Option Investor
Newsletter

Daily Newsletter, Monday, 7/28/2014

Table of Contents

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

Market Wrap

Stocks Falter

by Thomas Hughes

Click here to email Thomas Hughes
US equity indices faltered today as traders await a massive round of economic data and earnings reports.

Introduction

The US equity markets dipped early today as traders await the month end macroeconomic data, an FOMC meeting and upwards of 700 earnings reports. The drop, which began after the open, was slow to start but accelerated after the 10AM release of pending home sales. The SPX found near term support just above the short term moving average, as did the other majors, and was able to reclaim most of the early losses. During the afternoon trading picked up a little, pushing the major indices into the green but after some mild late day volatility the markets closed mixed, with some above and some below Friday's closing prices.

Market Statistics

All eyes are on the week ahead. This is a real whopper of a week in terms of data and earnings with the added possibility of numerous geopolitical situations impacting the markets. Today alone there were about 80 earnings reports with about 700 or more scheduled for the rest of the week. On the economic front it is the end of the month which means monthly macroeconomic data in the form of jobs numbers and several other important data points. We will also get the first estimate for Q2 GDP and an FOMC meeting. Ordinarily Friday's NFP and unemployment report would top my list of important market moving days for the week but I think Wednesday may take that spot this time. Wednesday morning the ADP number will be released at 8:15AM followed by the GDP estimated at 8:30AM, both before the FOMC announcement later that same day. The ADP isn't too important but can foreshadow NFP which is more important, the GDP is going to be closely watched as will the Fed.

Economic Calendar

The Economy

There was one data point released today, Pending Home Sales. Pending sales dropped by -1.1%, slightly more than expected. Analysts had expected an average drop close to -0.8%. This is of course depending on which estimates you are reading. At least one report I read had the expected number at +0.3%. Regardless the drop was not what the market wanted to hear and helped to send the indices to the day's low. Last month's number was revised lower by a half percent to +6%. On a year over year basis the number of homes under contract is only down -4.5%, better than the expected -5%. Other housing related data this week includes the Case-Shiller 20 City Index and Construction Spending. Case-Shiller is expected to rise nearly 10% while spending is predicted to drop by at least -0.5%.

Also on Tuesday new Consumer Confidence numbers are scheduled for release. Wednesday the calendar heats up as I've already described with that bubble of data spilling over into Thursday. The weekly jobless claims figures are accompanied by Challenger Job Cuts, Employment Cost Index and Chicago PMI. Friday wraps the week with Construction Spending, ISM, Michigan Sentiment, Personal Income/Spending, auto/truck sales, unemployment and NFP.

This weeks summary of Moody's Survey Of Business Confidence starts of on a somber note. Mark Zandi begins by saying that “business sentiment outside the US has softened”. This is the first mention of this or anything negative in some time but he goes on to reiterate previous reports by saying “U.S. business confidence remains strong, as it has all year, consistent with an economy that is expanding well above its potential. . . Responses to the survey questions are strong across the board, but hiring intentions are especially robust; more than half of respondents are hiring.” Hiring has been an underlying theme for many weeks now and is in line with last weeks drop in initial claims for unemployment.

The Oil Index

Oil prices remain weak. WTI traded down by nearly a dollar on an intraday basis, dipping down to $101.00 before bouncing back in the afternoon session. Lack of supply disruption and large stockpiles are pushing prices lower while increased sanctions and continuing violence in global hot spots is keeping the fear factor in play. In Libya fighting sparked a fire in a fuel plant that is feared to be out of control. The Libyan government has asked for international assistance in putting it out. In the Ukraine fighting is ongoing while in Iraq focus has shifted from ISIS to the dispute between Iraqi and Kurdish officials over ownership of Kurdish oil. Newly emerging in the headlines is another round of fighting in Syria which may threaten regional stability.

The Oil Index traded lower today, in line with the broader market, and found support along the short term moving average. The index traded lower by about -0.25%, finding bottom within one point of the 30 day EMA. The index has been firing off some weak trend following signals over the past week or so but has yet to move higher with conviction. Today's move is another retest of support and sign that traders are waiting for either the FOMC, earnings, economic data or a combination. Most of the big oil companies report this week and could provide catalyst through revenue, EPS and/or guidance. The indicators are neutral to bullish on the daily chart following the aforementioned series of weak signals; MACD right at the zero line, stochastic is rising in the longer term and falling in the shorter. There is support along the 1,650-1,675 level with resistance at the current all time high near 1726.


Exxon Mobil is scheduled to report earnings on Thursday. The largest oil company is expected to earn $1.91 versus last quarters $2.10. Today the stock rose more than 1% from the short term moving average to approach a new all time high. The stock has been in a consolidation range for 3 months and is now moving up toward the upper end of that range. The indicators are bullish but not strong, consistent with a stock approaching the top of a range. The longer term charts are a little more bullish but a break to new highs is a requirement with prices at the current level. This quarter's earnings could provide the catalyst but I think it will be guidance, future outlook and economic data that carry the trade.


The Gold Index

Gold traded exactly flat for today. After an initial pop of $2 that took prices briefly above $1305 gold retreated to close UNCH for the day. There is risk in the market due to global conflict and that risk is causing some to seek safety but the underlying trend of improving economics is still present as well. For now they are balanced just above $1300. Conflict could escalate at any time but so could the economic outlook and the prospect for rising Fed interest rates. The combination of the two, especially with so much of both on the table, may have gold traders on edge. It is not hard for me to imagine one with an eye on mainstream news and the other on CNBC, watching for any kind of sign while having their fingers poised above the buy/sell button in anticipation of whatever this week may bring. I would not be surprised to see some volatile gold trading because of it.

The Gold Index traded in line with the broader market today, moving lower in the early part of the session and then higher in the after noon. The index is bouncing off the short and long term EMA's but is still trapped inside a longer term resistance zone. The prevailing trend is still down as are the indications but there are some signs of longer term buying around the 150 day EMA. Earnings are going to be important as is guidance and outlook for gold prices. The big names in the sector are scheduled to report toward the end of this week. The gold companies were able to boosts earnings in the past quarter through cost reductions but those can only go so far in the face of low gold prices.


Barrick Gold is expected report earnings on Wednesday after the close of trading. The miner is expected to report EPS of $0.14, roughly 50% below last quarters results. Shares of the stock traded down from Friday's close, testing support at the long and short moving averages. Current price action is firmly in the middle of a long term range with the possibility of growing support. The indicators are bearish at this time but prices have been able to hold above $18 with multiple tests of support. A break below $18 could take the stock back to the low end of the range near $17 or lower. Resistance is just above the current level near $19. Earnings will be crucial, but so will gold prices and economic data affecting gold prices.


In The News, Story Stocks and Earnings

Earnings. Today there were only about 80 reports and not too many names of big interest on the list that I noted. Herbalife was one that caught my eye, if only because of the battle raging over it. The company reported earnings below expectations for the first time in many quarters and sent the stock down by more than 7% in after hours trading.


Merger Monday was more in the spotlight than earnings today even though there are so many reports this week. Big in the news is the purchase of Trulia by Zillow. The deal is worth over $3.5 billion in stock and sent shares of Zillow lower, intitially, and Trulia higher. Trulia gained close to 20% on an intraday basis while Zillow fell at first only to find support later in the day. Shares of the stock did not gain so much as the target company but did manage to climb more than 1.5%. The candles and indicators are strong and in line with higher prices over the long term.


Also in the news is an offer from Dollar Tree to buy competitor Family Dollar in a cash and stock deal worth $74.50 a share. Shares of both stock gapped up at the open but only Family Dollar was able to hold the higher prices. Shares of FDO climbed higher than the offer price raising speculation the deal would go higher and that other players could get involved.


The Indices

While most of the market was able to trade higher for at least part of the day the Transports were under pressure from the start of trading to the end. The Trannies lost more than a full percent in today's session, making the fourth day of decline since an all time high four day's ago. The index is just above support at the 8,250 level and the short term moving average. The indicators are bullish but showing weakness in the nearer term, weakness that could result in a test or break of support. The long term trend is still up so I will be looking for support to kick in during the week as earnings and data are released.


The Nasdaq also closed in the red today but by a much smaller margin, only -0.10%. The index dropped after a mildly weak open, approached the short term moving average and then moved back up to the closing level. The candle formed is not overly large but big enough not to be considered another spinning top like the previous 5 candlesticks. This is a small but positive sign of support along the moving average and in line with the prevailing trends. Support is currently at the 4,400 level, just below today's low and a hairs breadth above the 30 day EMA, with a previous all time high just below that.

The indicators are mixed on face value with the MACD in the red and stochastic showing a weak buy. The MACD peaks are bearish but also consistent with support, convergent with stochastic and in line with the trend. The risk at this time is for earnings to disappoint, economics to falter and/or geo politics to take hold of market direction. A break below support would confirm a potential double top that has been forming and put a downside target near the long term moving average. This move would be equal to roughly 10-15%.


The Dow Jones Industrial Average traded closed in the green after a morning spent testing support. Today the blue chips managed to eke out a gain of +0.13% after moving below the 30 day EMA. This is a good sign of near term support at least as we wait for the week to unfold. This index has been bobbing along the moving average since mid February and looks like it could keep on doing the same. The indicators continue to trend at/near the midpoint/equilibrium levels respective for to each. MACD is bearish now, but very weak as it has been, and peaking and in line with past bounces. Stochastic is overbought in the near term (%K) while in the longer term (%D) it is still in the middle of the range and apparently going nowhere fast. This combination leaves the up trend intact and in control with the appearance of slow, steady buying. A drop below support, currently indicated at the short term moving average, would find next support around 16,750.


The SPX made a move very similar to the blue chips. The broader market opened mildly weak, moved lower to test support at/near the moving average, and then moved back to set a new intraday high and close in the green. The index found resistance at the all time high set at the beginning of July but looks set to bounce higher provided nothing spooks the market. The indicators are moving lower in the near term but also setting up for a possible follow up signal to the weak signal I noted last Thursday. The SPX has basically been moving sideways all month, consolidating between previous and current all time highs, and pressured from beneath by the short term moving average. The forming pattern is taking on an upward bias and is poised for a potential break out.


The market tried to get scared today but in the end decided to wait and see what the fed and the data and the earnings have to say. There are a lot of reasons to worry but in the end the trends are still up and there is no reason to suspect change just yet so waiting for the data is only the right thing to do.

In the nearest terms, geopolitcal concerns have the power to cause a sharp movement but one that is likely short lived. There are at least four hot spots flaring up now including Iraq, Libya, Ukraine and Israel/Gaza. In the short term earnings and earnings growth are a concern and then longer out is the economic outlook.

Political turmoil or earnings may cause a correction but the economics dominate the long term trend. On an individual basis no one sector of the economy is carrying the recovery but as a whole everything is getting better a little bit at a time. Housing is not booming, but it is steady. Jobs creation isn't booming but it is also steady. The consumer isn't spending like crazy but is spending. As the one grows in turn does the other and sooner or later I think they will start to grow in tandem. For now be prepared for whatever may happen.

Until then, remember the trend!

Thomas Hughes


New Plays

Growing Competition

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Voxeljet AG - VJET - close: 17.67 change: -0.81

Stop Loss: 19.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 28, 2014
Time Frame: 2 to 3 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
Supporters of 3-D printing believe the technology will revolutionize the manufacturing industry. The technology is spreading. Normally 3D printers work with plastics and metals. Now there are companies trying to use 3D printers to make food. One company even hopes to 3D print human organs.

VJET is a German technology company that makes 3D printers on an industrial scale. A normal 3D printer can sit on your desk. VJET's largest printer has a workspace of 4x2x1 meters and is about the size of a garage.

This stock went public in 2013 during the initial 3D printing craze. Unfortunately the euphoria has worn off. VJET has tumbled from $70.00 in late 2013 to $13.00 just a couple of months ago. This industry saw a significant rally in June but it peaked in early August. Now VJET is retreating lower again.

VJET's latest earnings report in May was a disappointment. Wall Street was hoping for a loss of 6 cents with revenues of $3.79 million for the March quarter. VJET reported a loss of 22 cents and revenues only hit $2.7 million.

The 3D printing stocks stumbled again today after Amazon.com (AMZN) announced their 3D printing online store. This could spell trouble for 3D companies. AMZN is a tough competitor. Now it looks like AMZN's initial foray into 3D printing is small nicknacks for consumers. They're selling the end product and not printers. This is unlikely to affect VJET's business.

The bigger threat might be Hewlett-Packard (HPQ), which announced earlier this year that they were entering the 3D printing market and planned to build printers for businesses, not the consumer. That's not good news for VJET.

Today shares of VJET are breaking support near $18.00. We think the decline continues. I do want to point out that investors should consider this a more aggressive, higher-risk trade. That is because the short interest in VJET is up to 44% of the very small 9.6 million share float. That does pose a risk of a short squeeze (just like the rally VJET saw in June).

Tonight we're suggesting a trigger to open bearish positions at $17.45. We are not setting a target yet but the point & figure chart is bearish with a $14.00 target.

Considering buying the put option instead of shorting the stock. Buying a put will limit your risk to the cost of the put.

Traders should also keep in mind our time frame. This trade may only last two or three weeks. The company reports earnings in mid August but there is no confirmed announcement date yet.

Trigger @ $17.45

- Suggested Positions -

Short VJET stock @ $17.45

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

Buy the Sep $17 PUT (VJET140920P17) current ask $1.95

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

Annotated Chart:



In Play Updates and Reviews

Small Caps Continue To Underperform

by James Brown

Click here to email James Brown

Editor's Note:
The small caps continue to weigh on the broader market. Yet the Russell 2000 did bounce from its mid July lows today.

CPHD hit our entry trigger today.


Current Portfolio:


BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.60 change: +0.17

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: +0.7%
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:
07/28/14: HPQ looked resilient today and managed to outperform the major indices with a +0.4% gain and another 52-week high. I would still consider new bullish positions at current levels.

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: 36.99 change: +0.34

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: +0.8%

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:
07/28/14: SFTBY is starting to bounce from the bottom of its trading range. Shares outperformed the wider market with a +0.9% gain.

I would hesitate to open new positions at this time.

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: 26.34 change: -0.82

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: + 2.1%

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:
07/28/14: Before the opening bell shares of DSW were downgraded from "neutral" to "underperform". The stock reacted with a gap down at $26.34 and closed with a -3.0% decline on the session. I don't see any changes from my earlier comments.

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



Cepheid - CPHD - close: 39.19 change: -0.28

Stop Loss: 41.10
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

Comments:
07/28/14: The sell-off in CPHD continued on Monday and shares lost -0.7%. The stock also hit our suggested entry point at $39.20. I would still consider new positions at current levels.

Earlier Comments: July 26, 2014:
CPHD is in the technology sector. If you look deeper the company operates in the scientific and technical instruments industry. According to the company's website, "Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer."

CPHD, like most of the U.S. stock market, had a great 2013. Unfortunately the rally peaked in February-March 2014. This stock set its all-time highs in the $55-56 zone. Market watchers already know that momentum and high-growth names were crushed during the March-April market pullback. CPHD was no exception. The stock corrected from $55 to $40. It looked like CPHD was on the path to recovery but then the stock collapsed again in the last two weeks.

The problem is CPHD's earnings. The company reported earnings on July 17th. Their adjusted results for the second quarter of 2014 was a loss of 10 cents a share. That was better than Wall Street's estimate for a loss of 13 cents a share. CPHD delivered pretty solid revenue growth. Sales in the second quarter surged +21.4% to $116.5 million. That came in better than analysts were expecting. Yet CPHD's net results were down -40% from a year ago.

Listening to the company's management paints an optimistic outlook. CPHD's CEO John Bishop said they sold a record-setting 1,084 of their GeneXpert systems last quarter. That's more than all of 2012. Gross margins improved as well with margins rising from 45% to 49%. So why did the stock fall?

Investors sold the stock on disappointing guidance. CPHD expects 2014 revenues in the 4452-461 million zone. That's relatively close to Wall Street's $459 million estimate. Yet CPHD is forecasting EPS of 10 cents to 13 cents. That is significantly lower than analysts' estimates of 20 cents. You can see the reaction in CPHD stock with the big drop on July 18th.

The post-earnings sell-off continues and now CPHD is breaking down under significant support at the $40.00 level. The next stop could be the $36-35 area or lower. Currently the point & figure chart is bearish and forecasting at $29.00 target.

I would consider this a more aggressive trade. The latest data listed short interest at 16.8% of the 68.9 million share float.

Friday's low was $39.26. We're suggesting a trigger to open bearish positions at $39.00.

- Suggested Positions -

Short CPHD stock @ $39.20

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

Long SEP $40 PUT (CPHD140920P40) entry $2.35

07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike


Five Below, Inc. - FIVE - close: 35.27 change: -0.14

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:
07/28/14: FIVE underperformed the market again with a -0.39% decline. Shares look like they will retest support near $34.00 soon. We're waiting for a breakdown. Our suggested entry point for bearish positions is $33.75.

I want to caution investors that this should be considered a more aggressive trade. There are a lot of people already bearish on FIVE. The most recent data listed short interest at 20% of the 48.6 million share float. That does raise the risk of a short squeeze. Considering using a put option on this trade. That way your risk is limited to the cost of the option.

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: 44.68 change: +0.21

Stop Loss: 45.10
Target(s): To Be Determined
Current Gain/Loss: -2.1%

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:
07/28/14: The bounce in FRGI continued but share are hovering just beneath technical resistance at its 20-dma and 30-dma near $44.80.

I am not suggesting new bearish positions given this rebound.

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