Option Investor
Newsletter

Daily Newsletter, Saturday, 8/9/2014

Table of Contents

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

Market Wrap

Headline Short Squeeze

by Jim Brown

Click here to email Jim Brown

News of a Russian withdrawal from the Ukraine border and tactical airstrikes by the U.S. in Iraq overcame a slow news day to cause a major short squeeze.

Market Statistics

The market rallied on low volume as shorts covered their positions ahead of the weekend. This was a monster short squeeze as the expected invasion of Ukraine failed to materialize. Investors had been trading the market decline for the last two weeks in expectations for the Russian invasion, stronger sanctions and weaker economies in Europe. The news Russia had declared an end to its "military exercises" and was returning the men and equipment to their bases came at 1:PM and Dow spiked another +120 points on that news.

Strangely the massive short covering came on only a tweet from a Russian news agency rather than an entire story on the news wires. That shows how over shorted the market was and how concerned traders were about going into the weekend short.

The turnaround was significant after the S&P futures dipped -15 points overnight to 1890 before reversing course to trade at 1913 just before the cash market opened. You don't see a 23 point range in the S&P futures in an overnight session very often. This also proves the market was heavily shorted.


The yield on the ten-year treasury had declined to 2.37% early in the morning as the various war premiums were priced into the market. When the news broke at 1:PM about Russia ending the exercises the yield spiked back to 2.42% but that was still the lowest closing yield since June 19th 2013.


Elsewhere there was news of additional bombing strikes by U.S. and Iraqi aircraft against the Islamic State (IS). That suggests that once the campaign started it may end up being the beginning of the end for the Islamic State. The terrorists had pressed their gains and were moving towards Irbil, the capital city of Kurdistan, and putting the Kurdish people and many Americans and other nationalities at risk. Also, the IS had trapped up to 50,000 civilians of multiple religious backgrounds on a mountain in Northern Iraq. These civilians had fled from the approaching IS forces bent on genocide, rape and torture. Many of these people were Yazidis Christians that IS had sworn to kill and President Obama finally realized he had to act to head off a disaster.

In Israel the Hamas terrorists resumed their rocket attacks and the Israeli air force returned the fire with multiple attacks on the rocket launch facilities.

The economic news on Friday was minimal. The Wholesale Trade report for June showed inventories rose +0.3% and half the analyst estimate for +0.6% gain. May was revised lower from +0.5% to +0.3%. Durable goods inventories rose +0.7% while nondurable goods declined -0.2%. The report was ignored.

Productivity and costs for Q2 rose with output rising +2.5% compared to a -4.5% decline in Q1 as a result of the severe weather. Compensation rose +3.1% and significantly lower than the +6.8% rise in Q1. Unit labor costs slowed dramatically from an 11.8% rise in Q1 to only +0.6% in Q2. This report is positive for the Fed. They were concerned about the sharp rise in unit labor costs in Q1 and the potential for those costs to continue to rise.

Next week also has a light calendar with the Retail Sales and Industrial Production as the highlights. There is nothing on the calendar that should move the market.


The earnings calendar for next week has very few highlights. Priceline, Cisco Systems, Walmart, JC Penny and Applied Materials will be the most watched. This is the last major earnings week of the Q2 cycle.


Cereal maker Post Holdings (POST) probably wishes they could have announced earnings on Saturday when the markets were not open. The company lost 30 cents per share compared to a profit of 3 cents in the year ago quarter. In an effort to be less dependent on the low margin cereal business Post made 7 acquisitions since August 2013 and they announced another one with earnings. They said they were acquiring peanut butter maker American Blanching for $128 million. The loss came from trouble integrating all of those businesses into one company. Analysts worried they tried to grow too fast and the drag from the integration process could last significantly longer. Shares were down more than -20% intraday but rebounded to a -16% loss at the close.


Green Mountain Coffee (GMCR) reported a +21% rise in earnings to 99 cents that beat estimates of 87 cents and raised full year guidance. More than 81% of revenue came from sales of the single cup brewers and the K-cups to support them. Sales of K-cups rose +10% to $826.3 million on a 15% increase in volume. The company raised full year guidance from $3.63-$3.73 to $3.71-$3.78. Sales are expected to rise in the high single digits.

The earnings were strong but the stock was not. Their current quarter guidance was for 68-75 cents and analysts were expecting 86 cents. Shares of GMCR appear to be vulnerable below $113.


Nvidia (NVDA) posted adjusted earnings of 25 cents that rose +12.9% and beat estimates of 19 cents. Tegra processor revenues rose +200% thanks to automobile systems and mobile devices. Google recently selected the Tegra processor for its Project Tango tablet development. They upgraded guidance slightly on expectations for higher processor volume. Shares rallied +9% on the news.


The number of companies reporting has slowed dramatically and there was little in the way of reports on Friday. Despite the big gains in the market the volume was low at 5.5 billion shares. This was the lowest volume day of the week and this was a very volatile week. You would have expected a lot more volume given the volatility.

However, there are only three weeks left in the summer with Labor Day on Sept 1st normally seen as the last day of summer. Kids are going back to school already and any trader/investor still planning on a vacation is going to be taking it over the next three weeks.

If it were not for the Russian invasion cloud hanging over the market all week I doubt we would have seen any volatility and the volume would have been much lower. Assuming, the Russian military is being pulled back from the border the market could be very lackluster next week.

Not only has volume been low but most of it was leaving the market. Lipper reported outflows from stock funds of $15.8 billion for the week and the highest outflow in six months. Another $7.1 billion left high yield bond funds. That was the most in one week since records were started in 1992.

The S&P traded down to 1904 on Thursday followed by the futures trading down to 1890 overnight. These were critical levels that were begging for an oversold bounce. Add in the Russian short covering on Friday and the rebound was born.

A lot of long term rallies begin with a huge short squeeze. However, very few are started on a 5 billion share day. Volume is a weapon of the bulls and they were not expending any of that volume ammo on Friday.

James noticed an interesting point while researching plays on Friday. The stocks that rallied the most were the ones most shorted. That should not be a real surprise but he also noticed that the stocks that declined the least over the last two weeks barely moved on Friday and quite a few were actually down. This confirms the short squeeze theory and also points out that the rebound was very narrow in breadth. In a real rally you would expect the stocks with the best relative strength in a decline to be the biggest gainers when that decline is over. Clearly that did not happen on Friday.

An example would be IBM. The stock declined $12 over the last week and then rebounded sharply on Friday.


This suggests we should not expect the rebound to continue on Monday or at least not with a big gain. While I do believe that S&P 1900 level would be a great rebound point we do need to see some non headline confirmation. That means we need to see what the market is going to do without being headline driven.

If there is no follow through next week then the shorts will return and we could take another shot at that 1900 level. Resistance is now 1943.


The Dow gave us an example of a perfect support bounce. If the market was only the Dow then I would be telling everyone to load up with longs on Monday. The Dow declined to support and closed at 16,368 on Thursday. On Friday the opening low was only 16,364 indicating the support held and that could have energized the early morning rebound in the market. When clear support levels hold it is a sign for shorts to begin to cover.

The next hurdle for the Dow is going to be the 16,600 level where it tried to rebound and failed on August 4th.



The Nasdaq rebounded less than the Dow and remains stuck below strong resistance at 4371. The Nasdaq has vacillated around the prior support at 4344-4350 for the last week. There have been daily spikes to just below 4380 and daily dips to 4325 but it always seems to come back to center on that 4350 range. This is one reason we should not get too excited about the Friday gains. The short squeeze did not even reach the resistance highs from the last three days at 4380.


You will probably notice that the list of the top 25 point gainers below only has a handful of the big names you would normally expect to see in the list. GOOG and AMZN are there but the rest of the list is populated by an eclectic list of rarely seen tech stocks. For instance when have you seen FOSL gain $4 in one day? The stock has been in a steady downtrend since November. How about UEIC? Bet you don't know that company but an 11% gain got it on the list on Friday.


When the Nasdaq breaks back above 4400 I would be more inclined to bless the rebound. Until then I am going to be skeptical.


The Nasdaq 100 ($NDX) has the same pattern as the Composite index only less volatility. The uptrend support from March worked perfectly at 3850 but the rebound was lackluster. A decline below that 3850 level would turn market sentiment negative.


The Russell 2000 appears to be building its third bear flag since its decline from the recent highs. However, this time may be different. The Russell has shown stronger relative strength than the rest of the indexes over the last week. While the Dow, S&P and Nasdaq were making new lows on Thursday the Russell was resisting. When the short squeeze appeared on Friday the Russell closed at the high for the week. While that may be just another failed rally in progress it could also be the spark for a continued rebound next week.


The downside to the Russell daily chart is the impending cross of the 100 day average over the 200-day. While this cross is not watched as closely as the "death cross" of the 50-day below the 200-day it is still relative. The cross of the two longer term moving averages suggests a continuation of the trend to the downside. While the 50/200 cross is considered a shorter term trading signal pointing to a change in direction the 100/200 cross is seen as confirmation of the existing trend. In this case it would be a declining trend.

Obviously you can drive yourself crazy trying to match up all the various trend signals so I mention it only in passing. We should note it but not run out and sell every stock we own.

The key for me would be a Russell bounce back above those averages at 1144/1148. They will function as resistance and even more so since they are so close together. If we can move back over 1165 that would be a strong signal predicting a new high. However, for this week I would watch the bear flag and see if it breaks to the upside rather than downside. Three downside broken flags in a row would be negative.


The Russell 3000 also made a perfect goal line stand at the 1138 level and it has not relinquished its hold on the 100-day average. This is the seventh time it has tested that average since December 2012 and each time it dips just below only to rebound back to new highs. Let's hope this test follows the same pattern.


Lastly the Transports also made a perfect rebound off recent support at 8000. I wrote last week the transports should eventually return to their 100-day average, now at 7938 and they came close on Friday with a dip to 7959. I believe that is close enough and I would expect them to rally from here. That does not mean they won't retest it again but I think that support should hold.


While I believe Friday's rebound was just a monster short squeeze there were just enough positives in the charts above to suggest we may have found a bottom. The Transports, Russell 3000 and the Dow appear to be honoring decent support points. If we were to retest those support levels next week and rebound again I would be a buyer. I would be a reluctant buyer if we simply moved higher from here. I would want to see the Nasdaq and the Russell 2000 confirm the move with decent gains.

The market has been in a pattern of 3% declines and rebound to new highs for many months now. In this decline the Transports fell -6.5%, Dow -4.7%, S&P -4.4%, Nasdaq Composite -3.7%, Nasdaq 100 -3.8%, Russell 2000 -8.7% and Russell 3000 -4.8%. This has been a significant decline that was mostly headline driven. Even in the midst of this decline there were buyers. Once the headlines evaporate the fundamentals will come back into play. Overshadowed by the geopolitical events was a Q2 earnings cycle with 10% earnings growth, 5% revenue growth and +3.95% GDP growth. This growth will bring the Fed back into the picture with rate hikes sooner rather than later BUT we are still at least six months away from those hikes. The market has plenty of time to return to its highs before those rate hikes appear.

The S&P has not had a 10% correction since August 2011 but there have been nine mini declines of 3% or more. We are due for a 10% decline.

I am typically early with my calls on market direction and I am not saying we should rush into longs next week. However, we could be at a turning point and we should pay close attention to market direction early in the week. I would rather nibble at some longs in a positive market than be looking back 500 points from now and wishing I had bought something. Just be aware we could be at a turning point but cautious enough that a failed rebound does not cause a material loss of capital.

Next week is August options expiration and historically this is the strongest week of the month for August. Declines are normally early in the month and again at the end of the month.

Random Thoughts

The National Association of Active Investment Managers NAAIM Exposure Index has fallen to the lowest level since September. This means their exposure to equities is at an 11 month low. At the same time the AAII weekly investor sentiment survey found the most pessimism among respondents since August 2013 with 38.2% bearish and 30.9% bullish. However, over the last week the ProShares UltraShort S&P-500 ETF saw outflows of $50 million and the ProShares Ultra S&P 500 ETF has seen inflows of $592 million. Apparently investors are using the surge in volatility and the return to support as a reason to buy stocks while they are on sale.

The CBOE Equity Put/Call Ratio spiked up to 1.04 on Friday August 1st. That was the highest reading in three years and the 19th highest since 2003. This suggests traders were turning significantly bearish and buying millions of puts. It is also a contrarian indicator because it suggests everyone is betting on a declining market. Buy stocks when nobody else wants them.

However, Reuters claimed the spike was due to a "fat finger" trade where more than 700,000 put contracts were traded across a number of different stocks in 1,300 trade orders. The premium on the contracts was $8 million and they were for weekly options that expired at the end of the day. The trades were executed in less than a minute and the options expired 3 hours later. All of the major exchanges said they had no broken orders or illegitimate trades so whoever placed the orders ended up paying a lot of premium for nothing.


Goldman Sachs said the 3 biggest risks to the stock market were 1) geopolitical events, 2) China and 3) rising interest rates. With Ukraine tensions easing and the U.S. finally attacking ISIS the main geopolitical events would seem to be fading. China's economic reports have begun to improve and Goldman said the China risk is now "broadly balanced" rather than "skewed to the downside." That leaves bond yields and rising interest rates as the most likely cause of market volatility in the coming months.

China's trade surplus surged to a record in July as export growth surged +14.5% compared to estimates for 7% growth. Imports declined -1.6% leaving them with a trade surplus of $47.3 billion. Exports to the EU surged +17% and +12.3% to the USA. The decline in imports is somewhat related to the drop in commodity prices. Volume of commodity imports rose +18.1% but the average price fell -14.5%.

Recession, what recession? Over the past three months growth in credit card debt has exceeded wage growth in the USA. This is the first time since the Great Recession and suggests the consumer is once again confident enough to borrow more than they make and leverage themselves once again. For the last five years the consumer has been deleveraging and getting rid of debt. Now that trend is reversing. Is it because they are more confident or has the cost of gasoline and food grown to the point they have to charge groceries to eat?

Mark Faber, author of the Gloom, Boom and Doom report reiterated his call for a 10% to 20% correction this fall. His call has become so monotonous that nobody really believes him anymore. Eventually he will be right but even a stopped clock is right twice a day.

Italy's economy declined -0.2% last quarter and that put it into a technical recession for the third time since 2007. Actually Italy's economy has declined 11 of the last 12 quarters so in reality it is a depression more than a recession. The decline has wiped out the prior 14 years of growth. Italy's problem is excessive regulation. It is hard to start a business and once started you can't fire employees. If you hire somebody you better like them a lot because you are stuck with them until they quit.

The number of stocks in the S&P-500 trading above their 50-day average declined to 23% and the lowest reading in more than a year. The number rebounded to 35.4% at the close on Friday but that is still very low. This would suggest serious oversold conditions and indicate there could be a continued bounce in our future.


Malaysian Airlines is being sold to the Khazanah Nasional Bhd sovereign wealth fund for $429 million. The fund already owned all but 30.6% of the airline. It will now become a national airline after the loss of two planes back to back over a 4 month period. The fund said the airline will require substantial funding to rebuild it into an effective operational company. Passenger traffic has dropped significantly after the twin disasters.

McDonalds (MCD) same store sales declined -2.5% in July matching the largest decline in a decade. Sales in the U.S. fell -3.2% and -7.3% in Asia. McDonalds menu has been challenged by numerous competitors offering healthier food and a broader menu. Also burger joints like Smashburger and Five Guys are exploding across the country. McDonalds and YUM Brands both suffered in Asia after a common supplier was found to have shipped them out of date meat that forced the companies to remove some items from the menu until alternate suppliers could be found.

Apple products were dropped from the approved list for government buyers in China. Apple failed to submit documents that included a pledge not to violate state or public interests. The documents would also have required Apple to submit detailed product information such as engineering details, product components and schematics. China is concerned U.S. products have embedded security hacks that will allow the NSA to eavesdrop on electronic communications. Ten Apple products including iPads and Macs were dropped from the list.

Putin announced bans on food and agricultural products from the U.S. and EU in retaliation for the sanctions. Almost immediately border guards began turning back trucks from Lithuania and Estonia loaded with cheese, yogurt and meat. Along with Latvia and Poland the Baltic states are heavily reliant on exports to Russia with those exports accounting for almost 2.5% of their GDP. Russia received 19.8% of Lithuania's exports in 2013, Latvia 16.2%, Estonia 11.4%, Poland 5.3% and Finland 9.6%. The sudden surplus of food products means food prices are going to get a lot cheaper in those countries as the excess supplies are dumped into the market. That may be good news for consumers but bad news for farmers.

Ukraine is threatening to cut off oil and gas supplies headed to Europe from Russia. Ukraine is no longer receiving gas for use in the Ukraine since Russia stopped exports to Ukraine in June. However, there are multiple pipelines across Ukraine that transport oil and gas to Europe. The Ukraine is considering a partial or complete ban on the transit of "all resources" across its territory in retaliation for Russian support of the rebels and the ban on food imports from Ukraine. More than 86.1 billion cubic meters of natural gas and 15.6 million metric tons of oil were shipped across Ukraine in 2013. A halt of this magnitude would be severely damaging to the Russian economy. The country is also considering a ban of Russian airline flights over Ukraine territory.

The news coming out of Russia is of course the exact opposite of reality. Sergei Glazyev, an advisor to Putin, said the U.S. "hawks" are "setting the world ablaze" and "provoking a global conflict" with the "aim of establishing control not only in Europe but also in Russia."Glazyev has prepared a list of 15 proposals to "counter the attacks against Russia" after Putin invited the Ukraine and its 40 million citizens into a trading bloc to rival the EU. Russia can't go it alone against the U.S. and must create an "anti-war coalition" to check the "U.S. aggression."

Russian strategic nuclear bombers conducted at least 16 incursions into northwestern U.S. air defense identification zones over the past ten days. This was an unusually sharp increase in aerial penetrations according to U.S. defense officials. The unusual number of flights by Russian Bear bombers prompted the scrambling of U.S. jet fighters on several occasions. During one incursion near Alaska a Russian intelligence gathering jet was detected along with the bombers. These flights are a blunt warning by Putin for the U.S. to stay out of the Ukraine situation. Putin believes President Obama is weak and he is trying to intimidate him into inaction with these flights.


The IRS is missing emails from the seven people in charge of the approval of tax exempt status of conservative organizations. Reportedly each of their hard drives failed about the same time Congress began looking into complaints about harassment. The EPA also "lost" emails that were the target of a Congressional investigation. Last week we learned that the Health and Human Services (HHS) department in charge of the roll out of Obamacare told the House Oversight Committee that the emails on the roll out had been deleted. The claim by Marilyn Tavenner at 5:PM on Thursday came 10 months after those emails were subpoenaed by Congressional investigators. Adding in the missing emails from the HHS that means emails from more than 20 witnesses under subpoena by Congress have been "lost or destroyed." These emails are supposedly protected by Federal laws on records retention.

It defies logic that emails for so many key people have been accidentally lost or destroyed in violation of Federal law. In each of the cases the loss of the emails were not disclosed until months or even years after they were requested by Congress. Only after the witnesses could stall no longer did they disclose the emails were missing. That homework eating dog must be getting really fat on his new email diet.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The only thing that stands between a man and what he wants from life is often merely the will to try for it and the faith to believe that it is possible."

Richard Devos

 


New Plays

Relative Strength Winner

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Green Plains Inc. - GPRE - close: 40.48 change: +0.56

Stop Loss: 38.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

Trigger @ $40.75

- Suggested Positions -

buy GPRE stock @ (trigger)

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

Buy the Dec $45 call (GPRE141220C45) current ask $2.80

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Friday Delivers Oversold Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered widespread gains on Friday. Many of the market's worst performers produced an oversold bounce.


Current Portfolio:


BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.17 change: +0.35

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: We will plan to exit prior to earnings on Aug. 20th
Average Daily Volume = 8.9 million
New Positions: see below

Comments:
08/09/14: HPQ held up relatively well last week in the face of rising market volatility. Investors continued to buy the dips near its trend of higher lows (between the 30-dma and 50-dma). Investors looking for a new entry point could wait for a rally past $35.50 but keep in mind that we will most likely exit prior to HPQ's earnings report on Agust 20th.

Conservative traders might want to move their stop closer to $34.00.

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

chart:


Skyworks Solutions - SWKS - close: 51.27 change: +0.14

Stop Loss: 49.65
Target(s): To Be Determined
Current Option Gain/Loss: -2.6%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
08/09/14: SWKS bounced near $50.50 on Friday morning but the rebound lagged behind the market's broad-based bounce. I would wait for a new rally past resistance near $52.50 before considering new bullish positions.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

- Suggested Positions -

Long SWKS stock @ $52.65

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

Long Nov $55 call (SWKS141122C55) entry $2.86

08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike

chart:


BEARISH Play Updates

Aaron's Inc. - AAN - close: 25.29 change: +0.24

Stop Loss: 27.10
Target(s): To Be Determined
Current Option Gain/Loss: +8.9%
Entry on July 30 at $27.75
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 809 thousand
New Positions: see below

Comments:
08/09/14: AAN fell to a new 2014 low on Friday morning before bouncing. Shares added +0.9% on Friday but still posted its sixth weekly loss in a row. I do not see any changes from my prior comments.

AAN is oversold and due for a bounce. More conservative traders may want to take some money off the table now.

Earlier Comments: July 29, 2014:
Shares of AAN are down -3.7% for the year. Honestly, I'm surprised it's not down a lot more. The company is in the lease-to-own space for residential furniture, consumer electronics, home appliances and more. They have over 2,000 locations in the U.S. and Canada.

Back in February this year AAN reported earnings and guided lower. On April 15th AAN issued a new earnings warning and blamed it on the harsh winter weather. AAN reported earnings just a couple of weeks later and lowered guidance again. AAN issued yet another earnings warning on July 15th. Then when the company reported earnings on July 25th they lowered guidance yet again. With this many warnings I'm surprised investors have not left this stock like rats fleeing a sinking ship.

So why in the world were shares of AAN surging in May and June? Management has been battling with its second largest shareholder for months. In May they moved to declassify the board of directors. This means shareholders can remove all of the board members all at once if they choose to, on an annual basis. Naturally board members who want to keep their job tend to produce more shareholder friendly policies in a situation like this. I suspect this was the driving force behind the May-June rally.

Then the latest round of earnings warnings in July have completely erased all of their gains. Today shares of AAN are sitting near support at the $28.00 mark. The $27.85 level appears to be the level to watch. Tonight we're suggesting a trigger to launch bearish positions at $27.75.

I would consider this more aggressive trade. AAN is down significantly this month and could see another oversold bounce. Just because the path of least resistance is now down doesn't mean AAN can't ricochet higher once in a while.

NOTE: AAN does have options, which might be a way to limit your risk instead of shorting the stock. Unfortunately the option spreads look a bit too wide to actually trade them.

- Suggested Positions -

Short AAN @ $27.75

08/07/14 new stop @ 27.10
investors may want to take some money off the table now.
08/05/14 new stop @ 28.05
07/31/14 new stop @ 28.55
07/30/14 triggered @ 27.75

chart:


Cepheid - CPHD - close: 38.70 change: +0.06

Stop Loss: 40.51
Target(s): To Be Determined
Current Option Gain/Loss: +1.3%
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:
08/09/14: CPHD spent last week churning sideways in the $38.50-39.50 area. The stock flirted with a bullish breakout above its simple 10-dma but struggled to maintain it. The $40.00 level should be more significant overhead resistance.

At this point traders may want to wait for a clearly defined failed rally near $40.00 or a new relative low under $38.25 before considering new positions.

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

07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike

chart:



Deutsche Bank - DB - close: 33.30 change: +0.70

Stop Loss: 35.55
Target(s): To Be Determined
Current Option Gain/Loss: +0.4%
Entry on August 04 at $33.45
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
08/09/14: The German DAX stock market index is down -4.1% year to date. The index appears to have formed a bearish double top near 10,030 and is down over 1,000 points from its early July highs to close at 9,009 on Friday. This is a new low for the year and below its March low of 9,017. It's worth noting that the 9,000 level could be support and after a -10% pullback the DAX may be due for a bounce. Of course a breakdown under 9,000 would look very bearish for German stocks.

Meanwhile shares of DB continue to underperform its home market and currently down -30.9% year to date. Financial stocks in the U.S. did find some support last week. The XLF looks like it wants to rebound and if it does bounce it might boost DB. Shares of DB are starting an oversold bounce of their own (+2.1% on Friday) but should find resistance in the $34.00-35.00 area.

I am not suggesting new bearish positions in DB at this time. Keep an eye on the simple 30-dma near $35.00 as the level to watch.

Earlier Comments: August 2, 2014:
Banking scandals continue to plague the financials. Most of us are familiar with the mortgage loan scandal that has haunted the major U.S. banks for the last few years and finally seems to be fading away. Then some of the biggest international banks were hit with the Libor rate fixing scandal. Now some of the big banks are suffering with a dark pool trading scandal. Dark pools are essentially institutional trading that is concealed from the public markets.

If that wasn't bad enough Europe's economy is slowing down. The region was already struggling before the Ukraine-Russian conflict arose. Now with a growing list of sanctions against Russia the impact is starting to accelerate the economic slowdown in Europe. Plus the specter of financial stress in the European financial system has risen again with the recent collapse of Portugal's Banco Espirito Santo, which recently filed for creditor protection.

Add all of these factors together and you can see why shares of DB, one of Germany's biggest banks, might be struggling. The stock Broke down back in March this year and it's been sinking every since. The month of July saw shares consolidate sideways but DB has started to break out of this trading range. The Point & Figure chart is pretty ugly and suggesting a long-term $14 target.

Friday's intraday low was $33.69. I am suggesting a trigger to open bearish positions at $33.45.

- Suggested Positions -

Short DB stock @ $33.45

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

Long Oct $33 PUT (DB141018P33) entry $1.45*

08/07/14 new stop @ 35.55
08/04/14 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

chart:


Fifth Third Bancorp - FITB - close: 19.67 change: +0.15

Stop Loss: 20.65
Target(s): To Be Determined
Current Option Gain/Loss: - 0.6%
Entry on August 06 at $19.55
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.2 million
New Positions: see below

Comments:
08/09/14: It was a bearish week for FITB with the stock breaking down to new 2014 lows. The drop below round-number support at $20.00 and its May lows is bearish. However, I will point out that the financial sector ETF looks like it's trying to form a short-term bottom. It could just be a sideways consolidation before the group turns lower but if the XLF breaks higher it could support the entire sector. The KRE regional bank ETF also found some short-term support last week although the big picture trend remains pretty bearish for the KRE.

Shares of FITB have found short-term support in the $19.45 area. Traders may want to wait for a new failed rally near $20.00 before initiating new positions or wait for a new low under $19.40.

Earlier Comments: August 5, 2014:
Fifth Third Bancorp started as the Bank of the Ohio Valley in Cincinnati back in 1858. According to the company's press release FITB is now "a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $133 billion in assets and operates 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest

The stock market's recent dip has reduced the S&P 500 index's 2014 gains to +4.9%. Yet the financial sector has been underperforming. The XLF financial ETF is only up +2.4%. Many of the banking stocks are weighing on the group. The regional banks have performed even worse with the KRE regional bank ETF down -6.9%. If you look at weekly chart of the KRE you'll notice a big bearish head-and-shoulders pattern that has formed over the last several months. This doesn't bode well for the group.

Banks have been struggling with little to no growth. Most are willing to lend but only to customers with the best credit ratings. Even if they do lend money the interest rates today are so low it's tough to make a profit. Housing prices continue to rise but the number of mortgages is shrinking.

FITB reported earnings on July 17th. Last quarter their mortgage banking revenues collapsed -67% from a year ago. FITB's profits plunged fro $591 million Q2 2013 to $439 million Q2 2014. The company did manage to beat Wall Street's estimates by 4 cents a share. Unfortunately FITB management lowered their revenue guidance.

Technically shares of FITB are bearish. They have broken the long-term bullish trend of higher lows (see the weekly chart). They have also recently broken below key support near $20.00.

Tonight we're suggesting bearish positions at current levels (no trigger). We'll try and limit our risk with a stop loss at $20.65.

- Suggested Positions -

Short FITB stock @ $19.55

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

Long Nov $20 PUT (FITB141122P20) entry $1.20*

08/06/14 trade begins. FITB gaps down at $19.55
*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

chart:


Six Flags Entertainment - SIX - close: 36.87 change: +0.55

Stop Loss: 39.15
Target(s): To Be Determined
Current Option Gain/Loss: +0.1%
Entry on August 06 at $36.90
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 909 thousand
New Positions: see below

Comments:
08/09/14: SIX broke its long-term trend line of support last week. It also marked its sixth weekly decline in a row. Unfortunately Friday saw a widespread market rebound and many of the market's worst performers and oversold stocks bounced hard. SIX added +1.5% on Friday and formed a bullish engulfing candlestick reversal pattern. We'll have to wait and see if SIX confirms this reversal. Currently the $37.00-38.00 area should be overhead resistance.

Investors may want to start adjusting their stop loss lower.

Earlier Comments: August 4, 2014:
Everyone loves to have fun. The trend of stay-cations that started during the financial crisis of 2008-2009 has probably driven a lot of traffic toward domestic amusement parks. Shares of SIX have definitely performed well these last few years with a rally from its 2010 lows near $8.00 to 2014 highs near $43.00. Unfortunately the momentum may be slowing down.

According to the company website, "Six Flags Entertainment Corporation is the world's largest regional theme park company with $1.1 billion in revenue and 18 parks across North America. The company operates 16 parks in the United States, one in Mexico City and one in Montreal, Canada. For more than 50 years, Six Flags has entertained millions of families with world-class coasters, themed rides, thrilling water parks and unique attractions including up-close animal encounters, Fright Fest® and Holiday in the Park®."

The last earnings report was July 21st. SIX managed to beat bottom line estimates but revenues were a miss. Wall Street expected Q2 revenues of $396 million. SIX only reported $376.5 million. On the plus side SIX said that their amusement park guests were spending more once they got into the park. SIX also reported +9% growth in their season pass business. Unfortunately, attendance was down -8% in the second quarter. Oddly enough SIX blamed the harsh winter on slower Q2 attendance and some analysts were questioning that excuse. Goldman Sachs recently removed SIX from their buy list following the revenue miss. SIX is growing but it is not growing fast enough to justify its current valuations. The stock is trading with a P/E ratio near 32 compared to the S&P 500's P/E closer to 16.

Technically shares of SIX appear to have formed a bearish double top with the peaks in March and June. Now SIX is on the verge of breaking a long-term trend line of support (see weekly chart below).

The post-earnings reaction low was $37.12 on July 21st. We are suggesting a trigger to open bearish positions at $36.90.

FYI: SIX does have options but the spreads are so wide they are untradeable.

- Suggested Positions -

Short SIX stock @ $36.90

08/06/14 triggered @ 36.90

chart:


Yandex N.V. - YNDX - close: 29.00 change: +0.56

Stop Loss: 31.10
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Entry on August 07 at $28.88
Listed on August 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
08/09/14: The stock market's big bounce on Friday was due to hope that Russia would de-escalate the situation on the Ukraine border. It's no surprise that YNDX, a Russian company, outperformed with a +1.9% gain on Friday. It is worth noting that it closed off its high. The market might hope for a diplomatic resolution in Ukraine but that doesn't mean market participants trust Russian President Putin to keep his word.

Let's wait a day or two and see how YNDX performs before launching new positions. Overall it still looks bearish.

Earlier Comments: August 6, 2014:
Officially registered in Amsterdam, YNDX is actually headquartered in Moscow. They are one of the largest internet companies in Europe. They're also the dominant search engine in Russia with almost 62% of all search traffic.

The company's latest earnings report on July 29th looks bullish. Earnings were 30 cents a share versus the estimate of 29 cents. Revenues soared +32% to 12.2 billion Russian rubles ($361.5 million). That was above estimates for revenues in the $340-358 million range. Their Q2 search queries were up +21% from a year ago. Plus, YNDX reported their number of advertisers was up +25% from a year ago and up +6% from the prior quarter.

In spite of all the bullish numbers investors used the post-earnings rally to sell. The stock action is bearish. The trend of lower highs has now turned into a new pattern of lower lows. Today's drop of -2.3% not only underperformed the market but it broke recent support in the $29.50 area.

The current geopolitical risks between Ukraine and Russia could be pressuring YNDX. The U.S. and Europe have launched multiple sanctions against Russia and Russian companies as a penalty for Russia's support of Ukraine separatists. Yesterday stocks sank sharply on news that Russia was building up troops on the Ukraine border again. It would appear that Russian President Putin will not back down. There is speculation that instead of an actual "invasion" that Russia will send troops across the border as a "humanitarian effort" to protect people. If that does happen the global equity markets are not going to react well and Russian stocks could be hurt the worst.

Tonight we're suggesting bearish positions now at current levels. We will start with a stop loss at $31.10, above the 20-dma and 100-dma.

- Suggested Positions -

Short YNDX stock @ $28.88

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

Long NOV $28 PUT (YNDX141122P28) entry $2.40*

08/07/14 trade begins. YNDX opens at $28.88
*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

chart: