more than expected to a new low not seen since June of 2007 as well. Claims fell by -79,000 to 2.507 million. This is a sharp drop and an extension of a downtrend in longer term unemployment. As I have postulated before, I view the initial claims as a sign of turnover in the market and continuing claims as a sign of how quickly a person who gets fired can find work and total claims as an indication of longer term unemployment. This is not official, just a theory I have in place. In that light total claims also fell, by -20,292, to 2.446 million.


Housing permits and starts were released at 8:30AM coincident with the claims data. Permits fell versus an expected rise. On the flipside the previous month's data was revised higher to just over 1 million homes. While the new data suggests building permits cooled off a little for the current month the revision shows they were stronger last month and could lead to more starts in the next month. This month housing starts fell by -9.3% to 893,000 missing estimates. Last month's data was also revised higher but not over 1 million. This could get revised higher in light of the higher revision to permits.

The bit of data I thought might move the market a little more was the Philly Fed Survey Of Business. The survey rose to a reading of 23.9 from last month's 17.8 versus an expected fall to near 12. All readings within the report rose in June and all future indications were rose or remained positive. This is the fifth month of positive readings in the survey and reflect sentiment similar to that reported by Mark Zandi in his weekly survey of business. This is also the highest level for this indicator since March of 2011. New Orders are up 17, Shipments up 9, labor is near flat but improved.

Accoriding to RealtyTrac foreclosures are down to 2006 lows and down -16% from last year. Todya's data reveals that nothing has changed. Employment trends are still positive, housing is still growing slowly and business sentiment is positive.

Safety In Gold

The crash report sent traders scurrying in a knee jerk reaction into gold. Gold prices had been up a few dollars and were hovering just above $1300 when the reports started to flow in. At that time gold prices shot up $20 or so. The metal found resistance at $1325 and moderated down to a closing price of just over +$17. This situation could keep some buying in gold in the near future, at least until we get a better indication of what happened. For now no one is taking credit.

The Gold Index climbed more than 2% today in the hopes that gold prices would remain elevated. The index is making a bounce from support but still indicated very weak. Bullish momentum is still in decline and stochastic is moving lower. The long term trend is down, the most recent signal is bearish and today's rise is driven by news/flight to safety reactions. This may be another trap and one to be cautious of.


The Oil Index

Oil prices may have been affected by the crash news but were already on the move. WTI had been up close to to $2 earlier in the day and moved back up to the daily high before the close of the session. WTI climbed $1.92 while Brent rose only about $0.60, narrowing the spread some. The positive Chinese GDP released earlier this week, our own economic data, earnings and a draw down in stocks are providing a reason to think oil demand could rise. WTI settled at $103.10 at the end of today's session. The Oil Index fell today, in line with stocks and not with the underlying commodity. The index is now sitting on the short term moving average with long term support just a few points lower. Bearish momentum is in decline while stochastic is indicating an early buy suggesting that a stronger signal could be on the way. Support is at 1,650 so that is the line to watch for now. A break below that would find support at 1,625 and 1,600.


In The News

Microsoft made a big headline today announcing 18,000 new job cuts. The cuts are focused on the Nokia branch of the business, purchased last year, and are part of the overall restructuring process begun by the new CEO. The move will cost the company close to $1.5 billion dollars over the coming quarters and is expected to reduce long term operating costs, streamline and focus business segments. The stock popped on the news during the early session and gapped up at the open. Strong selling ensued driving prices down from the open but not below yesterday's close.


The Banking Index

Morgan Stanley was the last of the big financials to report earnings today. They too beat estimates, by a nickel. Adjusted EPS is $.60 and comes on slightly better then expected revenue. The report says that loan portfolios continue to grow and that the company expects this to continue into the future. The stock moved higher in pre market trading and then gapped up to resistance at the open. After trying to move higher selling pressure took over and sent shares lower. Morgan Stanley has been trending sideways for almost a year and is now moving down from the upper end of that range. The indicators are listless and without direction, in line with a trading range .


The BKX fell pretty hard today, aided by lack luster revenue guidance from regional bank FifthThird. The index dropped more than 2% to come to rest on a near/long term support line. Indicators are weak and point to a further move lower. Bearish MACD is picking back up and stochastic is trending lower in the range with a potentially bearish crossover. A break below this level could take the index to the next support around $67.50. Earnings this quarter were good, I think now there is concern for more improvement into the future.


Earnings Roundup

There was a flurry of reports before the bell today including the banks. Phillip Morris, tobacco maker, beat on the top and bottom lines. The company also reaffirmed full year guidance. Shares of the stock were one of today's few gainers. SAP, one of the fastest growing cloud companies, beat expectations and raised its full year guidance. The company said that it is experiencing subscription growth and higher revenue rates for cloud computing. Shares of this stock gapped up at the open and then sold off during the day, closing with a small gain. United Health Care also beat earnings expectations. The health company reported $1.42, $0.16 better than the consensus estimates. Investment company Blackstone beat on the top and bottom lines. The company reported the gains come on the back of sales of assets in the private equity side of business. Shares of Blackstone carried the trend of gapping up at the open, then selling off during the day. Medical products maker Novartis also reported profits and revenue above estimates and reaffirms full year guidance. Novartis shares bucked the trend, gapping lower and rising during the day. After the closing bell earnings from Google had the market moving a little. The internet giant beat expectations with an increase of profit on better than forecast revenue.

The VIX

The VIX spiked with today's sell off. The so called fear gauge climbed by more than 25% today creating one of the longest candles I have ever seen it make. Looking back over the past 3 or 4 year the index has made a few candles of this nature but they always precede a subsequent drop. Nearly every time the index makes such a strong move the next day it moves down with an equally strong movement. The few times it did not the down move came a day or two later. This could be a sign of something good for the market as it could be wiping a lot of negativity and expectations of pullback or correction out of the market. In the near term and going into tomorrow the news will have a lot to do with how the index and the market reacts. If the crash scenario detoriates, or looks like Russia was behind it, then there will likely be more selling.


The Indices

The Techs and the Transports tied for biggest decline today with a drop of -1.41 each. The Transports are falling from a brand new all time high and still above near term support. The indicators are still on the neutral side although bullish at the time. The recently turned bullish MACD is already peaking and stochastic is still moving sideways, just under the upper signal line. There is something going on here and I'm not sure what it is yet. If the selling persists there is support for the index just below today's closing price along the 8,250 round number level, and then just below that at the 30 day moving average. The long term trend is up but it looks at this time that the index may consolidate some in the near term with a chance of it moving down to the long term trend line about 300 points lower.


The Techs were also hit hard today as traders moved out of the riskier assets and into the safer plays. The Nasdaq Composite has now made a lower high and is in danger of making a lower low. Today's move down took the index below my long term support line and the short term moving average with increasingly bearish indicators. Momentum is on the rise and stochastic is moving lower in the range. I expect to see some more weakness here with a possible strong retest of support. A break below would find first support near 4,300 with a short term target down around 4,100.


The broad market fell more than 1% today for the first time in nearly 3 months. The last time I can see for sure, without measuring, was April 10th. That was during a long term trend line bounce and I think that is what could be happening now, a move down to the long term trend line. Today's move was a drop down from the resistance of current all time highs and has the look of a consolidation or correction to trend. The long term trend line is not far from the current level and could be reached with only a few days of moderate selling.


The Dow fell by just under a full percent, also moving down from a freshly set all time high. Today's move brought the index back below 17,000. The index is still above the short term 30 day moving average with indicators that are positively neutral. MACD is at the zero line and has been over the last few peaks while stochastic is firmly trending through the middle of the range. These readings are highly divergent and could be leading to a correction or pull back in the index. Support for the index is found below the 17,000 line at 16,750 and 16,500.


There has been some underlying near term weakness in the markets of late and only needed a catalyst to set it off. Not anything overtly bearish but as if the market was waiting for something and this is what it got. The geo politics in Ukraine and Israel are near term problems just like they ISIS last month, Ukraine the month before and others along the way. The long term trends are up and I expect them to continue but for the near term earnings haven't been strong enough to keep the market elevated. This correction is good for the rally as it will provide a cooling off time and potential trend following entries in the future. Tomorrow may be a tough day because of the plane crash story that is still unfolding but keep in mind that economic data and Fed outlook point to continued, steady growth through the end of the year at least. What was once called the most hated rally I now dub the Tortoise Rally, slow and steady, slow and steady.

Until then, remember the trend!

Thomas Hughes


New Plays

Will Investors Sell Ahead Of The Weekend?

by James Brown

Click here to email James Brown

Editor's Note:

It was a busy news day. There were a lot of headlines for the stock market to digest and most of them were negative.

Just last night President Obama announced another round of targeted sanctions against Russia for its support of the pro-Russian insurgents in Ukraine. Then today a passenger jet was shot down near the Russian border.

Malaysian Airlines

It's been a tough year for Malaysian Airlines. In March the airline lost Flight 370 from Kuala Lumpur to Beijing in international waters. Today Malaysian Airlines lost flight 17, which was headed from Amsterdam to Kuala Lumpur. This was a huge Boeing 777 jet with 280 passengers and 15 crew. Reports suggest it was shot down at 33,000 feet by a surface-to-air missile near the city of Donetsk, a bastion for the pro-Russian separatists.

No one is claiming responsibility. The Ukrainians blame the rebels and the rebels blame the Ukrainians.

Israel Troops

Hamas terrorists tried to infiltrate Israel through an underground tunnel today. They were stopped by Israel's defense forces but the event sparked a massive ground offensive by Israel into Gaza. Israel had been preparing for a ground offensive and calling up reservists in the last few days.

The Israeli operation hopes to eliminate most of the Hamas weapon stores in Gaza. These last few weeks have seen a constant barrage of rockets and mortars into Israel. Nearly 75% of the Israeli population has been at risk from these rocket attacks, which had grown to over 120 rockets a day. The ground offensive is expected to last 10 days to approximately two weeks.

As geopolitical risks escalate the markets saw investors pulling money out of stocks and into traditional safe haven trades like bonds and gold, which both rallied today.

The question to ask tonight is will traders decide to hit the sell button again on Friday for fear of escalating tensions this weekend?

We are not adding any new trading candidates tonight.




In Play Updates and Reviews

Ukraine & Israel Send Stocks Lower

by James Brown

Click here to email James Brown

Editor's Note:
News that a jetliner was shot down over Ukraine and Israel moving troops into Gaza pulled stocks lower.


Current Portfolio:


BULLISH Play Updates

Microsoft Corp. - MSFT - close: 44.08 change: +1.63

Stop Loss: 43.85
Target(s): To Be Determined
Current Gain/Loss: + 6.4%

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:
07/17/14: MSFT started the day in rally mode. The stock soared to $45.71 this morning on news it was laying off 18,000 people. The company is trying to streamline some of its core products. MSFT also said that its X-box sales doubled in June after price cuts to buy the game system without the Kinect sensor.

Given the market's recent weakness we are turning more cautious on all of our plays tonight we're moving the stop loss on MSFT to $43.85.

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

07/17/14 new stop @ 43.85
06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike



Micron Technology - MU - close: 33.05 change: -1.59

Stop Loss: 31.75
Target(s): To Be Determined
Current Gain/Loss: - 4.8%

Entry on July 16 at $34.60
Listed on July 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 31 million
New Positions: see below

Comments:
07/17/14: Last night SanDisk reported earnings and beat earnings estimates and the revenue estimates but guided lower for the third quarter. This SNDK warning has been blamed for weakness in shares of MU today. MU gapped open lower at $33.83 and plunged -4.5% by the close.

I am not suggesting new MU positions at this time.

Earlier Comments: July 15, 2014:
The group of "old tech" stocks have been outperforming the market. Names like Microsoft (MSFT) and Intel (INTC) and Micron (MU) are seeing a lot of interest, especially has PC sales come in a lot better than expected. There appears to be a revival of the PC at least from business clients. One thing all of those PCs need is memory.

Micron Technology describes themselves as a global leader in advanced semiconductor systems. Micron's broad portfolio of high-performance memory technologies—including DRAM, NAND and NOR Flash—is the basis for solid state drives, modules, multichip packages and other system solutions. Backed by more than 35 years of technology leadership, Micron's memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.

DRAM prices have been rising and that's good news for MU. The memory making industry has changed significantly in the last few years. Instead of multiple firms all beating themselves up on pricing the DRAM market is down to just three big companies. The major players are Samsung, Hynix, and Micron.

MU reported earnings back on June 23rd. Analysts were expecting a profit of 70 cents a share on revenues of $3.88 billion. MU delivered 79 cents a share and revenues rose +71.8% to $3.98 billion. The better than expected results has sparked some analyst upgrades and new price targets in the $38.00 to $50.00 range. MU is considered too cheap by some analysts. They're currently trading at just 10.5 times forward earnings. The broader market is trading for about 15.5 times. Shares of MU have been playing catch up the trend will likely continue.

After the closing bell tonight Intel reported earnings and beat analysts estimates thanks to better than expected demand for business computers. The mobile phone and tablet revolution has cannibalized PC sales for years. According to Intel tonight it looks like PC sales have stabilized and the "worst is over". That should be good news for companies like Micron.

Shares of MU are already in an up trend. The stock looks poised to breakout past its early July highs near $34.50. Tonight we're suggesting a trigger to launch bullish positions at $34.60, which would be a new twelve-year high for the stock.

Current Position: Long MU stock @ $34.60

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

Long Oct $35 call (MU141018C35) entry $2.59*

07/16/14 triggered @ 34.60
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike



SoftBank Corp. - SFTBY - close: 37.40 change: -1.02

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +2.0%

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:
07/17/14: The market's widespread sell-off today pressured SFTBY to a -2.65% decline. This is another reversal from resistance near $38.50. I am not suggesting new positions at this time.

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.



BEARISH Play Updates

Coach, Inc. - COH - close: 34.09 change: +0.30

Stop Loss: 34.60
Target(s): To Be Determined
Current Gain/Loss: -1.9%

Entry on July 16 at $33.45
Listed on July 14, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.7 million
New Positions: see below

Comments:
07/17/14: Yesterday's intraday bounce continued today. The stock rallied up to $34.55 before reversing. It looks like the rally failed near COH's 10-dma and 20-dma. Our stop loss is at $34.60. I'm not suggesting new positions at this time.

Earlier Comments: July 14, 2014:
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. Most 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.

current Position: short COH stock @ $33.45

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

Long AUG $33 PUT (COH140816P33) entry $1.10*

07/16/14 triggered @ 33.45
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike



DSW Inc. - DSW - close: 26.95 change: +0.20

Stop Loss: 29.15
Target(s): To Be Determined
Current Gain/Loss: - 0.2%

Entry on July 16 at $26.90
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
07/17/14: The market delivered a broad-based sell-off today. So naturally Murphy's Law dictates that DSW moved the opposite direction. Shares outperformed with a +0.74% gain. DSW should find short-term resistance at $27.25 and $27.50. I would still consider bearish positions at current levels.

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.

current Position: short DSW stock @ $26.90

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

Long OCT $25 PUT (DSW141018P25) entry $1.05

07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike