Option Investor
Newsletter

Daily Newsletter, Thursday, 7/24/2014

Table of Contents

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

Market Wrap

S&P 2000 In Sight

by Thomas Hughes

Click here to email Thomas Hughes
Global data and earnings pushed the S&P 500 a little closer to the elusive 2,000 mark.

Introduction

A combination of global and domestic macroeconomic data and earnings from nearly 230 companies combined to send the S&P 500 to a new all time high. Chinese and European flash PMI readings started the ball rolling in the early sessions. Chinese PMI rose to an 18 month high indicating that manufacturing in that region is responding to stimulus measures. The index came in at 52, versus the previous 50.7 and the expected 51. In the EU net PMI came in at a surprising 54 with expected weakness in France and other peripheral countries. In Germany PMI rose to 52.9, ahead of the expected 52 and last months reading. Asian markets were mixed but mostly in the green while in Europe buyers were able to lift the indices across the board with an average gain around 0.5%.

Market Statistics

Futures trading indicated a higher opening throughout the pre opening session. There were some fluctuations but the indication for the SPX was about 3 points higher than yesterday's close. A flood of earnings reports and a much better than expected jobless claims number had little affect on the market but did help to support it. At the open trading was in the green with some pressure to test yesterday's closing price in the first half hour to an hour. The SPX and other indices were pushed back to break even and into the red for a brief time before moving back up to the intraday high. One cause for the early pressure was a weaker than expected new home sales number that did not inspire a lot of confidence in the housing recovery. The remainder of the day saw the indices drift between the lows and highs of the day, closing near the mid point of the range.

Economic Calendar

The Economy

Today initial claims for unemployment was released with a surprise drop. Claims fell by an unexpected -19K to below 300,000 and a new low not seen since before February 18, 2006. This is the first time claims have been below 300K since before the crisis and a sign I have been on the watch for. This is not the holy grail of economic data by any means but is an important level in terms of this one particular indicator. This is a sign that near term unemployment, layoffs and job turnover are improving and could lead to improvements in other areas. Last weeks figure was revised upward but by a mere 1,000 claims. The four week moving average fell by more than -7K and is on the verge of breaking 300K as well. This is also a new low, one not seen since before May 19, 2007. Now that intitial claims have fallen below 300K it may be time to start looking for another marked improvement in the jobs data. The next round of which is just next week. Initial claims lag by a week, continuing claims by 2.


Continuing claims fell as well in this weeks data, by -8,000. Claims for a second week of unemployment dropped to 2.5 million and another low not seen since June 16, 2007. Last week's data was revised up by 1,000. The four week moving average of continuing claims fell by -17,000, also a new almost 7 year low. Looking at the table of adjusted claims provided by the DLS it appears as if they are trending lower with no sign of bottoming. Total claims was the negative surprise in today's jobs related data, climbing by more than 165,000 to 2.611 million. This is off of recent lows but still near the somewhat recently set long term lows.


On an unadjusted basis claims fell by more -78,215, or -21.1%. This is more than 30% more than expected. On a state by state basis New York and California led with gains in claims of 14,427 and 11,126, respectively. Georgia was next runner up with a gain of 6,112. Michigan and New Jersey both had drops in claims with Michigan's -6,846 leading the way. Now that the jobs market seems to be stable and possibly picking up some analysts are calling for an increase in wages as the next sign of recovery. Based on the results of Moody's weekly Survey Of Business Confidence that sign may come soon. The last two weeks summary of the survey has included positive sign that wage increases are in the works and could begin to appear in the hard data soon.

New Home sales posted an unexpectedly large drop. Sales fell -8.1% to an annualized rate of 406,000. This is below the expected rated of 479,000 annualized sales. The headline drop is not counting the downward revision to last months data which would put this month's figure closer to the -20% mark. On a year over year basis sales are down -11.5% with an increase of inventory of 3.1%. The caveat here is that the numbers are based on estimates with a margin of error of +/-12.3%.

Tomorrow Durable Goods Orders is the only thing on the economic calendar. Next week however is going to be a big one as it is the next FOMC meeting and the end of the month. End of the month means ADP, Challenger, NFP and unemployment data along with several other key reports.

The Oil Index

Oil prices dropped about $0.50 for WTI in the early part of the session. Later that drop extended to $0.90 and then $1.25 as diminishing concerns for global unrest merge with high stockpiles and improved supply. WTI settled near $102 today, down near -1%, but is still elevated over the longer term. Oil over $100 is good for oil company earnings, at least in theory, and that theory seems to have oil companies on the move. The Oil Index is bouncing off of its long term support line and is now moving higher. The index moved up about a half percent today and crossed the 1,700 line for the first time since breaking and being rejected by that same line last month. The move is approaching the current all time high and is accompanied by bullish indicators. Stochastic is firing off the strong trend following signal and that was confirmed today by MACD. Longer term bulls will need a break of resistance but a test of the current all time high seems likely in the near term. Support is at 1,650 with resistance near 1,725.


The Gold Index

Gold broke $1,300 today and fell to a potential support level near $1,290. Early indications had the metal trading just above round number support at $1,300 but once prices dipped below they quickly retreated down to the next level. US economic data and in particular the jobs picture have helped to strengthen the dollar and bring prices down. The Gold Index made a similar move to the down side, breaking a near/short term support line and then later the short term 30 day EMA. The indicators are bearish and gaining strength, in line with the underlying long term trend, and point to lower prices. Downside targets are $95, $92.50 and $90 in the near to short term with resistance just above the current level. Longer term there is some signs of a possible bottom around $85.


In The News, Story Stocks and Earnings

Today more than 230 companies reported earnings on what is one of the single biggest day's of the season. Action before the bell was mild considering the number of those meeting or beating expectations. The percentage is now around 79% in favor of those S&P 500 companies at least meeting the expectations. After hours was active as a number of high profile names reported. A quick round up of names reporting before the bell includes 3M, Ford, General Motors, and American Airlines. Those after the close of trading include Visa, Starbucks and Amazon.

3M reported earnings that were more or less in line with expectations. The company reported earnings of $1.91 per share and reaffirmed their guidance. Earnings are up 11.7% and are a record for the company. The stock rose today to touch a new all time intraday high but fell back from before the close. The indicators are neutral within the current uptrend but could be rolling into a buy but more confirmation is needed to get bullish on this one from here.


Ford reported better than expected earnings, driven by a surprise profit in Europe. The European arm of the company reported its first profit in 3 years, at least a quarter or two ahead of the general expectations. Adjusted EPS of $0.40 is 11.1% better than consensus estimates and on top of a slight miss in revenue. This suggests that operations are better than expected although sales are light. Shares of the stock opened higher, climbed to a new three and half year intraday high before falling from long term resistance. The indicators are bullish but weak and could be indicating the top of a range. The longer term charts are more decisively bullish so I am not counting out higher prices, but with the possibility of near to short term consolidation or pullback. Support is around $17.50 with the next level just below along the short term moving average in the $17.25 region.


GM did not meet expectations due to the impact of the recall on top and bottom line numbers. On an adjusted basis GM earned $0.58 per share, just shy of estimates, on revenue that also fell short. On a non adjusted basis GM reported earnings more than 70% lower than last year at this time due to the massive cost of the recalls, scandal and compensation fund which is just an estimate. Shares of GM fell more than 4% today, dropping below the short term moving average with strongly bearish indicators. A retest of support near $35 or $33 looks likely.


American Airlines, among other air carriers, reported earnings that beat expectations. The airline reported record earnings and initiated a stock buyback along with a dividend, the first since 1980. The company also reported further plans that are intended to reduce debt and costs. The stock, which has been trending higher since the first of the year, moved higher on the news before falling in the late afternoon trade.


After hours action was a little hot as a number of S&P and Nasdaq companies reported. Visa beat on the top and bottom line as consumer spending increased. Starbucks also beat top and bottom with 22% EPS growth, 6% comp store growth and an improvement in gross margins. Amazon was a disappointment, reporting a much wider than expected loss on revenue that was in line with estimates.

The Indices

The SPX moved marginally higher today to set a new all time intraday and closing high. The index moved about 0.1% higher after a day of light trading. Economic data and earnings helped to push the index to the high but next weeks FOMC meeting and round of economic data may be keeping the rally in check for now. The index is firing a stochastic trend following signal that is yet to be confirmed by MACD. However, similar trend following set ups over the past year and more have resulted in upward movements in the range of 40-60 points in the near to short term. The daily charts, shown here, are convergent with the longer term weekly charts which adds even more weight to current bullish analysis. This leads me to think the so-called summer melt-up that folks have been talking about could happen. Next week there are quite a few events on the calendar that could be the catalyst including the FOMC and the NFP.


The other indices were not able to hold positive territory today but closed more or less flat. The Dow Jones Industrial Average lost about -0.02% or just under 3 points. The index has been consolidating over the past week and is inside a narrowing range supported by the short term moving average and the current all time high. The indicators are on the bullish side but still more neutral than not. There is no sign of reversal or stopping here, just not much sign of strength. The index is still moving slowly and steadily higher and that is supported by the indicators.


The Dow Jones Transportation Average lost -0.03% today, or just under 2 points. The index moved lower after a flattish opening and a mild test of the new all time high set yesterday. This index is also moving slowly and steadily higher, like the blue chips, but with more strength. Bullish momentum is steady, even with today's mild drop, and stochastic is pointing up while moving higher in the upper signal zone. There is a chance for some near term weakness but short and long term indications are bullish. A short consolidation here could be expected as it is the first target based on the break out of the flag pattern from the beginning of the month. The next upside target on a continuation is 8,750. Should a dip ensue support is about 250 below the current level along the 8,250 level and the short term moving average.


The tech heavy Nasdaq shed the most today, -0.04%. The index found resistance less than a half point below the current all time high after an opening just above yesterday's close. This indicator is at resistance set last month with indicators that suggest it will test this level in the least. MACD is on the verge of crossing the zero line, an event that will attract momentum traders, while stochastic is giving off a fairly strong trend following signal. Earnings reported after the bell may weigh on the index tomorrow but the long term trend is up and the indicators are supportive of it. Resistance is at 4485 with support along the short term moving average along the 4400 line.


The indices started to make their move this week, ahead of the FOMC and data, just like it has done over the past 2-3 months. Each time the FOMC or NFP approaches the market gets ready to move, then creeps across the line to a new high even before the news is released. Today that move paused as traders digested the data and earnings in preparation for the reality of what next week will bring. The jobless claims data today is one indication that next week we may get some strong numbers from ADP, NFP and unemployment. The new home sales data not so much. In the end the key is how the data all fits together, no one piece is the answer and no single sector can carry the weight of the economy. It is the broader view and the data trends as a whole that matters. Next week we will get a another piece of the puzzle. Tomorrow be on the lookout for durable goods orders and prepare for some potentially volatile trading driven by today's after hours reports and new reports in the morning.

Until then, remember the trend!

Thomas Hughes


New Plays

Geopolitical Risks Rising

by James Brown

Click here to email James Brown

Editor's Note:

The rally in the U.S. stock market seemed to stall on Thursday. The flood of earnings news remains largely bullish but geopolitical tensions are rising and could stymie the rally.

The situation with Israel's ground offensive in Gaza is escalating. Not only is it drawing major demonstrations around the world but the warfare has turned to rioting in Gaza. Reports suggest that tens of thousands of Palestinians have clashed with Israeli forces with the Gaza residents throwing rocks, Molotov cocktails, and fireworks.

At the same time the situation with Ukraine and Russia is getting worse. The U.S. military says they have evidence that Russians have been sending more tanks into Ukraine and the Russian military has been firing their artillery at Ukraine targets. If that wasn't enough Bloomberg reported that the Ukraine (Kiev) government is in trouble with two parties, the UDAR and Svobada, both quitting the government, which dissolves the current coalition. This could force new elections by September or October.

In other news yet another passenger plane went down in Africa with over 115 people on board.

Put it altogether and the U.S. market has been extremely resilient to all these headlines. Yet as they continue to pile up it could start to impact investor sentiment.

Today was also a huge day for quarterly earnings announcements with hundreds of companies reporting results today. There is a chance tomorrow could see a post-earnings let down.

No new trades tonight.

I will note some of the bullish stocks on my watch list:
RFMD, YPF, KATE, SYMC, NTAP, DOW, LM, MRO, MS, LUV, F, CPHD(bearish),

If these continue to perform well we might add a couple in the weekend newsletter.




In Play Updates and Reviews

Market Rally Stalls On Thursday

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market rally appeared to stall on Thursday's session.


Current Portfolio:


BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.04 change: +0.06

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: -0.9%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: see below

Comments:
07/24/14: HPQ delivered a mellow performance on Thursday with shares hovering near the flat line most of the day. I don't see any changes from my prior comments. I would wait for a new rally past $35.35 before initiating new positions.

Earlier Comments: July 22, 2014:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

- Suggested Positions -

Long HPQ stock @ $35.35

- or -

Long Sep $35 call (HPQ140920C35) entry $1.49*

07/23/14 triggered @ 35.35
*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: 36.81 change: -0.62

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: +0.4%

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:
07/24/14: The Japanese market closed in the red again. Yet shares of SFTBY are underperforming both the NIKKEI index and the U.S. indices. SFTBY plunged -1.65% to close just below their 50-dma on no discernible news.

SFTBY has not traded below $36.00 in eight weeks. Tonight I am adjusting the stop loss to $35.75.

Alibaba IPO -- Previously there was hope that Alibaba might IPO in July. Then there was speculation that they might IPO on August 8th since the number eight is a lucky number in China. Now the most recent update suggests that Alibaba will not IPO until September.

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

07/24/14 new stop @ 35.75
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

DSW Inc. - DSW - close: 27.57 change: +0.08

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: - 2.5%

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:
07/24/14: DSW spiked up to the $28.00 level and then failed. The intraday reversal is encouraging but I would still wait for a new decline under $27.25 before considering new positions.

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

07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike



Five Below, Inc. - FIVE - close: 35.56 change: -0.43

Stop Loss: 36.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
Entry on July -- at $---.--
Average Daily Volume = 1.0 million
Listed on July 21, 2014
New Positions: Yes, see below

Comments:
07/24/14: FIVE's intraday rally reversed. Shares still managed to outperform the market with a +0.6% gain today but today's session does not look bullish.

We are waiting to launch bearish positions on a new relative low.

Earlier Comments: July 21, 2014:
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across a number of our category worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal (which we refer to as "Now"). We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management's experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to teens and pre-teens, as well as customers across a variety of age groups beyond our target demographic (source: company website).

FIVE has been suffering from a multi-year trend of lower same-store sales growth. The first quarter of 2014 broke that down trend with same-store sales growth of +6.2%. Management had previously guided in the 3-4% range and analysts were only expecting +3.8%. Meanwhile total sales surged +31.8% to $126 million, beating estimates of $121.9 million. The overall sales growth was a combination of adding new stores and the better same-store sales. Unfortunately FIVE guided lower in its Q1 report (June 4th). Management also guided for full-year 2014 same-store sales growth of just 4%.

FIVE opened 19 new stores in the first quarter bumping its total to 323 stores. Their long-term plan is 2,000 stores. That might be a warning signal. The FIVE co-founders have tried retail before with the Zany Brainy chain that sold toys and games. Zany Brainy eventually went bankrupt and one of the reasons blamed for the failure was growing too fast.

There have been plenty of bears claiming that shares of FIVE are too rich. The company's P/E is about 55. That is pretty expensive but growth names tend to carry high valuations. They are seeing strong revenue growth. That growth could face tough competition.

Wal-Mart (WMT) unveiled plans to start building smaller "neighborhood" stores in an effort to win back some market share. WMT plans to boost these smaller stores from 346 in 2014 to over 500 in 2015. Given WMT's strength in this industry they could squeeze FIVE's margins.

Shares of FIVE has been underperforming the major indices. The stock peaked near $55 a share back in November 2013. Since then investors have been selling the rallies and FIVE now has a bearish trend of lower highs. Today shares of FIVE are hovering above major support near $34.00. A breakdown could launch the next leg lower. The Point & Figure chart is currently bearish and forecasting at $28 target.

The February 2014 low was $33.94. We are suggesting a trigger to open bearish positions at $33.75.

Trigger @ $33.75

- Suggested Positions -

short FIVE stock @ (trigger)

- or -

buy the Nov $30 PUT (FIVE141122P30)

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


Fiesta Restaurant Group Inc. - FRGI - close: 44.44 change: +1.44

Stop Loss: 45.10
Target(s): To Be Determined
Current Gain/Loss: -1.6%

Entry on July 21 at $43.75
Listed on July 19, 2014
Time Frame: Exit PRIOR to earnings on Aug 5th
Average Daily Volume = 271 thousand
New Positions: see below

Comments:
07/24/14: Ouch! The two-day bounce in FRGI has just erased any potential gains for us. There is no news behind the rebound. It would make more sense to see FRGI surging if the market was showing more strength today.

Today's close back above $44.00 and its 200-dma, areas which should have been overhead resistance, is not good news for the bears.

We will adjust the stop loss down to $45.10. No new positions at this time.

Earlier Comments: July 19, 2014:
Fiesta Restaurant Group, Inc. (FRGI) specializes in fast-casual, ethnic restaurant brands. They currently own, operate, and franchise the Taco Cabana and Pollo Tropoical brands with more than 300 locations across the southern United States, the Caribbean, Central and South America. Most of their stores are located in Florida.

FRGI was the best performing restaurant stock last year with a gain of 240%. Yet shares have been seriously underperforming this year with a -15.5% decline and that's after the eight-week rally from its May 2014 lows.

The company is growing. They're expected to boost their store growth by 17 percent this year. Their latest earnings report was mixed. FRGI delivered a profit of 33 cents per share when Wall Street was looking for 30 cents. Revenues were up +8.8% year over year to $145.4 million. That's nice growth but analysts were expecting revenues of $147.5 million.

Same-store sales and traffic were up +6.3% and 4.6%, respectively at the Pollo Tropical brand. Yet the Taco Cabana brand only saw +0.8% sales growth and traffic was negative.

The U.S. restaurant industry saw first quarter traffic decline. It looks like the trend continues in the second quarter. Industry wide traffic declined -1.7% in June. That's the 19th consecutive month of negative traffic. Now FRGI does seem to be outperforming its peers in the restaurant industry but it does seem to be swimming up stream against a cautious consumer spending environment.

The rally off FRGI's May lows appears to be breaking down. FRGI has been consolidating sideways the last few days and looks poised to break support at its simple 200-dma soon.

We think it will break down. I would consider this more of a short-term technical trade than a bearish call on FRGI's fundamental business. The $35-37 area looks like it could be significant support. We'd like to try and capture the drop.

Tonight I'm suggesting a trigger to open bearish positions at $43.75 with a stop loss at $45.75.

FRGI is scheduled to report earnings on August 5th and we do not want to hold over the announcement.

Current Position: short FRGI stock @ $43.75

07/24/14 new stop @ 45.10
07/21/14 triggered @ 43.75