Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/21/2015

Table of Contents

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

Market Wrap

Earnings Weighing Heavy on Market

by Jim Brown

Click here to email Jim Brown

On the surface companies may be reporting better than expected earnings but expectations were really low. Sales revenue is continuing to be a serious challenge and lower revenue eventually leads to lower earnings. The rising number of revenue misses is causing some investors to move to the sidelines.

Market Statistics

The AAII Investor Sentiment Survey hit a milestone this week. The proportion of individual investors that described their six-month outlook as neutral is above 45% for the second consecutive week. This is the first time in more than 26 years that has occurred. This last occurred on January 27th, 1989. Neutral sentiment has now been above the historical average of 30.5% for 15 consecutive weeks. Investors with a bullish outlook rose to 32.1% but still below its historical average of 39%. Bearish sentiment declined to 22.8% with the historical average at 30.5%.

More than 22% of respondents said events in the Middle East were affecting their market outlook. Another 19% said events in Europe were a concern with the strong dollar bothering 15% and the global economy another 11%.

Apparently the permanently bullish individual investor is reconsidering his outlook but they have not turned bearish. They are confused about where the market is headed given the geopolitical issues and the weak earnings and guidance. This is especially evident in the choppy trading and low volume.


The news today that a high frequency trader in the UK was arrested for causing the Flash Crash in May of 2010 could be a new reason for traders to fear the market again. Navinder Singh Sarao was arrested and charged with 10 counts of commodities fraud, 10 counts of commodities manipulation, wire fraud and one count of spoofing. The U.S. is requesting extradition to the USA. The CFTC also filed civil charges calling him a "very significant player in the market."

Sarao is thought to have made $40 million from his scheme to crash the futures market. The complaint say Sarao used an automated trading program to manipulate the market using the E-Mini S&P-500 futures contracts on the Chicago mercantile Exchange (CME) while trading from his home in London.

The trader used a layering strategy where his program placed multiple high volume sell orders at different prices to make it look like there was a large volume of orders being dumped on the market. This causes other traders following the market move to sell their positions and begin to short the market. His phony orders were modified or replaced 19,000 times during the crash and covered 20 million contracts. The rest of the global market only traded a total of 19 million contracts on May 6th. His multiple orders to sell were placed at several ticks under the actual market but close enough simulate actual trades when they disappeared as actual trades dipped to his spoofed price.

He has continued trading and spoofing the E-Minis over the last 5 years but with smaller volume. However, the CFTC claims he engaged in market manipulation and spoofing on about 400 days between 2010 and into 2014. Even with his lowered trade rate he was the fifth largest trader of E-Mini's in the world. Spoofing was made illegal in the 2010 Dodd-Frank legislation. The CFTC said there are probably others doing this same thing today. "If there was one, there can be hundreds. Why can't there be hundreds of people doing this same thing all over the world?" While regulators don't blame Sarao for the entire crash they do believe his spoofing caused other large institutions and high frequency trading programs to dump large orders into the market. The 2010 SEC report blamed a single large trade from Kansas's Waddell & Reed Financial for setting off the crash. After today's arrest that claim is likely to change.

Waddell & Reed's computers triggered a sale of 75,000 S&P futures contracts when the market began to crash as part of a strategy to hedge an existing equity position. The value of that order was $4.5 billion. The algorithm was programmed to sell the E-Minis so that the sell volume was only equal to 9% of the total volume, calculated over the previous minute. The high volume spoofing artificially inflated the global volume by triggering program trades globally. That rapid spike in volume allowed the Waddell & Reed program to sell the 75,000 contracts over a period of less than 20 minutes. Over the prior 12 months a sell program of that size had been triggered only twice and neither time did it cause a major market disruption. In the flash crash the rapid acceleration of the selling in the E-Minis caused the cross-market arbitrageurs to rapidly liquidate equivalent positions in the underlying equities. Selling volume increased more than 1000% in only a matter of minutes.

Since institutions and funds can own thousands of contracts of the S&P futures as part of their investment strategies, a sudden downdraft in those futures can trigger automated sell programs. One event leads to another and the crash was born.

The picture below is the "home" of "Nav Sarao Futures Limited" west of London.


Bill Gross made news today by claiming that German debt is now the "short of a lifetime." The 10-year Bund was yielding .94% on Tuesday morning, up +19.8% from Monday as a result of the Gross comments. The shorter German maturities either already have a negative yield or very close to it. Gross said it was only a matter of time before the trend would reverse. Once the ECB halts its QE program or even begins talking about halting it as the Fed did with its taper, the debt will be sold hard as money rotates back into risk assets. Gross is anticipating a 10-15% return over a 1-2 year period. Doug Kass said last week, "Near zero to negative sovereign debt yields in Europe represent the bubble of all investment bubbles, dwarfing even the Nasdaq bubble of 16 years ago. Mark my words I will make a fortune shorting these bonds at some point in time...probably much sooner than later."

The economic calendar had only one entry today and it was a lagging indicator. The regional employment report showed that unemployment declined in 23 states and Washington DC in March. Another 15 states were unchanged with 18 states showing employment increases. The states with the biggest declines had the strongest ties to the energy sector. Analysts claim more than 100,000 energy workers were laid off in Q1. For instance, Texas lost -25,400 jobs, Pennsylvania -12,700 and Oklahoma -12,900. The report was ignored.

The calendar for Wednesday has Existing Home Sales and Thursday is New Home Sales. Those are the high points for the rest of the week. The Kansas Fed Mfg Survey is of interest but likely to be ignored.


The calendar that matters for the rest of the week is the earnings calendar. There are several large cap techs and Dow components to report and continued earnings misses could sink the market.


Harley Davidson (HOG) reported earnings of $1.27 that beat estimates for $1.25. Revenue declined to $1.67 billion from $1.73 billion but still beat estimates for $1.58 billion. However, shares dropped hard after the company said shipments would decline because of heavy discounting by competitors. Harley said they were not going to compete with the strong discounts and shipment growth would grow only 2-4% in 2015, down from prior estimates for 4-6% growth. In Q2 they expect to ship between 83,000-88,000 motorcycles, down from 92,217 in the same quarter in 2014.


United Technology (UTX) reported a +20% rise in earnings to $1.58 but the strong dollar knocked them down to $1.51. Analysts were expecting $1.45. Revenue fell -1% to $14.5 billion and missed estimates for $14.9 billion. The company blamed the weakness on the continued currency headwinds. UTX reaffirmed its full-year outlook for earnings of $6.85-$7.05 and analysts are expecting $6.98. Shares initially rallied to $119 but fell back to close at $107 and a fractional gain.


Lockheed Martin (LMT) posted earnings of $2.74, down -6% from $2.87 in the year ago quarter. Analysts were expecting $2.48. Revenue of $10.11 billion missed estimates for $10.21 billion. The company said revenue was down because fewer airplanes were delivered and the impact of the dollar. Shares declined fractionally.


Under Armour (UA) reported earnings of 5 cents that matched analyst estimates. Revenue rose +25% to $804.9 million and barely beating estimates for $802 million. However, revenue from apparel, their largest product category, rose only +21% compared to +30% in the comparison quarter. The company said gross margins would be flat after previously saying they would improve. The dollar was to blame. They are projecting a 23% rise in sales in 2015 and that would be the lowest since 2009. Shares of UA declined -5%.


After the bell Yahoo (YHOO) reported a -60% drop in earnings to 15 cents that missed estimates for 18 cents. Revenue of $1.04 billion also missed estimates for $1.06 billion. CEO Marissa Myer said, "Yahoo is amidst a multi-year transformation to return an iconic company to greatness." Unfortunately she has about three more quarters to accomplish that feat or she will be replaced. The Yahoo board is not favorable to leaving a CEO in place that can't make the changes needed. She has already had 2 years and historically 3 is about the limit for troubled companies. Myer increased costs by about $500 million a year since she has been in charge.

Display advertising revenue fell -7% and the price per ad declined -17%. On the bright side search revenue rose +20% with search volume at a five-year high thanks to a partnership with Mozilla. Yahoo received 43,000 job applications in Q1. Yahoo signed a new agreement with Microsoft that allows either company to terminate the search partnership at any time starting later this summer.

After falling -15% in afterhours shares recovered to end slightly positive for the session.


Amgen (AMGN) reported earnings of $2.48 that beat estimates of $2.10. Revenue of $5.03 billion rose +11% and beat estimates of $4.91 billion. The company said strong performance of Enbrel and Prolia helped power the gains. The company raised full year revenue guidance to $21 billion. Shares of AMGN rose +$4 in afterhours.


Chipotle Mexican (CMG) posted earnings of $3.88 that beat estimates for $3.66. However, revenue of $1.09 billion missed estimates for $1.11 billion. Same store sales rose +10.4% but that was less than estimates for +11.8%. Same store sales averaged a +16.8% increase in 2014. The company only reiterated the same guidance it gave last quarter and said they were still struggling to find more pork and that was limiting sales in some areas. Shares declined about -$36 after the report.

They are probably going to have trouble finding chicken in the months ahead. More than 7.8 million chickens have been killed because of exposure to the bird flu. More are expected as the virus is transmitted by wild birds from state to state.


YUM Brands (YUM) reported earnings of 80 cents compared to estimates for 72 cents. Revenue of $2.62 billion missed estimates of $2.64 billion. Same store sales in China declined -12% but analysts were expecting -14.4%. They are still suffering from a meat sourcing issue where a supplier sent them out of date meat products. Same store sales declined an average of -16% in 2014. YUM has 6,700 stores in China, which are mostly KFC and Pizza Hut stores. Shares of YUM rallied +$3 after the report.


VMware (VMW) reported earnings of 86 cents on an 11% increase in revenue to $1.51 billion. That was the slowest revenue growth in seven quarters. Analysts were expecting 84 cents and $1.5 billion. They blamed the strong dollar for impacting overseas sales. Shares initially declined more than $2 in afterhours but rebounded to close flat.


Gilead Sciences (GILD) spiked $4.50 on a call by Bernstein for the company to buy Vertex (VRTX). Gilead has a surplus of cash but their Hep-C franchise is not going to last forever. Bernstein said buying Vertex would give them a pipeline of new drugs. Bernstein expects Gilead's cash inflows to decline 30-40% between 2017-2021 as its drugs go off patent. Vertex has a promising Cystic Fibrosis drug called Cayston and the commercial infrastructure to capitalize on it. Gilead has more experience in developing multiple drug combinations and that would be needed to take Cayston to the next level. This is another high dollar drug that sells for $250k-$300K per year for the average patient. Bernstein did their homework and pointed out several associated drugs that Gilead and Vertex could combine to create a longer lasting franchise.

Gilead only has a PE of about 10 today despite the huge inflow of cash from their new Hep-C drugs. They could easily afford Vertex even if they had to pay a hefty premium. Maxim's Jason Kolbert disagreed with the Bernstein analysis saying Vertex is already fairly valued and there are better CF drugs in the pipeline from other companies. This is what makes a market. Gilead shares rallied +$4 and VRTX +$6.65.



In other biotech news Perrigo (PRGO) said it would not accept Mylan's (MYL) $29 billion offer. Mylan offered to buy Perrigo for $205 per share in cash and stock. Perrigo said the offer was too low and did not value the company's assets correctly as well as the benefits from the recently closed Omega acquisition.


Mylan is also under attack as Teva Pharmaceuticals (TEVA) offered to pay $82 per share for Mylan. That values the company at $40.1 billion and a 21% premium over Monday's closing price. If Teva is successful in its hostile bid for Mylan it would create the dominant global generic drug company. It would be the largest in the world and be able to dramatically cut costs by demanding concessions from suppliers. In the U.S. 7 out of 8 prescriptions are filled with generics. Mylan markets more than 1,800 generic drugs.


Markets

Despite the Nasdaq's gain of +19 points thanks to the biotech news, Tuesday was not a good day in the markets. Monday's "inside day" where the highs and lows were inside the highs and lows from Friday was due purely to a short squeeze. There was no follow through today and volume was very low. In fact the volume on Monday was only 5.6 billion shares and today was 5.8 billion. Investors are definitely pulling back from the market and there are multiple reasons.

Weak earning will get most of the blame but the market technicals are still deteriorating. The market has failed to recapture the highs made in February and each attempt has resulted in a lower high. Since the October rebound culminated just after Thanksgiving at 2075 on the S&P the market has traded sideways with severe fits of volatility. Normally when there is prolonged volatility the market ends up with a directional move. Here we are five months later and today's close was only 22 points above the 2075 post Thanksgiving close.

As I wrote at the beginning of this commentary the majority of investors are confused and have turned neutral on the market. Every failed rally kicks a few more undecided traders to the curb to wait for a direction. At the risk of repeating myself we need a correction in order to clear the cobwebs and set the market up for a new move. However, a correction going into the summer doldrums risks setting us up for the same lackluster market action several months from now only at a lower level.

The S&P is struggling at the 2100-2110 level. The opening spike this morning topped out at 2109.64 and it was immediately sold with the index ending the day only 3 points off the low for the day.

Friday's dramatic drop gave us a clear support level at 2075 and the action over the last two weeks has given us a clear picture of resistance at 2100-2110. Until these levels break the market is trapped in neutral with no direction.


The Dow was dragged lower by Travelers (TRV) after they posted a -14% decline in earnings of $2.55 that match some estimates. Revenue of $6.63 billion missed estimates of $6.78 billion. The company tried to offset the negativity in the stock by announcing the addition of $5 billion to their stock buyback program. It did not help and Travelers shares declined -4.26 to knock about -32 points off the Dow.

Dupont (DD) reported earnings of $1.34 that beat estimates for $1.31 but revenue of $9.17 declined -9% and missed estimates of $9.41 billion. Their forecast worsened with the company saying the strong dollar would now knock 80 cents off full year earnings compared to the previous 60 cent forecast. They now expect earnings to come in at the low end of their prior forecast. Shares declined -$2 and knocked another -15 points off the Dow.

The index spiked to strong resistance at 18,100 at the open and it was immediately sold. The selling persisted all day to close near the lows. With another round of Dow components reporting on Wednesday the outlook is not much better. Even if they do report positive earnings there will be continued drag from those already reported including GE, GS, IBM, DD, TRV, INTC, VZ, etc.

Resistance remains 18,100 with support at Friday's lows at 17,750.



The Nasdaq Composite posted a +19 point gain thanks to the rally in the various biotech stocks. Only about 5 of the top 25 gainers were in a different sector. This enabled the Nasdaq to close back over 5000 but right in line with the highs from last week. Can the Nasdaq move to new high with only one sector contributing the gains? Yes, as long as those gains continue to be outsized moves. The instant the sector takes a rest the index could crash if there is no positive help from another sector.

Fortunately the semiconductors are starting to show life but resistance on the $SOX is right at 710 and today's high. It will be a tough job for the chip stocks to take over the leadership without a catalyst to drive them. In the biotechs we are seeing potential acquisitions almost every day but not so in the chip sector.



Resistance on the Nasdaq remains 5026 with initial support at 4950.


The small cap Russell 2000 has lost its mojo. The index has failed to recover last week's high at 1275 and today's action was lackluster with a fractional loss. They are not selling them off yet but investors have definitely quit buying. If the Russell declines below 1250 and support from Friday it would indicate the game has changed and we should begin forecasting a steeper drop.


I remain neutral on the market. I am not ready to pull the plug and turn bearish but there are far more bearish stocks than bullish stocks today. In researching for the other newsletters yesterday I looked at more than 800 individual stock charts. The vast majority were showing a bearish trend. If that majority continues to broaden and the number of stocks leading us higher begins to dwindle then we will eventually move lower.

You have to ask yourself today, "Why buy?" What reasons do investors have to be bullish on the market? Earnings are a negative. Economics are weak. The Fed meeting is next week and while they are not likely to raise rates they will definitely talk about raising rates in the near future. If they name June as a potential date the market will not react well. The market is projecting September or longer. The geopolitical events of Greece, Iran, Yemen, Russia, Ukraine, etc are still clouds over the market.

They say bull markets climb a wall of worry. If they do it over the next couple weeks it will be rock climb rather than a simple wall of worry. I continue to recommend holding a minimum number of long positions and keep your stops tight.

Remember, the market never goes in the direction you expect and when it does decide to move it moves in a hurry. Also, the market does not need a reason to correct.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

 


New Plays

Struggling To Stay Fresh

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Krispy Kreme Doughnuts - KKD - close: 18.79 change: -0.04

Stop Loss: 19.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on April -- at $---.--
Listed on April 21, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 608 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Earlier this year everyone was speculating that the multi-year lows in gasoline prices would be bullish for consumer spending, especially at restaurants. Thus far that premise hasn't really panned out. Gasoline prices remain $1.00 lower than they were a year ago but restaurant stocks as a whole are not seeing a significant increase in sales. Investor sentiment on shares of KKD seems to have gone stale with shares down -15% from their 2015 highs.

KKD is in the services sector. They're part of the restaurant industry. According to the company, "Krispy Kreme is a leading branded specialty retailer and wholesaler of premium quality sweet treats and complementary products, including its signature Original Glazed® doughnut. Headquartered in Winston-Salem, N.C., the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937. Today, there are over 980 Krispy Kreme shops in more than 20 countries around the world."

Their 2015 Q3 earnings back in December were in-line with estimates while revenues came in below analysts' expectations. Yet KKD offered a bullish guidance for the rest of their fiscal year. Shares sold off anyway in spite of the improved guidance.

Their most recent earnings report was March 11th when KKD announced its 2015 Q4 results. Earnings were up a significant +36% to $0.17 a share. That was one cent above Wall Street estimates. Revenues rose +11.3% to $125.4 million. Unfortunately that missed expectations for $128 million. Domestic same-store sales were up +3.6% while international same-store sales were down -2.6% most likely due to the strong U.S. dollar.

KKD management expects their 2016 fiscal year results to be in the $0.79-0.85 range. That is already accounting for low gasoline prices, which is still expected to boost sales throughout the remainder of the year. The bad news is that Wall Street was looking for earnings of $0.85 per share. The combination of the revenue miss (second quarter in a row) and the lowered guidance helped send KKD's stock lower.

Bulls could argue that KKD is growing and sales will improve as they expand. In fiscal year 2016 KKD does plan to open several new stores including 10 to 15 new company-owned stores, 10 to 20 new domestic franchise stores, and 95 to 110 net new international franchise locations. Unfortunately, if the stock's chart is any indication, investors aren't buying it.

Currently the stock has fallen toward significant support in the $18.00-18.50 zone, which is underpinned by the simple 200-dma. This area is also support on the point & figure chart, which is currently bearish and forecasting at $16.00 target. If KKD breaks down under $18.00 it could signal a drop toward its 2014 lows near $15.00.

Tonight we are suggesting a trigger to open bearish positions at $17.90. I want to point out that April 23rd and 24th could be volatile for KKD. Much larger rivals Dunkin Donuts (DNKN) and Starbucks (SBUX) both report earnings on April 23rd. Their quarterly results could have an influence on shares of KKD.

Trigger @ $17.90

- Suggested Positions -

Short KKD stock @ $17.90

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

Buy the AUG $18 PUT (KKD150821P18) current ask $1.20
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Tuesday Morning Rally Fails

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market spiked higher on Tuesday morning. Most of the market saw these gains fade. The NASDAQ managed to post a gain but the S&P 500 and the Russell 2000 both closed in the red. Fortunately, losses were mild.

SWIR hit our stop loss.


Current Portfolio:


BULLISH Play Updates

CDW Corp. - CDW - close: 38.72 change: +0.41

Stop Loss: 36.40
Target(s): To Be Determined
Current Option Gain/Loss: +0.2%
Entry on April 13 at $38.65
Listed on April 09, 2015
Time Frame: Exit PRIOR to earnings in mid May
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
04/21/15: Good news! The relative strength in CDW continues and shares have broken out to new highs. I am suggesting new bullish positions at current levels.

Trade Description: April 9, 2015:
Traders have been consistently buying the dips in information technology stock CDW. Now the stock is poised to breakout to new highs.

The company offers a broad range of hardware, software and integrated IT solutions to its clients. These include mobility, security, cloud computing, virtualization, data center optimization, and more.

Their website describes the company as "CDW is a leading provider of integrated information technology solutions in the U.S. and Canada. We help our 250,000 small, medium and large business, government, education and healthcare customers by delivering critical solutions to their increasingly complex IT needs. A Fortune 500 company, CDW was founded in 1984 and employs more than 7,200 coworkers. In 2014, the company generated net sales of more than $12.0 billion."

Earnings last year were healthy. CDW has consistently beaten Wall Street's earnings and revenue estimates for the last four quarters in a row. Revenues have been showing double-digit growth for the last year. Their most recent report was February 10th when CDW delivered its Q4 results. Analysts were expecting a profit of $0.53 a share on revenues of $2.95 billion. CDW reported $0.59 a share with revenues up +12.4% to $3.05 billion.

Analysts seem optimistic on CDW. Barclays has listed CDW as one of its top picks and noted that the company has very little exposure to Europe or Asia so the strong dollar shouldn't hurt it that bad. Another analyst, with RBC Capital Markets, believes that any softness in the consumer market will be overshadowed by strength in the enterprise market.

Technically the bullish trend of higher lows in CDW has been coiling more tightly. Now, with the stock up four days in a row, CDW is on the verge of breaking through resistance in the $38.00-38.50 area. Tonight we are suggesting a trigger to launch bullish positions at $38.65.

- Suggested Positions -

Long CDW stock @ $38.65

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

Long MAY $40 CALL (CDW150515C40) entry $0.90

04/13/15 triggered @ 38.65
Option Format: symbol-year-month-day-call-strike


Cognex Corp. - CGNX - close: 50.14 change: -0.07

Stop Loss: 49.45
Target(s): To Be Determined
Current Option Gain/Loss: -2.4%
Entry on April 09 at $51.35
Listed on April 08, 2015
Time Frame: Exit PRIOR to earnings in May
Average Daily Volume = 515 thousand
New Positions: see below

Comments:
04/21/15: Tuesday was the second time in three sessions that traders bought the dip in the $49.75-49.80 region. I'm worried the stock is rolling over. More conservative traders may want to move their stop closer to $49.70.

I am not suggesting new positions at this time.

Trade Description: April 8, 2015:
Shares of CGNX are trading at all-time highs and with good reason. The company has been consistently beating analysts' earnings estimates and guiding higher.

CGNX is in the technology sector. According to the company's marketing materials, "Cognex Corporation designs, develops, manufactures and markets a range of products that incorporate sophisticated machine vision technology that gives them the ability to 'see.' Cognex products include barcode readers, machine vision sensors and machine vision systems that are used in factories, warehouses and distribution centers around the world to guide, gauge, inspect, identify and assure the quality of items during the manufacturing and distribution process. Cognex is the world's leader in the machine vision industry, having shipped more than 1 million vision-based products, representing over $4 billion in cumulative revenue, since the company's founding in 1981. Headquartered in Natick, Massachusetts, USA, Cognex has regional offices and distributors located throughout the Americas, Europe and Asia."

Research is forecasting the machine vision industry to grow more than +12% a year for the next six years. By 2020 the market for this business could be more than $9 billion. CGNX appears to be leading the pack. Looking at the last three quarters they have beaten earnings estimates. Revenues have consistently been in the double-digit growth range. The company has raised their guidance twice. In their last quarter gross margins hit 75%. The biggest customer is Apple (AAPL).

In CGNX's earnings report Dr. Robert Shillman, Chairman of Cognex commented on their results saying, "2014 was a fabulous year for Cognex! We reported the highest annual revenue, net income and earnings per share in our 34-year history. In addition, operating margin expanded to 30% driven by the substantial leverage in our business model. That level is a dramatic increase over the 24% reported for 2013 and was achieved despite the significant investments that we made in sales and engineering during the year."

CGNX guided Q1 above Wall Street estimates. They expect strong revenue growth year-on-year and gross margins in the mid 70% range.

Technically shares of CGNX just recently broke out above round-number resistance at $50.00. The point & figure chart is very bullish and forecasting a long-term target at $79.00. Traders quickly bought the dip today. Tonight I am suggesting a trigger to open bullish positions at $51.35.

- Suggested Positions -

Long CGNX stock @ $51.35

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

Long MAY $50 CALL (CGNX150515C50) entry $5.20

04/09/15 triggered @ 51.35
Option Format: symbol-year-month-day-call-strike


Daqo New Energy Corp. - DQ - close: 29.03 change: -0.75

Stop Loss: 28.75
Target(s): To Be Determined
Current Option Gain/Loss: -8.0%
Entry on April 20 at $31.55
Listed on April 18, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 127 thousand
New Positions: see below

Comments:
04/21/15: The Chinese market rallied today. That begs the question, why did DQ underperform both its home market and the U.S. market today?

Technically today's decline (-2.5%) confirms yesterday's bearish engulfing candlestick reversal pattern. More conservative traders will want to exit immediately. If there is any follow-through lower tomorrow odds are high we'll see DQ hit our stop loss at $28.75. I'm not suggesting new positions at this time.

Trade Description: April 18, 2015:
Solar energy stocks can be volatile. The market is constantly reacting to the swirling waters of politics, international trade, tariffs, and subsidies. Currently it looks like solar stocks are on the rebound after a rough second half in 2014.

DQ is in the technology sector. According to the company, "Daqo New Energy Corp. (DQ) is a leading polysilicon manufacturer based in China. Daqo New Energy primarily manufactures and sells high-quality polysilicon to photovoltaic product manufacturers. It also manufactures and sells photovoltaic wafers."

They provide more detail on their website. DQ says, "We utilize the chemical vapor deposition process, or the 'modified Siemens process,' to produce polysilicon, and have fully implemented the closed loop system to produce high-quality polysilicon cost-effectively. We manufacture and sell high-quality polysilicon to photovoltaic product manufacturers, who further process our polysilicon into ingots, wafers, cells and modules for solar power solutions. Currently our annual capacity for polysilicon is 6,150 MT. We plan to further increase the capacity to 12,150 MT."

Plus, "We also plan to upgrade our off-gas treatment process from traditional Hydrogenation technology to Hydrochlorination technology. Based on our ultra pure polysilicon, we have expanded into downstream wafer business. Our current wafer manufacturing annual capacity is 72 million pieces. Most of our wafer product is high efficiency wafer which represents approximately 4.3 watts per piece."

The company's most recent earnings report was April 10th. DQ reported their 2014 Q4 and full year results. Last quarter the company earned a profit of $3.6 million but that's down from $5.9 million a year ago. Revenues were better than expected at $49.5 million versus the $46.1 million estimate. Gross margins improved from 31.7% to 32.1%.

Their full year 2014 results saw revenues improve +67.5%. Polysilicon shipments were up +40.6% versus 2013. Gross profit hit $43.3 million compared to a loss of $26.1 million in 2013.

A few of the details in their Q4 2014 results did spark some concern. DQ saw an increase in selling, general, and administrative expenses. The cost to produce their polysilicon rose +1.4%. The average selling price for polysilicon fell from $21.50/kg from Q3 to $20.47 in Q4. At the same time DQ's shipments were down -3.8%. To boil it down, analysts are concerned about oversupply and overcapacity issues. At the moment investors appear to be ignoring those concerns thanks to DQ's optimistic outlook.

In their latest earnings report the company provided an optimistic industry forecast. DQ management said, "Global solar PV installations in 2014 totaled approximately 45.0 GW, which represents a 23.2% increase compared to 36.5 GW in 2013. Currently most analyst reports forecast that global solar PV installations in 2015 will be in the range of 52~55 GW, which represents a growth of 16%~22% compared to 2014. In 2014, annual solar PV installations in China were reported to amount to 10.6 GW. In March 2015, Chinese National Energy Administration released the 2015 target for solar PV installations of 17.8GW, which is 19% higher than the initial target of 15GW, and represents an increase of almost 70% from 10.6 GW in 2014. Although some additional polysilicon supply may enter the market mainly in the second half of 2015, we believe the supply and demand of polysilicon will remain in balance, on the premise that the global markets, including the China market, will grow as expected."

This positive outlook has helped push shares of DQ to new four-month highs and above significant resistance at $30.00 and its simple 200-dma. The point & figure chart has turned positive and currently forecasting a long-term target at $48.00.

I want to remind readers that solar stocks can be volatile and DQ especially since it has a very, very small float of only 5.37 million shares. Therefore I'm suggesting very small bullish positions if DQ can trade at $31.55. We'll try and limit our risk with an initial stop loss at $28.75.

*small positions to limit risk* - Suggested Positions -

Long DQ stock @ $31.55

04/20/15 Caution: DQ has produced a potential one-day bearish reversal pattern
04/20/15 triggered @ $31.55


Prestige Brands Holdings - PBH - close: 44.18 change: -0.12

Stop Loss: 42.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.3%
Entry on March 20 at $42.35
Listed on March 19, 2015
Time Frame: Exit PRIOR to earnings on May 14th
Average Daily Volume = 342 thousand
New Positions: see below

Comments:
04/21/15: PBH quietly churned sideways along the $44.00 level today. More conservative traders will want to consider raising their stop loss closer to the 20-dma near $43.50. I would not launch new positions at this time.

Trade Description: March 19, 2015:
Shares of PBH are outperforming the broader market. The relative strength has lifted the stock to new all-time highs and a +20% gain in 2015.

PBH is part of the services sector. According to the company, PBH "markets and distributes brand name over-the-counter and household cleaning products throughout the U.S. and Canada, and in certain international markets. Core brands include Monistat® women's health products, Nix® lice treatment, Chloraseptic® sore throat treatments, Clear Eyes® eye care products, Compound W® wart treatments, The Doctor's® NightGuard® dental protector, the Little Remedies® and PediaCare® lines of pediatric over-the-counter products, Efferdent® denture care products, Luden's® throat drops, Dramamine® motion sickness treatment, BC® and Goody's® pain relievers, Beano® gas prevention, Debrox® earwax remover, and Gaviscon® antacid in Canada."

The company's most recent earnings report was noteworthy. Analysts were expecting a profit f $0.40 a share on revenues of $190.2 million. PBH delivered $0.48 a share, which is a +60% improvement from a year ago. Revenues were up +36.4% to $197.6 million, another beat. PBH's OTC products saw +37.2% sales growth in North America and +107.8% growth internationally.

Matthew M. Mannelly, President and CEO of PBH commented on his company's performance, "In light of our excellent year to date and third quarter results, we are updating our previously provided outlook for fiscal year 2015. We are tightening our expected adjusted EPS range from $1.75 to $1.85 per share to $1.82 to $1.85 per share, and anticipate revenue growth at the high end of our previously provided outlook of 15-18%. The update is driven by anticipated organic growth in the legacy business during the fourth quarter."

Wall Street analysts are forecasting 2015 Q1 (PBH's Q4) results to see +29% EPS growth and +30% revenue growth.

It's also worth noting that PBH is a potential buyout target. They have been targeted before. Back in 2012 Genomma Lab offered $834 million in cash but PBH rejected the offer, calling it too low.

The better than expected earnings in early February launched PBH above major resistance in the $37.00 area. Shares spent four weeks digesting those gains and now they're back in rally mode. The point & figure chart is bullish and forecasting at $54.00 target. Tonight we are suggesting a trigger to launch bullish positions at $42.35.

- Suggested Positions -

Long PBH stock @ $42.35

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

Long JUL $45 CALL (PBH150717C45) entry $1.55

04/18/15 new stop @ 42.85
03/21/15 new stop @ 40.35
03/20/15 triggered @ 42.35
Option Format: symbol-year-month-day-call-strike


Vipshop Holdings - VIPS - close: 29.98 change: +1.40

Stop Loss: 27.85
Target(s): To Be Determined
Current Option Gain/Loss: -0.6%
Entry on April 09 at $30.15
Listed on April 01, 2015
Time Frame: 8 to 12 weeks (option traders, exit prior to expiration)
Average Daily Volume = 6.3 million
New Positions: see below

Comments:
04/21/15: Widespread gains back home in the Chinese market probably gave shares of VIPS a boost today. The stock surged +4.9% and closed right at round-number resistance near $30.00. I would like to see some follow through before considering new positions.

Trade Description: April 1, 2015:
The main Chinese stock market has broken out to multi-year highs. This has provided fertile ground for shares of VIPS to grow. The company is an online retailer that specializes in flash sales of female-oriented products.

According to the company, "Vipshop Holdings Limited is China's leading online discount retailer for brands. Vipshop offers high quality and popular branded products to consumers throughout China at a significant discount to retail prices. Since it was founded in August 2008, the Company has rapidly built a sizeable and growing base of customers and brand partners."

Earnings have been strong. Looking at the last four quarterly report VIPS has beaten Wall Street estimates and raised guidance four quarters in a row. We're talking triple-digit growth for earnings and revenues.

VIPS' most recent report was its Q4 results on February 17th. Earnings were 12 cents a share, which was actually two cents below expectations. However, revenues soared +109% to $1.36 billion. Gross margins improved from 24.5% to 24.9%. Active customers grew +114% to 12.2 million (plenty of room to grow).

In their earnings press release Mr. Donghao Yang, chief financial officer of Vipshop, commented, "We are very proud of our fourth quarter financial results, which exceeded our prior expectations. Our progress in mobile, market expansion, along with our long-standing commitment to customers enabled us to further boost both the total net revenue and the net income attributable to our shareholders. During the fourth quarter of 2014, the mobile contribution of our platform reached approximately 66% of our gross merchandise volume. Looking ahead, we are firmly confident that by executing our growth strategies and further investing judiciously in fulfillment, technology and talent, we will be able to further fortify our position as the leading online discount retailer in China and continue delivering a satisfying shopping experience to our growing base of customers."

Management issued bullish guidance again. They see 2015 Q1 revenues in the $1.25-1.30 billion range, which suggest +78% to +85% growth from a year ago. Analysts estimates were at $1.21 billion. You can see how the stock reacted to the news and optimistic guidance.

Chinese stocks got another pop recently when a Chinese official suggested their government might provide even more stimulus. Here's a quote from a recent Bloomberg article, "China has room to act with both interest rates and 'quantitative' measures, People's Bank of China chief Zhou Xiaochuan said in remarks at the Boao Forum for Asia, an annual conference on the southern Chinese island of Hainan. Analysts surveyed by Bloomberg expect the PBOC will lower both benchmark lending rates and banks’ required reserve ratios, adding to cuts made in recent months." Link to the Bloomberg article.

Technically shares of VIPS have broken out past all of its major resistance levels and now it's flirting with a breakout past round-number resistance at $30.00. The point & figure chart is bullish and forecasting at $38.50 target. Tonight we are suggesting a trigger to launch bullish positions at $30.15.

- Suggested Positions -

Long VIPS stock @ $30.15

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

Long MAY $30 CALL (VIPS150515C30) entry $1.94

04/16/15 new stop @ 27.85
04/09/15 triggered @ $30.15
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Solera Holdings - SLH - close: 50.12 change: -0.31

Stop Loss: 52.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on April -- at $---.--
Listed on April 20, 2015
Time Frame: 3 to 4 weeks, exit PRIOR to earnings in May
Average Daily Volume = 536 thousand
New Positions: Yes, see below

Comments:
04/21/15: SLH spiked higher at the open but the rally didn't last. The stock underperformed the market with a -0.6% decline. We want to see a relative low. Our suggested entry point is $49.40.

Trade Description: April 20, 2015:
Investor sentiment appears to have soured on SLH. The longer-term trend is now down. The company is in the technology sector. They're considered part of the application software industry.

Here's a brief company description, "Solera is a leading provider of risk and asset management software and services to the automotive and property marketplace, including the global P&C insurance industry. Solera is active in over 70 countries across six continents. The Solera companies include: Audatex in the United States, Canada, and in more than 45 additional countries; Informex in Belgium and Greece; Sidexa in France; ABZ and Market Scan in the Netherlands; HPI, CarweB and CAP Automotive in the United Kingdom; Hollander serving the North American recycling market; AUTOonline providing salvage disposition in a number of European and Latin American countries; IMS providing medical review services; Explore providing data and analytics to United States property and casualty insurers; Service Repair Solutions, a joint venture with Welsh, Carson, Anderson & Stowe, that provides solutions for the service, maintenance and repair market; and I&S, a provider of software and business management tools, third-party claims administration, first notice of loss and network management services to the U.S. auto and property repair industries, specializing in glass claims."

Their most recent earnings report was the 2014 Q4 results on February 5th. Wall Street was expecting a profit of $0.79 a share on revenues of $283 million. SLH missed estimates with 40.77 a share. Revenues were up +18% but came in just a hair below expectations (essentially in-line). Unfortunately management lowered their earnings and revenue guidance for 2015 below Wall Street estimates.

Today SLH is trading with a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $44.00 target. Currently the stock is hovering just above round-number support at the $50.00 level. Last Friday's intraday low was $49.65. Tonight we are suggesting a trigger to launch bearish positions at $49.40. We'll try and limit our risk with an initial stop loss at $52.15. We will plan on exiting prior to earnings in mid May (no official date yet).

Trigger @ $49.40

- Suggested Positions -

Short SLH stock @ $49.40

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

Buy the JUN $50 PUT (SLH150619P50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Strayer Education, Inc. - STRA - close: 53.94 change: -0.07

Stop Loss: 56.15
Target(s): To Be Determined
Current Option Gain/Loss: -1.9%
Entry on April 07 at $52.95
Listed on April 06, 2015
Time Frame: Exit prior STRA's earnings report on May 6th
Average Daily Volume = 124 thousand
New Positions: see below

Comments:
04/21/15: The oversold bounce in STRA failed at its 20-dma this morning. Unfortunately there wasn't much follow-through lower. Shares just hovered near $54.00 all day.

More conservative traders may want to lower their stop loss. I'm not suggesting new positions at this time.

Trade Description: April 6, 2015:
The for-profit education stocks have not had a good year. The group is getting crushed. Student enrollments are falling as the labor market improves. Last week we saw the March jobs report was a disaster but the prior 12 months were all above +200,000 jobs a month, the best string of job growth in years. The unemployment rate has fallen to six-year lows. This is reducing the number of potential students for companies like STRA.

STRA was founded back in 1892. According to the company, "Strayer Education, Inc. (Nasdaq: STRA) is an education services holding company that owns Strayer University. Strayer's mission is to make higher education achievable for working adults in today's economy. Strayer University is a proprietary institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice to working adult students. Strayer University also offers an executive MBA online and corporate training programs through its Jack Welch Management Institute. The University is committed to providing an education that prepares working adult students for advancement in their careers and professional lives."

Another challenge for the for-profit industry is the U.S. government. Plenty of students are graduating with piles of debt and still can't get a job. Some schools have unusually high dropout rates. The authorities are investigating some schools for predatory enrollment practices. A new challenge is President Obama's proposal to make community college free for everyone, for the first two years. Of course "free" is a relative term since tax payers will be paying for it. No word yet on if or when this proposal gets off the ground but it generates headwinds for the for-profit educators.

STRA has been struggling with falling student enrollments and lower revenue per student. They reported Q4 earnings results on February 6th. STRA's $1.32 per share beat estimates by 14 cents. However, revenues plunged -6.4% to $116.1 million. Their fiscal 2014 earnings were down -7.8% from the prior year. Revenues dropped -11.4% in 2014.

The company is hoping that enrollment trends will turn positive in the first half of 2015 but they don't expect revenues to turn positive until the second half of the year.

Investors are bearish on the stock with short interest at 15% of the very, very small 10.0 million share float. This time the bears are probably right. Technically STRA looks ugly with a clear trend of lower highs and lower lows. You can see the sell-off on its Q4 report in the daily chart. The weakness accelerated in late March. The point & figure chart is bearish and forecasting at $46.00 target.

We are suggesting bearish positions with an entry trigger at $52.95. Investors will want to keep their position size small to limit risk. The small float and the high short interest could make this stock volatile. I suggest the put option, which would limit your risk to the cost of the option.

*small positions to limit risk* - Suggested Positions -

Short STRA stock @ $52.95

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

Long MAY $50 PUT (STRA150515P50) entry $2.25

04/07/15 triggered @ $52.95
Option Format: symbol-year-month-day-call-strike


Tessera Technologies Inc. - TSRA - close: 39.44 change: +0.83

Stop Loss: 40.15
Target(s): To Be Determined
Current Option Gain/Loss: -5.5%
Entry on April 17 at $37.40
Listed on April 16, 2015
Time Frame: Exit PRIOR to earnings on May 5th
Average Daily Volume = 585 thousand
New Positions: see below

Comments:
04/21/15: I'm urging caution on our TSRA trade. The stock displayed relative strength with a +2.1% gain. More importantly the stock broke through what should have been resistance near $39.00. The next resistance level is $40.00. I am not suggesting new positions at this time.

Trade Description: April 16, 2015:
After months of gains and generally bullish news shares of TSRA appear to be correcting lower.

The company is considered part of the semiconductor industry. According to the company, "Tessera Technologies, Inc., including its Invensas and FotoNation subsidiaries, generates revenue from licensing our technologies and intellectual property to customers and others who implement it for use in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies, among others. Our technologies include semiconductor packaging and interconnect solutions, and products and solutions for mobile and computational imaging, including our FaceToolsTM, FacePowerTM, FotoSavvyTM, DigitalApertureTM, face beautification, red-eye removal, High Dynamic Range, autofocus, panorama, and image stabilization intellectual property."

Their earnings report in late October 2014 was better than expected and TSRA raised guidance. They raised guidance again in January. Their earnings news in February helped push the stock to new 52-week highs. Unfortunately momentum appears to have reversed. The semiconductor space has been hit with downgrades and earnings warnings.

Now shares of TSRA has broken below multiple layers of support. The point & figure chart has generated a new triple-bottom breakdown sell signal with a $33.00 target. Today shares of TSRA sit on technical support at the 100-dam. A breakdown from here could portend a drop toward $34 or even $32.00 (near the 200-dma).

Tonight we are suggesting a trigger to launch bearish positions at $37.40. This is going to be a short-term trade. We will plan on exiting prior to earnings on May 5th.

- Suggested Positions -

Short TSRA stock @ $37.40

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

Long MAY $37 PUT (TSRA150515P37) entry $1.55

04/17/15 triggered @ 37.40
Option Format: symbol-year-month-day-call-strike


Olympic Steel Inc. - ZEUS - close: 11.11 change: -0.26

Stop Loss: 13.55
Target(s): To Be Determined
Current Option Gain/Loss: +10.8%
Entry on April 08 at $12.45
Listed on April 07, 2015
Time Frame: Exit PRIOR to earnings on May 1st
Average Daily Volume = 56 thousand
New Positions: see below

Comments:
04/21/15: So far so good. Shares of ZEUS continue to underperform the market and lost another -2.2% today. This is another multi-year closing low.

I'm suggesting we exit near $10.00 if we get the chance. Keep in mind we want to exit prior to earnings on May 1st.

No new positions at this time.

I want to remind readers that this is a higher-risk, more aggressive trade.

Trade Description: April 7, 2015:
We are adding ZEUS to the newsletter as a momentum trade. You could also consider it a hedge against our STLD trade, which hasn't really panned out as expected.

If you're not familiar with ZEUS, here's a brief description: "Founded in 1954, Olympic Steel is a leading U.S. metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The Company's CTI subsidiary is a leading distributor of steel tubing, bar, pipe, valves and fittings, and fabricates pressure parts for the electric utility industry. Headquartered in Cleveland, Ohio, Olympic Steel operates from 35 facilities in North America."

The steel industry has been really struggling with a flood of cheaper imports. We saw three major steel companies, STLD, NUE, and AKS, all lower guidance in March. The biggest complaint was a surge in imports, which has continued into 2015. The good news is that imports are slowing down because the glut of supply has driven prices lower. The bad news is that steel prices have been crushed.

Shares of ZEUS have been in a bear market for about a year. The earnings picture has not helped with ZEUS missing Wall Street's bottom line earnings estimates the last four quarters in a row.

Steel companies are hoping for the price of steel to find a bottom in the May-June time period. A couple of the companies listed above have suggested that the second half of 2015 will be better. That might just be wishful thinking. The economic slowdown in the first quarter of 2015 doesn't bode well for basic material companies.

Meanwhile the path of least resistance for ZEUS is lower. The point & figure chart is bearish and forecasting at $10.00 target. Today we saw ZEUS breakdown under support near $13.00 on double its average volume.

I consider this a higher-risk, more aggressive trade because ZEUS is not very liquid. The daily volume is exceptionally low. Plus, the options are not tradable because the spreads are too wide. I'm suggesting small bearish positions if ZEUS trades at $12.45 or lower. We're not setting a target tonight but I'd aim for the $10.00 area.

*small positions to limit risk* - Suggested Positions -

Short ZEUS stock @ $12.45

04/08/15 triggered @ $12.45



CLOSED BULLISH PLAYS

Sierra Wireless - SWIR - close: 36.30 change: -0.49

Stop Loss: 36.45
Target(s): To Be Determined
Current Option Gain/Loss: -5.4%
Entry on April 16 at $38.55
Listed on April 15, 2015
Time Frame: Exit PRIOR to earnings on May 7th
Average Daily Volume = 712 thousand
New Positions: see below

Comments:
04/21/15: SWIR continues to reverse lower. I can't find any news to account for the relative weakness. Shares underperformed the market with a -1.3% decline and marked its third loss in a row. Our stop was hit at $36.45.

- Suggested Positions -

Long SWIR stock @ $38.55 exit $36.45 (-5.4%)

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

MAY $40 CALL (SWIR150515C40) entry $1.55 exit $0.75 (-51.6%)

04/21/15 stopped out @ 36.45
04/16/15 triggered @ 38.55
Option Format: symbol-year-month-day-call-strike

chart: