Option Investor
Newsletter

Daily Newsletter, Monday, 5/11/2015

Table of Contents

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

Market Wrap

Still No Follow Through

by Thomas Hughes

Click here to email Thomas Hughes
The bulls tried to hang on to last Friday's gains but were just not able to do it.

Introduction

There were no official economic reports and very little in the way of earnings to move the market today. There was some news on an international level but it did not appear to have a serious impact on today's trading. In Asia the People's Bank of China made a surprise move to lower its key interest rate by 25 basis points. In Europe the Greece debacle wears on; Greece appears to be avoiding default on its IMF payment but it is still far from being out of the woods.

Market Statistics

Futures trading indicated a mixed day of trading right from the start. There was some fluctuation in prices during the early pre-market session but for the most part the indices were trading flat. After the open the indices tried to make a move higher, led by the NASDAQ, but that move was short lived.

The first hour of trading after the open saw a lot of volatility, the indices moved up and down within a tight range until hitting the early high shortly after 10. After that they slowly declined until all four of the major indices were in the red. The slow, steady decline hit bottom around 2pm and despite a late afternoon attempt to move higher closed near the lows of the day.

Economic Calendar

The Economy

No official economic reports were released today but we always get a new Moody's Survey Of Business Confidence each week. This week the index declined by -1.1 points, the second week of decline, but remains near the all time high set two weeks ago. In his summary Moody's Chief Economist Mark Zandi says

“Business sentiment remains steadfastly near a record high. An astounding more than half of the responses to the survey are positive, while less than one-tenth are negative. Confidence is especially strong in the U.S., where hiring and investment spending are robust. Credit is also freely flowing. Pricing is sturdy, despite heightened deflation concerns in much of the world, and sales are healthy. The only lackluster responses are with respect to assessments of present conditions, likely reflecting the recently soft global economy”


According to FactSet 447(89%) of the S&P 500 companies have reported earnings so far this season. Of those 71% have reported earnings above estimates while only 45% have beaten on revenues. As it currently stands, the blended rate for earnings growth is now positive, 0.1%. This is nearly 5% better than expected and well above the average improvement expected based on the 4 year averages. On an ex-energy basis earnings growth is 5.6%, also much better than first predicted. The reason for the improvement is a higher than average number of companies beating estimates, an those that are beating are beating by rates higher than average.

Eight sectors are now reporting better than expected, led by energy. So far, the energy sector has produced an aggregate earnings surprise of +28.7%. The next largest surprise is coming from the health care sector, about 10.5%. Looking forward analysts are predicting that revenue growth is going to remain weak into the end of the year but pick up starting in 2016. Also, margins are expected to rise by an average 0.1% on a quarter to quarter basis into the end of the year. There is some important data to watch out for this week. Tomorrow is the JOLTs report on job openings and labor turnover. Later in the week look out for retail sales, import/export prices, business inventories, jobless claims, PPI, TIC flows, Empire Manufacturing, industrial production, capacity utilization and Michigan Sentiment. As always, take the rear looking data with a grain of salt and focus on the more forward looking data points. JOLTS, business inventories and TIC flows are all for March/Q1, the rest is for April/May/Q2. Next week is the start of this month's round of housing data as well as the FOMC minutes.

The Oil Index

Oil traded choppy today and ended with a slight loss. The price of WTI fell -0.19%, the price of Brent -0.75%. Today's action was impacted by increasing reports that the shale producers may be ramping up production in response to higher prices. This is a bearish turn of events in my opinion and will only serve to increase supply/stockpiles if true. Additionally, OPEC output remains high and may even be on the rise.

On the flip-side, one of Libya's oil fields remains closed do to violence in that country and fighting is still raging in Yemen. Today the Yemen rebels took responsibility for shooting down a Moroccan jet fighter just days before the humanitarian cease-fire is set to begin. Yemen itself is a small country but when you consider that over 4 million Yemeni live and work in the Saudi oil fields the scope of the issue takes on a slightly more ominous tone.

The energy sector fell more than -2% in today's session despite the relatively high price of oil and better than expected earnings results. The Oil Index dropped back below the short term moving average and my support/resistance line 1,400. The indicators are bearish and gaining strength pointing to lower prices in the near to short term. Downside targets remains near 1,350 and then 1,300 where the long term trend line comes into play. The long term trend is up, and with earnings expectation for next year so strong, any near term sell-off will be a buying opportunity.


The Gold Index

Gold prices fell by about a half percent today on a stronger dollar. The dollar gained against the euro and the yen on the heels of last weeks NFP report. The NFP was only as-expected but as-expected is perfect for telling the market that the labor market and the economy is not dead and adding some strength to the dollar. Gold is now trading below $1190 and very near to $1180. This level has provided support over the past two months and could do so again.

The gold miners managed to hold last week's closing prices despite the drop in gold prices. Today's action created a small bodied candle on the GDX Gold Miners ETF and closed with a gain of 0.25%. The index is still winding up within its narrowing range and is currently moving up from my rising support line. The indicators are consistent with support along the rising support line with MACD momentum approaching equilibrium. I'm still bullish on the sector and waiting for a break out.


In The News, Story Stocks and Earnings

Earnings continue to roll in. The sector to watch this week will be the retailers. There are at least a dozen scheduled to report over the course of the week including Nordstrom's, Kohls, JC Penny and Macy's. Today the retail sector Spyder XRT lost -0.03% in a move that created a doji candle right at the short term 30 day moving average. This is the second day in a row that the ETF has traded at the moving average and created a doji. It looks like it is trying to move higher but has not quite been able to overcome resistance. The indicators are still bearish but momentum is on the verge of shifting to the upside, stochastic is consistent with a supported market and may be rolling over. Resistance is at $100 with support near $97-$97.50. If earnings for the sector are decent then this one could easily move above resistance with a target near $102.50 in the near term.


Dean Foods reported a top and bottom line beat this morning. The dairy processor and specialty foods maker also provided upbeat guidance for the next quarter. Consensus estimates were in the $0.19 per share range, the company guidance is in the range of $0.20-$30. The stock surged on the news, gaining more than 10% to hit resistance near $18.00.


Rackspace reported after the bell today. The cloud based web hosting company reported earnings in-line with estimates on lower than expected revenue. The company also provided guidance that was below analysts estimates and sent shares falling in the after hours session. Company guidance is a full 10% below consensus driven by declining margins. Currency conversions also had a negative impact on earnings and guidance. The stock lost more than 10% after the report was released, falling to a three month low.


Dish Network reported before the bell. The pay-TV provider reported earnings and revenue basically in-line with expectations driven on an increase in subscriber fees. The company reported revenue of $3.7 billion, up 3% from last year at this time, but also reported lower than expected new subscribers for both TV and internet services and a net decline in users. Shares of the stock lost -0.75%, extending the recent downtrend and setting a new 6 month low. The indicators are bearish and stochastic has just made a bearish crossover indicating potentially lower prices.


The Indices

The indices tried to move higher but failed, then they tried to hang near last week's closing prices and also failed. By the end of the day the majors were all in the red led by the S&P 500. The broad market lost just over a half percent, -0.51%, in a move down from resistance, halted by support. The index is still winding up within it rapidly narrowing range, squeezed between the long term trend line and the resistance of the all-time high. The indicators are mixed but still consistent with support along the rising trend line and possibly rolling into a potential trend following entry. MACD is very near to zero, following a bearish peak, and may shift to the upside.

The caveat is that even with a shift, momentum has been weak, in both directions, over the past few months and is likely not enough to break the market to new highs by itself. Stochastic is forming an early, weak, trend following signal, the caveat being that resistance is just above the current level. It looks like the index could move higher but without additional catalyst resistance will likely continue to keep prices from breaking to new all-time highs.


The Dow Jones Industrial Average made the next largest move today and in fact led the losses for most of the session. The blue chips lost -0.47% after trading as low as -0.5% and lower during the session. Today's action is a retreat from resistance that halted above support levels with indicators that suggest a retest of the highs could be developing. MACD momentum has just turned positive and stochastic is making a weak trend following signal. As with the SPX, the Dow has been halted at resistance several times over the past month or two so without additional catalyst could easily be halted again.


The NASDAQ Composite closed with a loss of -0.20% after spending most of the day trading in the green. The tech heavy index created a very small bodied candle, just above the short term moving average. Today's action was centered on the 5,000 level which did not hold. The indicators are bearish in the near term but still show support in-line with the trend over the short to long term. Bearish momentum is in decline and stochastic is showing a weak trend following bullish crossover so for now at least it looks like the index will move up to test resistance at the all time high. Near term support is along the moving average, with longer term support about 5% lower along the long term up trend line.


The Dow Jones Transportation Average made the smallest decline today, only -0.14%. Today's action created a doji candle at the moving average, with a close below the average, which makes it look like the index could retreat back to support along the bottom of the 6 almost 7 month trading range. The indicators are weakly bullish, MACD has just turned positive and stochastic is making a weak bullish crossover which makes it look as if it could move higher within the range. Support target is down along the bottom of the range near 8,600, possible upside target is 8,900.


The market is still waiting. Waiting for the signal to move up, or to move down. In the near term the indices continue to wind up within recent trading ranges with little strength. In the short to long term the indices are still trending higher. The economic trends are positive, as are the earnings trends despite this quarters low rate of growth, so I remain bullish as well.

The trends are supporting the market while it is fear of economic slow down, earnings declines, geopolitical risk and FOMC interest rate hikes that are providing resistance. If the trends break down so too may the market. The NFP provided one clue to the state of the economic trends and this weeks data will provide more.

In terms of earnings trends this season was weak, but much much better than expected. Not to mention the fact that the season is not yet over and will likely continue to improve. The next season may show more weakness but looking beyond that, to the end of the year and next year, expectations are quite good. There may be correction, consolidation or pull-back between now and then but the secular bull market is not over, not yet.

Until then, remember the trend!

Thomas Hughes


New Plays

Gaining Altitude

by James Brown

Click here to email James Brown


NEW BULLISH Plays

JetBlue Airways - JBLU - close: 21.83 change: +0.07

Stop Loss: 20.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 11, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.9 million
New Positions: Yes, see below

Company Description

Why We Like It:
The XAL airline index has been a disappointment this year. The XAL has been churning sideways for all of 2015 and is currently down -1.9% year to date. Meanwhile JBLU is soaring with the stock up +37.6% in 2015. These are ten-year highs.

JBLU is in the services sector. They're part of the regional airline industry. According to the company, "JetBlue is New York's Hometown Airlineâ„¢, and a leading carrier in Boston, Fort Lauderdale-Hollywood, Los Angeles (Long Beach), Orlando, and San Juan. JetBlue carries more than 32 million customers a year to 88 cities in the U.S., Caribbean, and Latin America with an average of 825 daily flights." JBLU is also the first major U.S. airline that has launched flights to Cuba since the U.S. government relaxed travel restrictions a few months ago.

The company has delivered quite a turnaround. They reported their 2015 Q1 results on April 28th. Earnings were one cent above estimates at $0.40 a share. That's a huge jump from a profit of just $0.01 a year ago. JBLU's operating margins surged from 3.1% a year ago to 16.6%. Revenues roes +12.9% to $1.52 billion in the first quarter. Not bad for a first quarter that suffered terrible winter weather on the East Coast.

JBLU said they are seeing success with their premium Mint service. Mint features lie-flat seats and is priced cheaper than rivals' business-class services. JBLU also said that their revenue for every seat flown one mile would rise 3% to 4% in April. That's a stark contrast to American Airlines, Delta, and United who all sais that revenue per seat would decline between 2% to 6% in the second quarter.

Analysts at JPMorgan have turned bullish on the airlines. They believe the U.S. airline industry has evolved. The major players have all matured and with discipline have boosted airline margins to record levels. Combine that with record-setting stock buybacks and the industry's stocks have performed well (i.e. they're up sharply in the last couple of years even though 2015 has been mediocre). The JPM team upgraded shares of JBLU to overweight and raised their price target from $19 to $28.

The rally in JBLU should have the shorts running scared. The most recent data listed short interest at 16% of the 308 million share float. Currently JBLU is hovering just below short-term resistance near $22.00. A breakout here could spark more short covering. Tonight we are suggesting a trigger to open bullish positions at $22.15.

Trigger @ $22.15

- Suggested Positions -

Buy JBLU stock @ $22.15

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

Buy the SEP $24 CALL (JBLU150918C24) current ask $1.00
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:



In Play Updates and Reviews

No Follow Through Higher

by James Brown

Click here to email James Brown

Editor's Note:
After big gains on Friday following the jobs report the U.S. market failed to see any follow through higher on Monday. Weakness in the bond market was making investors nervous.

ASPS, ATI, and SNCR all hit our bullish entry triggers today.


Current Portfolio:


BULLISH Play Updates

Altisource Portfolio Solutions - ASPS - close: 30.51 chg: +0.55

Stop Loss: 27.75
Target(s): To Be Determined
Current Gain/Loss: -1.9%
Entry on May 11 at $31.10
Listed on May 09, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 777 thousand
New Positions: see below

Comments:
05/11/15: ASPS started the week on a strong note. The stock rallied from $29.60 to $32.70 before lunchtime (a +10% move). Sadly ASPS was not able to maintain these gains. The stock faded back to a +1.8% gain. Our trigger to launch small bullish positions was hit this morning at $31.10.

Trade Description: May 9, 2015:
Shares of ASPS have been crushed from its highs near $170 a share back in late 2013 to almost $12 a share in March this year. That is thanks to the incestuous relationship that ASPS has with a handful of companies all founded by one man - William Erbey. One such company, Ocwen (OCN), is in danger of going out of business as authorities investigate the company on charges of misconduct. There is a risk to ASPS since a large chunk of ASPS revenues come from a relationship it has with OCN. It's not a surprise to see the slide in ASPS shares. However, the sell-off appears to be overdone and the stock may have found a bottom.

ASPS is in the services sector. According to the company, "Altisource Portfolio Solutions S.A. is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. Altisource leverages proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants. Altisource has been named to Fortune’s fastest growing global companies two years in a row."

Their most recent earnings report was April 23rd. Earnings soared +72% from a year ago to $0.56 a share even as revenues fell -1.0% to $207.8 million, which was significantly below estimates.

One of the most alluring features for traders to be short-term bullish on ASPS is the opportunity for a short squeeze. The most recent data listed short interest at 41% of the very small 9.6 million share float. That's very high and provides plenty of fuel for a short-covering fueled rally. Of course there is a risk. If OCN loses its legal battle with authorities it could go out of business and that will crush ASPS but that seems unlikely in the short-term. Meanwhile the broader market is pushing higher and poised to breakout, which could help fuel more short covering in ASPS.

The stock is pushing against resistance near $30-31. We are suggesting a trigger to launch small bullish positions at $31.10. I'm suggesting small positions to limit risk because ASPS can be volatile.

*small positions to limit risk* - Suggested Positions -

Long ASPS stock @ $31.10

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

Long JUN $30 CALL (ASPS150619C30) entry $3.00

05/11/15 triggered @ 31.10
Option Format: symbol-year-month-day-call-strike


Allegheny Technologies - ATI - close: 36.51 change: +0.82

Stop Loss: 33.85
Target(s): To Be Determined
Current Gain/Loss: +1.3%
Entry on May 11 at $36.05
Listed on May 05, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
05/11/15: The rally in ATI continued on Monday. Shares finally broke through resistance near $36.00 and hit our suggested entry point at $36.05. ATI ended the session with a +2.29% gain, outperforming the broader market by a wide margin. If you missed our entry point then consider waiting for a dip near $36.00, which should be new support.

Trade Description: May 5, 2015:
It looks like shares of ATI have put in a bottom.

The company is in the industrial goods sector. According to ATI, "Allegheny Technologies Incorporated is one of the largest and most diversified specialty materials and components producers in the world with revenues of approximately $4.4 billion for the last twelve months. ATI has approximately 9,600 full-time employees world-wide who use innovative technologies to offer global markets a wide range of specialty materials solutions. Our major markets are aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, and construction and mining."

ATI's most recent earnings report was April 21st. Management said their Q1 2015 earnings were $0.09 a share. Depending on who you polled ATI's nine cent profit was either one cent above or one cent below analysts' estimates. Whatever the case their $0.09 profit was a big improvement from the $0.19 loss a year ago. Revenues for Q1 2015 were up +14% from a year ago to $1.13 billion, which was above analysts' estimates.

ATI saw a big improvement from their Q4 with sales up +7% sequentially. This helped drive a +25% improvement in operating profits.

ATI President and CEO Rich Harshman commented on their results, "Aerospace market sales increased 14% in the first quarter 2015 compared to the fourth quarter 2014. We saw double-digit demand growth from both jet engine and airframe customers of 14% and 22%, respectively. First quarter aerospace demand was led by organic growth of our mill products. Sales of our nickel-based alloys and specialty alloys increased 15% and sales of our titanium alloys grew 16% with a good mix of value-added mill products. We expect sales growth of our precision forgings, castings, and components to begin later this year supported by the build ramp of next-generation jet engines."

Looking ahead ATI expects demand from the oil and gas market to remain soft. However, demand from the airframe and jet engine makers should be strong throughout 2015.

The stock broke out from a consolidation pattern on its better than expected Q1 earnings. This helped generate a buy signal on the point & figure chart, which is currently forecasting at $47.00 target. Shares of ATI spent a few days struggling with technical resistance at its 200-dma but they have broken out past this level as well. The past seven months looks like a massive bottoming process for the stock. Now shares are on the verge of breaking out past key resistance in the $35-36 area. We want to use a trigger at $36.05 to launch bullish positions.

FYI: ATI's next dividend ($0.18) is this month. The ex-dividend date is May 22nd. The shareholder record date is May 27th.

- Suggested Positions -

Long ATI stock @ $36.05

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

Long JUL $37.50 CALL (ATI150717C37.50) entry $1.25

05/11/15 triggered $ 36.05
Option Format: symbol-year-month-day-call-strike


Synchronoss Technologies - SNCR - close: 45.73 change: -0.02

Stop Loss: 43.85
Target(s): To Be Determined
Current Gain/Loss: -0.8%
Entry on May 11 at $46.10
Listed on May 09, 2015
Time Frame: Exit prior to June option expiration
Average Daily Volume = 527 thousand
New Positions: see below

Comments:
05/11/15: Early morning gains in SNCR pushed the stock above $46.00 and above its 10-dma. Our trigger to launch positions was hit at $46.10. The bad news is that the market's widespread decline this afternoon weighed on SNCR too. Shares closed back below the $46.00 level. At this time I would wait for a new rally past $46.10 before considering new positions.

Trade Description: May 9, 2015:
This trade is not for the faint of heart. Shares of SNCR have produced some rollercoaster like moves in the last six months. We want to use that volatility to our advantage.

SNCR is part of the technology sector. According to the company, "Synchronoss Technologies, Inc. (SNCR), is the mobile innovation leader that provides cloud solutions and software-based activation for connected devices across the globe. The company's proven and scalable technology solutions allow customers to connect, synchronize and activate connected devices and services that empower enterprises and consumers to live in a connected world."

Earnings and revenue growth has been impressive. SNCR has beaten Wall Street's earnings estimate the last four quarters in a row. Meanwhile sales have been growing at a strong double-digit pace. Looking at the last four quarters SNCR reported sales growth of +23.6%, +39.6%, +34.7%, and most recently +34.9%.

SNCR's 2015 Q1 report was announced on April 29th. Earnings rose +26% from a year ago. SNCR's Founder and CEO Stephen Waldis commented on his company's results, "Synchronoss delivered a strong start to 2015, highlighted by first quarter results that were at or above the high end of expectations. During the quarter, both sides of our business contributed to the strong performance, particularly our Cloud Services, which grew by 63% year-over-year. Mobile Operators around the world are capitalizing on the success of how personal cloud can drive important benefits to their valuable subscribers. We are pleased with our successful formula for helping our customers gain adoption and success with our personal cloud platform."

The stock was crushed from $52 to $44 (-15%) during the market's most recent swoon in the last several days of April. The sell-off was also a reaction to SNCR's earnings results. It looks like the sell-off was overdone and investors have started buying the stock near technical support at its rising 200-dma.

Tonight we are suggesting a trigger to launch small bullish positions at $46.10. More conservative traders may want to wait for a rally past the 10-dma instead (above 46.33). We'll try and limit our risk with a stop at $43.85. Keep in mind this is an aggressive play due to SNCR's volatility.

*small positions to limit risk* - Suggested Positions -

Long SNCR stock @ $46.10

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

Long JUN $50 CALL (SNCR150619C50) entry $0.90

05/11/15 triggered @ 46.10
Option Format: symbol-year-month-day-call-strike


Total System Services, Inc. - TSS - close: 40.98 change: -0.13

Stop Loss: 39.40
Target(s): To Be Determined
Current Gain/Loss: -0.1%
Entry on May 08 at $41.02
Listed on May 07, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 843 thousand
New Positions: see below

Comments:
05/11/15: It was a relatively quiet day for shares of TSS. The early morning rally faded but shares held near the $41.00 level. I am expecting TSS to fill the Friday morning gap higher. That means nimble traders could look for a dip near $40.80 as an alternative entry point to launch bullish positions.

Trade Description: May 8, 2015:
Consistently beating Wall Street's earnings estimates has driven shares of TSS to new all-time highs. The company is in the financial sector. The XLF financial ETF is down -1.2% for the year. TSS is up +19% for the year.

According to the company, "At TSYS® (TSS), we believe payments should revolve around people, not the other way around. We call this belief People-Centered Payments®. By putting people at the center of every decision we make, TSYS supports financial institutions, businesses and governments in more than 80 countries. Through NetSpend®, A TSYS Company, we empower consumers with the convenience, security, and freedom to be self-banked. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare and business solutions. TSYS' headquarters are located in Columbus, Ga., U.S.A., with local offices spread across the Americas, EMEA and Asia-Pacific."

This company has beaten analysts' estimates on both the top and bottom line the last four quarters in a row. Their most recent earnings report was April 28th. Earnings per share soared +41% to $0.54. That was eight cents above estimates. Revenues were up +11.7% to $662.2 million.

A few months ago (January 2015) TSS announced a new 20 million share stock buyback program to replace their old one. Last quarter they repurchased 1.45 million shares. When you include the company's dividend they paid out 73% of their available free cash flow to shareholders.

TSS' President and CEO, Mr. M. Troy Woods, commented on their recent results saying, "As a result of the great start to the year, we are revising our adjusted EPS guidance to grow between 12-14% from the previous range of 11-13%."

Shares of TSS surged to new highs on its earnings report. Since then traders have been buying the dips and the stock set a record closing high today. Tonight we're suggesting a trigger to launch bullish positions at $40.85.

FYI: TSS will hold an analyst day on May 20th.

- Suggested Positions -

Long TSS stock @ $41.02

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

Long AUG $40 CALL (TSS150821C40) entry $2.50

05/08/15 triggered on gap open at $41.02, suggested entry was $40.85
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Emerge Energy Services - EMES - close: 35.34 change: -1.20

Stop Loss: 41.25
Target(s): To Be Determined
Current Gain/Loss: +6.1%
Entry on May 07 at $37.65
Listed on May 06, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 413 thousand
New Positions: see below

Comments:
05/11/15: Good news! EMES did not see any serious follow through on Friday's bounce. The stock failed just below $37.00 this morning and underperformed the market with a -3.28% decline. More conservative traders may want to move their stop loss lower. I am not suggesting new positions at this time.

Trade Description: May 6, 2015:
The bubble in fracking sand and proppant stocks popped in 2014. The top in the fracking sand producers was just a couple of months after crude oil peaked last year. The impact of crude oil's decline and the industry's reaction to the oversupply-pricing issue will still be felt for months to come. Just as the oil and gas producers are cutting expenses, mothballing rigs, and delaying new projects, the proppant companies are forced to do the same. EMES recently announced they were canceling plans to build a new silica sand processing facility.

EMES is in the basic materials sector. They're part of the oil services industry. According to the company, "Emerge Energy Services LP (EMES) is a growth-oriented limited partnership engaged in the businesses of mining, producing, and distributing silica sand, a key input for the hydraulic fracturing of oil and natural gas wells. Emerge Energy also processes transmix, distributes refined motor fuels, operates bulk motor fuel storage terminals, and provides complementary fuel services. Emerge Energy operates its sand segment through its subsidiary Superior Silica Sands LLC and its fuel segment through its subsidiaries Direct Fuels LLC and Allied Energy Company LLC."

The earnings picture has been damaged by a very rough pricing environment for EMES' sand. Their Q4 2014 earnings, announced on March 2nd, were $1.01 per share. That was 12 cents below expectations. Q4 revenues were down -1.4% to $242.6 million compared to analysts' estimates of $301 million. That's a huge revenue miss.

The weakness continued in the first quarter. Wall Street was expecting EMES to report Q1 2015 earnings of $0.83 a share on revenues of $264 million. The company only delivered $0.39 per share with revenues down -25.5% to $204 million. The rest of 2015 is expected to remain challenging.

The stock was hammered again on April 24th when EMES management reduced their dividend from $1.41 per share down to $1.00.

The $40.00 level has been support and now shares are breaking down. The most recent data listed short interest at 13% of the very small 14.6 million share float. This time the shorts are probably right but the high short interest could make this a volatile trade. EMES' recent attempt at a bounce has been failing. We want to catch the next leg lower. Tonight we are suggesting a trigger to launch bearish positions at $37.65.

- Suggested Positions -

Short EMES stock @ $37.65

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

Long JUN $35 PUT (EMES150619P35) entry $2.35

05/07/15 triggered @ 37.65
Option Format: symbol-year-month-day-call-strike