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Daily Newsletter, Saturday, 7/4/2015

Table of Contents

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

Market Wrap

Nothing but Old News

by Jim Brown

Click here to email Jim Brown

Thursday was a lackluster day in the markets as old news was rehashed repeatedly and a lackluster employment report caused some investors to rethink the economic outlook. Greece is getting ready for their historic vote on Sunday and Europe is waiting to see what they choose.

Market Statistics

Greek PM Alexis Tsipras may be having a change of heart because it looks like the referendum is not going to turn out the way he hoped. With Greece in chaos with the banks closed and credit cards cut off he is not very popular today. The vote is being seen as a vote to stay or leave the eurozone and polling suggests more than 70% of Greek citizens want to remain in the euro. However, the polling for the Sunday referendum is too close to call with the "yes" side only slightly ahead. A poll on Saturday showed 41.7% would vote yes and 41.1% will vote no. As we all know polling of likely voters and the actual vote can produce dramatically different outcomes.

The fear over Greece had subsided on Thursday and trading was mostly just squaring up positions ahead of the weekend. A majority of analysts believe the market will rise next week if the yes side wins. However, that is not the end of the story. The PM will still have to meet with the EU Finance Ministers and work out a resolution to the bailout conditions. Even with a yes mandate behind him analysts expect him to still be obstinate when it comes to hammering out the conditions. The EU still has the upper hand as long as the ECB is not funding Greek banks. That will keep the pressure on at home and make Tsipras a more willing participant.

Let us hope for a vote to stay in the euro and a quick resolution to the bailout conditions so the market can get back to basics as Q2 earnings begin to flow.

Unfortunately late Friday news broke in the Financial Times that Greek banks were planning for the possibility of a "bail-in" by raiding the accounts of depositors. In 2013 Cyprus seized customer funds with a haircut imposed on uninsured deposits over 100,000 euros. With Greek banks closed for a week and on the verge of a financial collapse the plans call for a haircut of "at least" 30% on deposits over 8,000 euros. That means if you had an account with 100,000 euros when the banks closed a week ago, when they finally reopen you will have 70,000 euros. The bail-in would take place as a recapitalization program for the banks once Greece has agreed to a new bailout program with the EU, ECB and IMF. This is not something that is going to happen immediately but obviously it would have to happen before the banks reopened or everyone would attempt to withdraw their funds. Unfortunately, the capital controls are going to prevent that by continuing to restrict transfers and withdrawals for a long time. The Bank of Greece said the country only had enough cash to keep ATMs supplied until Monday and that allows for withdrawals of only 50 euros per day. Banks are down to their last 500 million euros and essential food and medicine will run out within days because of the lack of imports.

On Saturday Greek Finance Minister Yanis Varoufakis called the bail-in report in the Financial Times a "malicious rumor" with a tweet on his account. Twitter is hardly a channel for official news and it is difficult to believe anything Varoufakis or Tsipras say. Varoufakis said he would resign if Greeks voted yes on Sunday. He said, "I will not sign another extend and pretend agreement." Also, "I would rather cut off my own arm than sign an agreement without debt restructuring."

In the U.S. the Nonfarm Payrolls for June showed a gain of +223,000 jobs compared to estimates for 230,000. As estimates and actual go that was very close. However, it was a significant decline from the +280,000 initially reported in May. Also, the May number was revised down -26,000 to 254,000 and the April reading was revised down from 221,000 to 187,000 for a net loss to revisions of -60,000.

The adjusted U3 unemployment rate fell from 5.5% to 5.3% but not because more people were working. The labor force participation rate declined sharply from 62.9% to 62.6% and a post recession low because 432,000 people left the workforce. The more accurate reading of unemployment called the U6 rate rose from +10.4% to 10.8%.

All of the job gains were in the service sector with goods producing sectors adding only 1,000 jobs for the month, down from only 4,000 in May and 16,000 in April.

The average hourly earnings were flat at zero compared to a +0.2% average gain over the last four months and +0.6% n January. Rising wage growth is something the Fed wants to see before they raise rates.

Nearly every analyst said the expected rate hike in September is now off the table thanks to the payroll numbers and some other weak economics. However, there is an 80% chance of a December hike as evidenced by the Fed Funds Futures. The turmoil in Europe over the Greek disaster and the declining economics in China would be accentuated by rates hikes that spiked the dollar.

The Greek disaster is probably the excuse Yellen will use for pushing rate hikes off until 2016. The economy is not strong enough but she will not want to say that. Blaming Greece gives them another 3-6 months.


Factory Orders for May declined -1.0% after a -0.4% decline the prior month. Orders for durable goods were revised down from -1.8% to a -2.2% decline. Nondefense capital goods declined -7.3%. Defense orders showed the only strength at +8.0% but that was a rebound from a steep drop in April.

The economic calendar for next week is really light with only the ISM Nonmanufacturing and FOMC Minutes as highlights. The Wholesale Trade is never a market mover. The minutes will be the high point as analysts search for clues about a possible rate hike date.


The only material stock news on Thursday was mergers and acquisitions in the managed-care space. Centene (CNC) bid $6.3 billion for Health Net (HNT). The Affordable Care Act is expanding state and federally funded Medicaid by the millions as well as Medicare Advantage. That program has seen enrollment triple over the past decade. About 16.8 million people are enrolled in that program, up 1 million over the last year. Centene said Health Net would strengthen its presence in California, the nation's largest Medicaid market, and create a company with more than six million Medicaid members. HNT shares spiked +10% on the news.



On Friday, Aetna (AET) said it was buying Humana (HUM) for $37 billion to create the second largest managed-care company. The merger of the 3rd and 5th largest will put them right behind first place United Health (UNH). The Aetna deal has the same benefits as the CNC/HNT deal. It will greatly enhance Aetna's position in the Medicare Advantage and Medicaid programs. Aetna will pay the equivalent of $230 per share in cash and stock for Humana. The stock of Humana closed at $188 on Thursday before the news on Friday. Aetna shares will also react on Monday.


There has been no resolution in the Anthem offer for Cigna. Anthem offered $47 billion for Cigna (CI) but was rejected. With these offers being concluded for Humana and Health Net I would expect another bid for Cigna soon. Nothing prevents United Health from making a play for one of these companies so it is in their best interest to partner up quick before United comes calling.


Tesla (TSLA) shares jumped +$11 to a ten-month high at $280 after the company reported it delivered 11,507 vehicles in Q2, up 52% from the year ago quarter. That came after breaking the 10,000-car mark in Q1. The company plans to deliver 55,000 cars in 2015. They began the year with 20,000 reservations for the Model X SUV. Tesla plans on beginning deliveries of the Modal X late in Q3 or early in Q4. The prototype of the Model 3 sedan is expected to be released in March with deliveries planned for 2017. The car will have a starting price in the $35,000 range.

The problem Tesla is facing later this year is the actual sales of the Model X. This SUV model has gull wing doors that lift up. While that may have been a cool idea on the drawing board, it does not really work in real life. Most SUVs have a luggage rack on top for extra "stuff" when the family goes on trips/outings. Bikes, snowboards, surf boards, luggage, etc. With gull wing doors that does not work. There is no place to carry extra stuff because the trunk in the front is relatively small and there is no storage in the back. Also, the doors leak in the rain and when covered with heavy snow they cannot be opened. Several analysts believe this is going to lead to a slowdown in sales once these problems become well known. Once the first 10,000 or so hit the streets and complaints start pouring in from people that have not thought about those problem areas, we could see a dry spell between the Model S and the Model 3. With Tesla burning cash at the rate of about $500 million a quarter and $1.9 billion in the bank that means by the end of Q2 2016 they could be out of money. This will be especially true if the Model X falls flat after the first quarter of novelty sales.


Vertex Pharmaceuticals (VRTX) shares were halted most of the day on Thursday. The FDA approved the blockbuster drug for the treatment of cystic fibrosis called Orkambi. This is a drug combination that expands the patient base by about 400% and will generate $5 billion in revenue by 2018. This one drug is expected to turn Vertex profitable within the next three years. Orkambi was priced at $259,000 per year of treatment. That is going to give insurers a nightmare headache.


Biogen (BIIB) and AGTC (AGTC) announced a collaboration agreement to develop gene based therapies for ophthalmic diseases. The partnership will focus on developing a portfolio of therapeutic programs that will prevent blindness in children and adults. AGTC is eligible to receive upfront and milestone payments exceeding $1 billion starting with $472.5 million for the two lead programs and a royalty of up to mid tens percentages on the sales of the drugs. AGTC spiked +17% on the news.


Paypal acquired Xoom Corp for $890 million. This is a digital money transfer company and will complement Paypal's person to person money transfer business. The purchase price was thought to be a bargain and XOOM shares rose +21%.

Western Union (WU) shares fell -7% after Citigroup said the XOOM acquisition was bad news for Western Union.



Yelp (YELP) called off its hunt for a buyer and shares declined -10%. There were multiple bidders but nobody could agree on a price. With Yelp reporting a slowdown in visitor growth from 39% to 13% in Q4 with unique visitors declining for the first time ever the outlook for Yelp is not that positive. The company also lowered guidance so no surprise there were no big offers for Yelp.


Crude oil declined another -1.41 after dropping -2.50 on Wednesday. The unexpected build in crude inventories pushed prices down on Wednesday. Imports also rose to a two-month high of 7.51 million barrels per day. On Thursday, Baker Hughes said the overall active rig count rose +3 but active oil rigs rose +12. That was really unexpected and sent oil sharply lower.

U.S. production was 9.595 mbpd and only 15,000 bpd below the 40-year high set three weeks ago at 9.610 mbpd. Production is not declining and crude prices are falling. This could turn ugly over the next several months as fuel demand declines as summer driving fades.

If Iran and the P5+1 nations were to agree to a deal this week that included the lifting of sanctions it would be very bearish for oil prices. The Iranian Foreign Minister Mohammad Javad Zarif released a YouTube video in English saying negotiators were closer than ever but getting a deal would require "the courage to compromise, the self confidence to be flexible, the maturity to be reasonable and the wisdom to set aside illusions and the audacity to break old habits." Later in the statement he used the word hope in a clear reference to President Obama's book "the Audacity of Hope." The YouTube video was clearly an attempt to pressure the 6-nation team and especially the U.S. negotiators and President Obama. Some analysts perceived the video as a hardening of Iran's position as they tried to portray America as unreasonable and stuck in the past. The odds of a deal are slim and the odds of a deal that instantly remove the sanctions are almost zero.

The International Atomic Energy Agency (IAEA) released a report last week showing that Iran had failed to live up to the requirements of the most recent prior agreement by enriching more uranium than allowed and by failing to convert it into a form that could not be used in a bomb. This report of Iran's continued failure to live up to the terms of any prior agreement is just an example of how they would fail to live up to any future agreement.



Markets

The markets collapsed on Monday with the biggest losses of the year on fears over what would happen in Greece. That downdraft priced in those fears and the indexes drifted higher as the week progressed. The major indexes still ended the week with about a -1.5% decline with the exception of the Russell 2000 with a -2.5% decline. This is understandable since the Russell had the best rally over the prior month.

The S&P declined to within 3 points of its 200-day average at 2054 on Tuesday. The rebound found resistance at the 150-day average at 2078, which had been prior support. The S&P closed at 2076 and right under that resistance in preparation for a positive vote out of Greece over the weekend. The market was expecting Greece to vote to stay in the eurozone and investors were planning on a move higher next week.

The rumors about a bail-in haircut for Greek depositors could be overcome by a yes vote or made worse by a no vote. The point to remember is that regardless of the vote there are still days and weeks of uncertainty surrounding the Greek problem.

Investors and analysts alike do not know how this Greek tragedy is going to play out. As long as there is uncertainty, the markets will be volatile.

The market internals are still negative despite the minor rebound from Monday's crash. The percentage of S&P stocks trading under their 200-day average fell to 53.6%. The shorter term reading saw the percentage trading under their 50-day average fall to 27% early in the week but recover slightly to 35% by Thursday. That is still the lowest levels for the year.



The worst chart remains the S&P Bullish Percent Index. The percentage of S&P stocks with a buy signal on the Point and Figure charts declined to 57.6% and the second lowest level in more than 2 years. This chart is telling us the broader market is turning weaker.


Obviously, market conditions brought on by geopolitical headlines can reverse in an instant. In the U.S., we are headed into the Q2 earnings cycle with Alcoa officially kicking off the party on Wednesday. While there are only a few reports this week the pace will pick up significantly the following week. Unfortunately Q2 earnings are expected to see earnings decline -4.3%.

Goldman Sachs (GS) lowered their 2015 S&P earnings estimates from $122 to $112 with the consensus estimate at $119. The trend for earnings is declining and Goldman blamed it on declining revenues. In other words, sales at S&P companies are slowing despite decent job growth. This is one more reason why the Fed is unlikely to hike rates in September.

Analysts tend to go overboard with their earnings and price target corrections. With the consensus for earnings to decline -4.3% there is a good chance they over compensated and actual earnings could surprise to the upside. It will be several weeks before we will know if that is a real possibility.

For next week, the market will depend on the events in Greece but the declining internals will still be an overall drag. For the last three days the number of new 52-week lows have outpaced the number of new highs by about 3:1. That was significantly better than the 7:1 on Monday but still shows a negative trend.

For Monday, initial resistance on the S&P is roughly 2078-2081 followed by 2100. Initial support is around 2070 followed by the 200-day average at 2054.


The Dow is also struggling between recent support and resistance with two attempts to move back over 17,800. Both failed. With the earnings cycle upon us, the early weeks have a lot of Dow components reporting. If there are some positive earnings surprises then the Dow could gain some bullish sentiment. Conversely if there are some earnings misses then the existing weakness in about half of the components could spread.

Support is clearly 17,00 and resistance just below 17,800.



The Nasdaq is still being supported almost entirely by the biotechs. There is a battle being waged around the 4885-5000 level, which returned as support over the last two days. With the semiconductor stocks in decline and anything PC related also weak the Nasdaq is depending on healthcare, pharma and biotechs for support.

Resistance appears to be firm at 5040 but Thursday was a lower high at 5027. Because of the light volume and the Greek vote over the long weekend we really cannot attach too much importance to Thursdays trading.



The Russell 2000 is a point of concern for me. While the other indexes tried to rebound on Thursday the Russell had a definite negative bias and set a new four-week low. This is not a good sign since the Russell should have had a positive bias for the week after the rebalance the prior Friday. The 100-day average is still holding as support but only barely.

The Russell appears to be breaking down and while it was the leader on the way up it can also be the leader on the way back down. Summer is typically a weak period for small cap stocks and we could be seeing the beginning of that trend. I confess I expected it not to start for another couple of weeks.

Support is about 1243 with resistance 1260. The Russell closed right on the 100-day at 1248.


The Dow Transports just keep moving lower with multiple support levels broken and the October low at 7700 the obvious target. As long as the transports continue to weaken it is unlikely the Dow Industrials will mount any credible rally to new highs. This is an anchor for the Dow and the broader markets.


If we had a wish for next week it would look something like this. The Greeks vote yes to remain in the eurozone and accept the austerity demand from the troika. Tsipras would fly to Brussels and sign a new bailout agreement within 48 hours that reopened the ECB support for Greek banks. Greece would disappear from the headlines in time for the market to focus on better than expected Q2 earnings. Unfortunately, we have an almost zero chance of that wish coming true.

Regardless of the vote outcome, Tsipras will continue to be a stumbling block and the EU finance ministers will have to force him into the proverbial corner so tightly that he is forced to agree to their terms. While this is happening the market will remain volatile but not as bad as last Monday unless some new headlines erupt.

I would be cautiously long on any S&P move over 2080 and flat or short under 2050.

 

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Random Thoughts

Greece is on the verge of a disaster. As of late Saturday night ATMs are now limited to 50 euros instead of 60 because 20 euro notes have disappeared. Only 10-euro notes remain. Gas stations and small businesses have stopped accepting credit cards. With the banks down to 500 million euros any reopening of the banks would see them run out of cash within hours. Prior to the closing Greeks were withdrawing more than 1 billion euros per day. Restaurants are closing because they cannot import food. Manufacturing businesses are closing because they cannot import raw materials. Other businesses are closing because they cannot pay employees because of banking restrictions. This is a real disaster in the making. Greece Economy Shutting Down

This is a really good flow chart on the future for Greece depending on the outcome of the referendum and whether Tsipras remains in power. There is no easy solution. Barclays Big Picture for Greece


Greece owes the ECB roughly 160 billion euros. The ECB only has paid in capital of 8 billion. If Greece were to refuse payment all the eurozone nations would have to put up additional capital to keep the ECB solvent. Despite the fact that each nation has already been forced to contribute billions to the ECB to be transferred to Greece, they would be forced to contribute even more if Greece defaulted. That has got to be a bitter pill to swallow.


Last week the IMF released a document showing a gloomy analysis of Greek finances. The IMF said Greek finances, regardless of the vote, are unsustainable without substantial debt relief. The IMF said Greece would need a minimum of 50 billion euros in aid over the next three years just to keep it afloat and out of default. The IMF said Greece's debt burden of 185% of GDP can only be sustainable if the troika provides considerable extra financing through a mixture of new loans and debt restructuring. Some analysts believe the Greek debt would have to be cut by 75% in order for Greece to be able to continue functioning. The eurozone countries tried to pressure the IMF not to release the report ahead of the vote because it clearly spells out that the troika will have to give Greece more money. Greece Going Further into Debt


June is normally a month when millions of people enter the workforce. School is out and millions of students look for summer work. College graduates flood the market place looking for that first big job. Unfortunately, that did not happen in June. Over 432,000 people left the workforce in June and that was the largest drop in a single month in more than a year. That brought the work force participation rate down to 62.6% and the lowest level since October 1977.

Over the last decade, an average of 1.35 million workers entered the workforce in June. (Not seasonally adjusted)

Bloomberg on Drop in Workforce


China's Shanghai market declined -5.7% on Friday to cap the steepest three-week decline since 1992. The index is now -29% off the peak on June 12th. Chinese shares have lost more than $2.8 trillion in market cap in only three weeks. That is more than ten times the GDP of Greece. Only 39 of the 1,106 stocks in the index were positive on Friday. Regulators have pledged to investigate alleged market manipulation but in reality this is just an example of what happens when new investors leverage themselves as much as possible using margin. Chinese investors have been opening brokerage accounts at the rate of 3 million a week and then going "all in" on the market." Margin lending had risen 500% and that powered the 150% spike in the market.



Sentiment completely reversed its gains from the prior week and went even further into bearish territory. The prior week bullish sentiment spiked +10.1% to 35.6%. Last week it declined -12.9% to only 22.6%. That was the largest one-week decline since May 2013. The prior week bearish sentiment declined -12.6% to 21.7%. Last week bearish sentiment spiked +13.4% to 35.1% for the largest one-week spike since August 2013. Neutral sentiment was almost unchanged with a -0.5% decline to 42.3%.

This is the 14th consecutive week that bullish sentiment has been below its historical average of 38.8%.



The U.S. Intelligence Agency has gone back to the past. Instead of online forms and databases they are going old school and new applicants have to fill out forms on paper instead of computers. This is due to that monster cyber attack on the government database that saw personal information stolen on up to 14 million people.

The hard copies will be sent to the relevant agencies to review. The Office of Personnel Management (OPM) suspended the online system saying it will be offline for 4-6 weeks for "security enhancements." They are also going to hire a cybersecurity advisor to help prevent future intrusions. This is likely to be FireEye (FEYE). Government Going Back to Paper


China's Foreign Ministry expressed anger at the Pentagon on Friday after the updated National Military Strategy update slammed Chinese claims in the South China Sea as "aggressive and inconsistent with international law."

China is building artificial islands in areas where the Philippines, Vietnam, Malaysia, Brunei and Taiwan have conflicting territorial claims. They are building landing strips on the artificial islands as well as gun emplacements. China said the U.S. should abandon its Cold War mentality. The military strategy update was the first since 2011. China Angry about Military Report

Here is a slide show from the Washington Post showing the upgrades to many of the islands from water covered reef to become major harbors and military facilities. Reef Evolution


China passed a major security law last week to make networks and systems "controllable." As a core component all systems must be secure, which nobody really objects to the concept. However, the law would require anyone selling hardware in China to provide the source technical diagrams and flowcharts plus the software source code to prove there were no hidden security bugs in the equipment. Of course this would let China have access to every cutting edge piece of hardware and all the intellectual property associated and within months they could build their own identical equipment. With all the source code they could also create cyber attacks to create intrusions on the original equipment anywhere in the world. China Legislates Intellectual Property Theft


 

Enter passively and exit aggressively!

Jim Brown

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New Plays

Tougher Competition

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Whole Foods Market, Inc. - WFM - close: 39.15 change: -0.25

Stop Loss: 40.51
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 04, 2015
Time Frame: Exit PRIOR to earnings on July 29th
Average Daily Volume = 4.0 million
New Positions: Yes, see below

Company Description

Trade Description:
The natural foods market (i.e. organic foods) has bloomed from $6 billion annually in 1998 to $48 billion in 2012. Whole Foods Market (WFM) is probably the best known brand for organic groceries. The company has ridden that tidal wave of growth over the years. Unfortunately its rivals have caught on and now WFM is facing every increasing competition.

The grocery business is not a very high-margin game. Organic foods tend to be more expensive and allowed for better margins. A few years ago traditional grocery stores caught on and started expanding their selection of organic foods. Today traditional retail groceries control more than half of the total natural foods market. According to BMO Capital Markets, Costco (COST) actually sells more organic food than WFM.

Just in case you're not familiar with WFM, here's a brief description, "Founded in 1978 in Austin, Texas, Whole Foods Market (wholefoodsmarket.com) is the leading retailer of natural and organic foods, the first national "Certified Organic" grocer, and uniquely positioned as America's Healthiest Grocery Store. In fiscal year 2014, the Company had sales of approximately $14 billion and currently has 422 stores in the United States, Canada, and the United Kingdom."

All this competition has started to hurt WFM's growth but the company is still growing. Q1 results were announced on February 11th. WFM delivered earnings of $0.46 per share while revenues grew +10.2% to $4.67 billion. The EPS number was one cent above estimates while revenues matched estimates.

WFM's Q2 results came out on May 6th. Earnings were only in-line with estimates at $0.43 per share. Revenues were up +9.8% to $3.65 billion, which actually missed estimates. Investors were not happy with WFM's comparable store sales growth, which was below estimates at +3.6% for the quarter. Plus, WFM management lowered their fiscal year 2015 revenue estimate to $15.47 billion compared to Wall Street's estimate at $15.74 billion.

Shares of WFM collapsed the next morning (May 7th) with a plunge from about $47.75 to $41.00 before settling near $43.00. WFM has slowly withered since that earnings report. Management's estimate for +9% sales growth in 2015 doesn't seem to be enough to please investors. Analysts are forecasting earnings growth of +11% in 2015.

Investors seem doubtful about WFM's new store concept too. The company has suffered the "whole paycheck" nickname for years due to their high-price selection. Management has acknowledged that they are more of a luxury retailer. They've decided to try and target younger millennials with a "value" idea. This new value proposition will be smaller stores, cheaper prices, and somehow maintain WFM's reputation for quality products. Critics are worried that this new concept, due to launch in 2016, is a good recipe to cannibalize WFM's higher-margin business.

This past week WFM was snagged by a pricing scandal in New York. The New York Department of Consumer Affairs found that WFM was consistently overcharging consumers. The department tested 80 product categories and found WFM overcharging on several prepackaged items. The differences ranged from 80 cents to $15. Management confessed that they made some mistakes and would do a better job training their staff to fix the issue. WFM promised that if a consumer found they were being overcharged then WFM would give them the product for free. This negative story is probably just a temporary black cloud for WFM. The larger problem for the company is tougher competition.

Before I continue it's worth mentioning that WFM is a popular company for rumors. There have been rumors that WFM might buy some of its smaller competitors, like Sprouts (SFM). There have also been rumors that activist hedge funds or investors might get involved to try and improve the stock's performance. Occasionally these rumors might spark a bump in WFM but the overall trend is down.

WFM has broken down below round-number support near $40.00 and below its early June lows. Thursday's intraday low was $39.10. We're suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to WFM's earnings on July 29th.

Trigger @ $38.85

- Suggested Positions -

Short WFM stock @ $38.85

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

Buy the AUG $37 PUT (WFM150821P37) current ask $0.87
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

Stocks Pace Sideways Ahead Of Greek Vote

by James Brown

Click here to email James Brown

Editor's Note:
Most of the U.S. market paced sideways on Thursday ahead of the Independence Day holiday and the Greek referendum. Most investors were either on vacation or on the sidelines until the vote in Greece is over.

BABY and PACW hit our stops on Thursday.


Current Portfolio:


BULLISH Play Updates

Chimerix, Inc. - CMRX - close: 46.08 change: +0.28

Stop Loss: 42.95
Target(s): To Be Determined
Current Gain/Loss: -0.2%
Entry on June 26 at $46.15
Listed on June 25, 2015
Time Frame: exit PRIOR to earnings in August
Average Daily Volume = 428 thousand
New Positions: see below

Comments:
07/04/15: Shares of CMRX appeared to be asleep on Thursday with the stock drifting sideways in a narrow range. If recent history is any guide then CMRX should bounce off its rising 10-dma soon. Readers may want to wait for that bounce before considering new positions. The $47.25-47.50 zone is overhead resistance. A breakout past this level would definitely be bullish.

Trade Description: June 25, 2015:
Biotech stocks have been outperforming the broader market for the last couple of years. That outperformance continues in 2015. The IBB biotech ETF is up +23% in 2015 versus a +8% gain in the NASDAQ and a +2% gain in the S&P 500. CMRX has been lagging its peers with a +13.9% gain this year but that could be about to change as the stock looks poised to run.

According to the company, "Chimerix is a biopharmaceutical company dedicated to discovering, developing and commercializing novel, oral antivirals in areas of high unmet medical need. Chimerix's proprietary technology has produced brincidofovir (CMX001), a clinical-stage nucleotide analog lipid-conjugate, which has potent in vitro antiviral activity against many clinically relevant dsDNA viruses and a favorable safety profile in clinical studies conducted to date. Chimerix has completed enrollment of SUPPRESS, a Phase 3 study of brincidofovir for the prevention of cytomegalovirus (CMV) in adult hematopoietic cell transplant (HCT) recipients. In addition, Chimerix is enrolling the Phase 3 AdVise trial of brincidofovir for treatment of adenovirus (AdV) infection. Chimerix is working with BARDA to develop brincidofovir as a potential medical countermeasure to treat smallpox due to a threat of bioterror or accidental release."

In April this year CMRX was award an exclusive contract from the U.S. government to build a new smallpox vaccine. The Biomedical Advanced Research and Development Authority (BARDA) wants another treatment available just in case enemies of the U.S. try to use smallpox as a weapon or if there is some sort of accidental breakout from a lab. The 60-month contract is valued at $100 million but if all the options are awarded it could be worth up to $435 million in revenue to CMRX. The company's revenues for the trailing twelve months are only $4.5 million.

Earlier this month (June) CMRX announced they were going to raise $150 million in capital by selling 3,775,000 shares of stock. That was later bumped up to 4.3 million shares. These priced at $39.75. You can see how CMRX stock briefly dipped toward $39.00 on June 10th and investors immediately bought the dip. It's impressive to see CMRX increase its shares outstanding by 10% and the impact only lasted a few days as buyers gobble up the stock.

Technically CMRX appears to be in breakout mode. The stock consolidated sideways in the $35.00-43.50 range for five and a half months before finally breaking out a few days ago. The stock encountered some profit taking yesterday but traders bought the dip today. The point & figure chart is bullish and forecasting at $61.00 target.

Tonight we are suggesting a trigger to launch bullish positions at $46.15. Plan on exiting prior to CMRX's earnings report in August.

- Suggested Positions -

Long CMRX stock @ $46.15

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

Long AUG $50 CALL (CMRX150821C50) entry $2.10

06/26/15 triggered @ $46.15
Option Format: symbol-year-month-day-call-strike

chart:


Neurocrine Biosciences Inc. - NBIX - close: 47.31 change: -0.35

Stop Loss: 44.85
Target(s): To Be Determined
Current Gain/Loss: -2.0%
Entry on July 01 at $48.27
Listed on June 30, 2015
Time Frame: Exit PRIOR to earnings in August
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
07/04/15: NBIX underperformed the major indices with a -0.7% decline. Most of this loss was in the first 30 minutes of trading. NBIX spent most of Thursday inside a 40-cent range (about 47.10-47.50).

I am not suggesting any new positions tonight.

Trade Description: June 30, 2015:
Biotech stocks remain one of the best performing groups in the market this year. Year to date the IBB is up +21% versus a +0.2% gain in the S&P 500 and a +5.3% gain in the NASDAQ composite. NBIX is outpacing its peers with a +113% gain in the first half of 2015.

NBIX is in the healthcare sector. According to the company, "Neurocrine Biosciences, Inc. discovers and develops innovative and life-changing pharmaceuticals, in diseases with high unmet medical needs, through its novel R&D platform, focused on neurological and endocrine based diseases and disorders. The Company's two lead late-stage clinical programs are elagolix, a gonadotropin-releasing hormone antagonist for women's health that is partnered with AbbVie Inc., and NBI-98854, a vesicular monoamine transporter 2 inhibitor for the treatment of movement disorders. Neurocrine intends to maintain certain commercial rights to its VMAT2 inhibitor for evolution into a fully-integrated pharmaceutical company."

I like to remind readers that biotech stocks can be tough to trade. Normally they are volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points. Due to the nature of biotech work and how many smaller companies get paid with milestone payments as they develop treatments tends to make their earnings are very lumpy.

While we normally don't focus on earnings for the smaller biotech companies, I will point out that NBIX's most recent earnings report was much better than expected. Their 2014 Q1 results were a loss of ($0.17) per share. Analysts were expecting 2015 Q1 results to be a loss of ($0.30). NBIX reported a loss of ($0.01) per share. Revenues were $19.76 million for the first quarter. Management held a successful secondary offering last quarter and raised $270 million. This increased the company's cash and cash equivalents to $518 million. Hopefully investors won't have to worry about NBIX needing to raise capital any time soon.

After NBIX's Q1 results the stock was upgraded by two analysts. One raised their price target to $64. The other raised their price target to $69. Currently the point & figure chart is forecasting at $66 target.

Technically NBIX looks bullish following its breakout past resistance near $45.00. The recent pullback among the biotech stocks saw NBIX dip back toward this area, which is now support. Today's bounce looks like a potential entry point. Tonight we're suggesting a trigger to open bullish positions at $48.15.

- Suggested Positions -

Long NBIX stock @ $48.15

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

Long AUG $50 CALL (NBIX150821C50) entry $3.60

07/01/15 triggered on gap open at $48.27
Option Format: symbol-year-month-day-call-strike

chart:


Spirit AeroSystems - SPR - close: 55.15 change: -0.40

Stop Loss: 53.75
Target(s): To Be Determined
Current Gain/Loss: -2.3%
Entry on June 22 at $56.44
Listed on June 18, 2015
Time Frame: 6 to 8 weeks, exit prior to earnings in very late July
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
07/04/15: I don't see any changes from my previous comments on SPR. The stock looks like it's headed for what should be support near $54.00 and its simple 50-dam.

No new positions at this time.

Trade Description: June 18, 2015:
Airline stocks have gotten crushed lately as investors worry about the airliner industry overbuilding capacity. It's a different story for the airplane makers. Shares of SPR just closed near all-time highs. The Dow Industrial Average is up +1.6% year to date. The S&P 500 is up +3.0%. SPR is outpacing them both with a +30% gain this year.

SPR is in the industrial goods sector. According to the company, "Spirit AeroSystems, with headquarters in Wichita, Kan., USA, is one of the world's largest non-OEM designers and manufacturers of aerostructures for commercial aircraft. In addition to its Wichita and Chanute facilities in Kansas, Spirit has locations in Tulsa and McAlester, Okla.; Kinston, N.C.; Prestwick, Scotland; Preston, England; Subang, Malaysia; and Saint-Nazaire, France.

In the U.S., Spirit's core products include fuselages, pylons, nacelles and wing components. Additionally, Spirit provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul, and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus."

On their website SPR notes that they "have long-term agreements in place with our largest customers, Boeing and Airbus. Other major customers include Bombardier, Rolls-Royce, Mitsubishi, Sikorsky and Bell Helicopter." SPR does so much business with Boeing (BA) that buying SPR is almost a stealth trade on BA's backlog. Looking at BA's most recent earnings report their backlog hit a record high of $495 billion. That's about 5,700 new planes. BA plans to significantly increase production in 2017 and again in 2018, which should mean an increase in revenues for SPR.

Earnings from SPR have been somewhat mixed. On February 3rd they reported their 2014 Q4 results with earnings at $0.87 per share. That was 10 cents better than expected. Yet revenues were only up +5% to $1.57 billion, which missed expectations.

Results improved in the first quarter. On April 29th SPR said earnings were up +18% from a year ago. Their $1.00 per share beat expectations. Revenues were almost flat at $1.74 billion but that still came in better than analysts were expecting. SPR management issued somewhat bullish guidance on 2015 earnings but their revenue estimate was soft.

The stock initially sold off on its Q1 report but traders bought the dip the very next day. SPR continues to build on its bullish pattern of higher lows. Today the stock is poised to breakout past short-term resistance at $56.20. We are suggesting a trigger to launch bullish positions at $56.35. Plan on exiting prior to SPR's Q2 earnings report in very late July or early August.

- Suggested Positions -

Long SPR stock @ $56.35

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

Long OCT $60 CALL (SPR151016C60) entry $1.60

06/22/15 triggered on gap open at $56.44
Option Format: symbol-year-month-day-call-strike

chart:


Tempur Sealy Intl. - TPX - close: 67.70 change: +0.10

Stop Loss: 64.95
Target(s): To Be Determined
Current Gain/Loss: +7.2%
Entry on June 10 at $63.15
Listed on June 08, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 890 thousand
New Positions: see below

Comments:
07/04/15: TPX eked out another gain on Thursday. Shares are up five weeks in a row. On a short-term basis TPX just tagged its five-week trend line of higher highs. The next move is probably down, towards the 10-dma. More conservative traders may want to take some money off the table.

Tonight we are moving the stop loss up to $64.95.

No new positions at this time.

Trade Description: June 8, 2015:
Activist investors seek to influence management to incorporate major changes in a company with the expectation of unlocking shareholder value. Sometimes the mere mention of an activist investor buying a stock can get shares to move. In TPX's case the activists have won a major battle with management.

TPX is in the consumer goods sector. According to the company, "Tempur Sealy International, Inc. (NYSE: TPX) is the world's largest bedding provider. Tempur Sealy International develops, manufactures and markets mattresses, foundations, pillows and other products. The Company's brand portfolio includes many of the most highly recognized brands in the industry, including Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, OptimumTM and Stearns & Foster. World headquarters for Tempur Sealy International is in Lexington, KY."

TPX's most recent earnings report was April 28th. They announced their 2015 Q1 results with earnings of $0.55 per share. That was seven cents above estimates. Revenues were up +5.4% to $739.5 million. This was also above expectations. Management raised their 2015 forecast for both earnings and sales. The stock popped to new multi-year highs on this news. Yet the real story is probably the activist investors involved.

Hedge fund H Partners has been urging change with TPX management for months. TPX executives choose to fight. It came down to a proxy fight and shareholders voted to oust the CEO. Two more directors, who were under fire by H Partners have also left the board. H Partners built a website to inform shareholders their opinion on the company (www.fixtempursealy.com). There they posted their 90 page slideshow on why TPX needed a management change. You can see their presentation at this webpage.

The stock has been oscillating sideways in the $58-63 zone the last few weeks. It's starting to look like the consolidation may be over. TPX displayed relative strength last week and it held up today as well while the rest of the market was sinking. If TPX can trade over $63.00 it will generate a new quadruple top breakout buy signal on the P&F chart. We are suggesting a trigger to launch bullish positions at $63.15.

- Suggested Positions -

Long TPX stock @ $63.15

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

Long SEP $65 CALL (TPX150918C65) entry $3.50

06/27/15 new stop @ 64.40
06/22/15 new stop @ 61.90
06/10/15 triggered @ $63.15
Option Format: symbol-year-month-day-call-strike

chart:


Wayfair Inc. - W - close: 37.70 change: -0.28

Stop Loss: 35.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on June -- at $---.--
Listed on June 27, 2015
Time Frame: exit PRIOR to earnings in August
Average Daily Volume = 884 thousand
New Positions: Yes, see below

Comments:
07/04/15: We are not giving up on W yet. The stock has been consolidating sideways but with a somewhat bullish bias to it the last couple of days. I expect W to breakout higher soon as long as the market doesn't crash on Greek or Chinese headlines.

When W does move higher it could be big. Short interest has risen from 47% to 52% of the float. That's plenty of fuel for a short squeeze.

Our suggested entry point is $38.35.

Trade Description:
Tonight's new candidate has been outperforming the market and could see a short squeeze. Year to date W is up +92% and shows no signs of slowing down.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:
Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October last year and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading.

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

Naturally, with this much growth, the management is very optimistic. Niraj Shah, co-founder, CEO and co-chairman of Wayfair, commented on his company's results, saying,

"We are off to a strong start this year and are particularly pleased with the revenue strength and accelerated growth in our Direct Retail business. We believe the growth rate this quarter underscores the size of the market opportunity, the rapidly changing, and favorable dynamics of how customers purchase home goods and Wayfair's unique position in this large and rapidly growing market segment. Additionally, the increase in our advertising spend last year helped attract new, and higher value customers, driving both revenue growth and advertising spend leverage this quarter. We remain excited about the opportunity ahead as we continue to gain market share and grow."
On the company's conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.24 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 28.8 million shares, which is relatively small. The most recent data listed short interest at 47% of the float.

I noted earlier that on the first day of trading W peaked at $39.43. A few days ago the rally peaked at $39.43 (June 22nd). Afterwards traders jumped in to buy the dip when W tagged its 10-dma. Once W crosses above $39.43 the short squeeze could blast off. That's why tonight we are suggesting a trigger to launch bullish positions at $38.35.

Traders should consider this an aggressive, higher-risk trade. W has been a volatile stock in the past. There's no reason to expect that to change in the near future. Consider small positions to limit risk. We are listing a call option with this trade but I want to caution you that the option spreads are pretty wide.

Trigger @ $38.35 *small positions to limit risk*

- Suggested Positions -

Buy W stock @ $38.35

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

Buy the AUG $40 CALL (W150821C40)

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.

07/04/15 short interest has increased from 47% to 52% of the float
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

Continental Resources, Inc. - CLR - close: 40.00 change: -0.17

Stop Loss: 43.55
Target(s): To Be Determined
Current Gain/Loss: +8.6%
Entry on June 22 at $43.75
Listed on June 20, 2015
Time Frame: 6 to 8 weeks, exit prior to earnings in August
Average Daily Volume = 8.8 thousand
New Positions: see below

Comments:
07/04/15: CLR tried to bounce off round-number support at $40.00 on Friday morning. Fortunately the rebound failed and shares faded back toward the $40 level.

The stock does look short-term oversold here. If the market rallies or if crude oil bounces on Monday I wouldn't be surprised to see CLR bounce too. Tonight we're adjusting the stop loss down to $43.55. Look for CLR to find resistance near $42.00.

No new positions at this time.

Trade Description: June 20, 2015:
There are a lot of currents moving the oil industry these days. Currency moves, OPEC production, access to capital, falling rig counts, and potential bankruptcies. The stock performance for U.S. shale oil drillers have been suffering. CLR is one such stock.

CLR is in the basic materials sector. According to the company, "Continental Resources (CLR) is a Top 10 independent oil producer in the United States and a leader in America's energy renaissance. Based in Oklahoma City, Continental is the largest leaseholder and one of the largest producers in the nation's premier oil field, the Bakken play of North Dakota and Montana. The Company also has significant positions in Oklahoma, including its SCOOP Woodford and SCOOP Springer discoveries and the Northwest Cana play."

Earnings have taken a hit. CLR reported their Q1 results on May 6th. They reported a net loss of $186 million or 36 cents a share. That's a big drop from a 61-cent profit a year ago. After adjusting for writedowns and one-time items CLR said their quarterly earnings were a loss of ($0.09) per share. That was actually four cents better than analysts' estimates for a ($0.13) loss. Revenues plunged -41% to $592.89 million even though CLR's production surged +36% from a year ago.

Bullish investors could argue that crude oil put in a bottom earlier this year and the commodity should rally toward year end. Bulls can also point to falling production costs as a tailwind for the industry. CLR said their completion costs for wells dropped -15% from the end of 2014. Obviously this makes the company more profitable (or at least cuts their losses). Optimistically CLR expects their cost reductions to hit 20% by mid-year. There are some on Wall Street who think the industry has seen a bottom. Shares of CLR were upgraded by Goldman Sachs to a "buy" in May.

Bulls also note that the plunge in active rigs should be bullish for oil and thus oil companies. Weekly rig count, compiled by Baker Hughes, showed that the number of active oil and gas rigs fell again last week. This is the 28th week in a row that the number of rigs has declined. We're now down to 857 active oil and gas rigs, which hasn't been this low since early 2003.

Naturally you might think that a plunge to 12-year lows for active rigs means that U.S. oil production would shrink as well. That hasn't happened yet. While costs are going down oil producers are actually more efficient at pumping per well so production is going up. The low rig count is a leading indictor that production will eventually decline but it could be months from now. The U.S. EIA doesn't expect U.S. production to fall until early next year.

A bigger problem for the oil industry is competition. The recent OPEC meeting showed that the Saudis are willing to pump as much oil as they can to maintain their market share regardless of the price of oil. These are state-run oil companies and don't have to report to shareholders like American drillers. Plus the average cost per barrel of oil is a lot lower in Saudi than the U.S.

Another challenge for many drillers is capital. Drilling shale oil wells and fracking costs a lot of money. The drop in crude oil prices has made lenders less likely to loan money to drillers. To compensate for the lack of capital the oil drillers might be forced to sell more stock to raise capital and this would dilute current shareholders and drive stock prices lower. This past week the Cowen research company said, ""We expect ... E&Ps to issue additional equity in 2H2015 to fund 2016 capex as borrowing bases will be declining and debt metrics deteriorating."

The issue of debt and access to capital could be a fatal one. There are growing predictions that we will see up to a dozen publicly traded oil and gas companies file for bankruptcy between July 2015 and June 2016. Now CLR is not on the list but if we see smaller rivals start to go bankrupt it is going to put pressure on all the oil-industry stocks.

Oil stocks are also going to react to currency moves. The Federal Reserve wants to raise rates and that will lift the dollar. Even if the Fed doesn't raise rates the QE programs in Japan and Europe could drive the yen and euro lower, which boosts the dollar. A rising dollar pressures commodity prices lower.

A lot of investors are already betting on CLR to decline. The most recent data listed short interest at 17.9% of the 84.8 million share float. We think the bears are right. CLR has been underperforming the broader market. The point & figure chart is bearish and forecasting at $35.00 target. I suspect the 2015 lows near $42.00 could be support. Tonight we are suggesting a trigger to open bearish positions at $43.75.

- Suggested Positions -

Short CLR stock @ $43.75

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

Long SEP $40 PUT (CLR150918P40) entry $2.00

07/04/15 new stop @ 43.55
06/27/15 new stop @ 44.85
06/25/15 new stop @ 48.35
06/22/15 triggered @ $43.75
Option Format: symbol-year-month-day-call-strike

chart:


Murphy Oil - MUR - close: 41.42 change: +0.47

Stop Loss: 43.05
Target(s): To Be Determined
Current Gain/Loss: -0.7%
Entry on July 01 at $41.15
Listed on June 29, 2015
Time Frame: Exit PRIOR to MUR earnings in very late July
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
07/04/15: Some of the energy stocks managed a bounce on Thursday in spite of another down day for crude oil prices. MUR is one of those stocks. However, while MUR displayed relative strength on Thursday (+1.1%), the move was an "inside day", which suggest indecision on the part of traders. The overall pattern is still down.

If you're looking for an entry point I would wait to see if MUR tags resistance near $42.00 and rolls over again.

Trade Description: June 29, 2015:
The crash in crude oil prices in the second half of 2014 was pivotal turning point for the U.S. energy industry. Suddenly the booming oil and gas sector had its future being question with the price of oil now unprofitable for many drillers. Oil has managed a bounce from its 2015 lows while many of the oil and gas producers are still seeing their stocks decline.

MUR is in the basic materials sector. According to the company, "Murphy Oil Corporation is an independent exploration and production company with a strong, oil-weighted portfolio of global offshore and onshore assets. Exploration activities are focused in four main regions: Deepwater Gulf of Mexico, the Atlantic Margin, Southeast Asia and Australia."

The company reduced its 2015 capex outlook by -33% when they reported their 2014 Q4 results back in January. MUR's Q1 results came out in May. Profits evaporated with MUR delivering a loss of ($1.11) per shares versus a profit of $0.96 a year ago.

Management is trying to prop up their floundering stock price. On May 20th the company announced an accelerated stock buy back program of $250 million. This is part of a previously announced $500 million repurchase program from August 2014. The buy back doesn't seem to be working.

Goldman Sachs downgraded MUR to a "sell" in late May. Nearly a month later UBS has also downgraded MUR to a "sell". The UBS analyst expressed concern that MUR's production would likely decline in 2015 and 2016 since the company has cut back on investment.

The stock's attempt at an oversold bounce failed near $44 a couple of weeks ago and now shares are breaking down to new multi-year lows. The point & figure chart is bearish and forecasting at $34.00 target. Tonight we are suggesting a trigger to open bearish positions at $41.15.

- Suggested Positions -

Short MUR stock @ $41.15

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

Long AUG $40 PUT (MUR150821P40) entry $1.30

07/01/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike

chart:


On Deck Capital - ONDK - close: 11.76 change: +0.37

Stop Loss: 12.25
Target(s): To Be Determined
Current Gain/Loss: +18.0%
Entry on June 02 at $14.35
Listed on June 01, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 431 thousand
New Positions: see below

Comments:
07/04/15: The first half of Thursday's session was very quiet for ONDK. Shares traded sideways in the $11.25-11.40 zone most of the day. Then in the last 75 minutes of trading ONDK suddenly started to rally. Shares ended the day with a +3.25% gain. I suspect the move is a reflection of the lack of market participation on Thursday afternoon ahead of a long holiday weekend (i.e. the sellers were on vacation).

ONDK should find overhead resistance in the $12.00-12.10 area and at its simple 10-dma (currently 12.22). Tonight we are moving our stop loss down to $12.25.

No new positions at this time.

Trade Description: June 1, 2015:
You know something is wrong when a stock is down -50% from its post-IPO peak in less than six months.

ONDK is part of the financial sector. Here's how the company describes itself:

"OnDeck (ONDK), a leading platform for small business loans, is committed to increasing Main Street's access to capital. OnDeck uses advanced lending technology and analytics to assess creditworthiness based on actual operating performance and not solely on personal credit. The OnDeck Score, the company's proprietary small business credit scoring system, evaluates thousands of data points to deliver a credit decision rapidly and accurately. Small businesses can apply for a line of credit or term loan online in minutes, get a decision immediately and receive funds in as fast as the same day. OnDeck also partners with small business service providers, enabling them to connect their customers to OnDeck financing. OnDeck's diversified loan funding strategy enables the company to fund small business loans from various credit facilities, securitization and the OnDeck Marketplace, a platform that enables institutional investors to purchase small business loans originated by OnDeck.

Since 2007, OnDeck has deployed more than $2 billion to more than 700 different industries in all 50 U.S. states, and also makes small business loans in Canada. The company has an A+ rating with the Better Business Bureau and operates the website BusinessLoans.com which provides credit education and information about small business financing. On December 17, 2014, OnDeck started trading on the New York Stock Exchange under the ticker ONDK."

The company charges outrageous interest rates on its short-term loans. According to the SEC filings these can range from 20% to 99% APRs. They get away with this by only loaning to businesses and not individual consumers. Rising defaults are an issue. The company expects about 7% of their loans to go into default but some of the latest numbers suggest reality is closer to 20%. There is a concern that companies like ONDK will face future regulations that will limit how much interest they can charge. Another bear argument is valuations.

The company was valued around $1.4 billion at its IPO. Even with the decline it's still valued near $1 billion today. That's for a company without any profits. They lost ($0.01) per share in the fourth quarter and that jumped to a loss of ($0.05) per share in the first quarter.

Another potential landmine for shareholders is ONDK's six-month lockup expiration. Currently there are about 13.2 million shares outstanding. On June 15th, 2015 another 56 million shares are unlocked.

The stock broke down on its earnings report in early May. Now it's breaking down below its 2015 lows in the $14.50-15.00 zone. The point & figure chart is bearish and forecasting at $7.00 target.

The stock has seen some volatile moves. I would consider this a more aggressive, higher-risk trade. Tonight I am suggesting a trigger to launch bearish positions at $14.35. Traders may want to use put options to limit their risk.

- Suggested Positions -

Short ONDK stock @ $14.35

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

Long AUG $14 PUT (ONDK150821P14) entry $1.80

07/04/15 new stop @ 12.25
06/29/15 new stop @ $12.45
06/20/15 Caution! ONDK may have formed a bullish double bottom
06/16/15 new stop @ 13.25
06/15/15 new stop @ 14.25
06/10/15 new stop @ 15.15
06/02/15 triggered @ $14.35
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BULLISH PLAYS

Natus Medical Inc. - BABY - close: 41.31 change: -0.98

Stop Loss: 41.85
Target(s): To Be Determined
Current Gain/Loss: -2.9%
Entry on June 18 at $43.10
Listed on June 16, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 249 thousand
New Positions: see below

Comments:
07/04/15: After a big rally off its late May lows shares of BABY reversed sharply lower last week. Monday's market-wide drop (the worst day of the year) snapped the up trend in BABY. The stock was unable to recover and hit our stop loss when it underperformed on Thursday with a -2.3% decline.

- Suggested Positions -

Long BABY stock @ $43.10 exit $41.85 (-2.9%)

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

OCT $45 CALL (BABY151016C45) entry $2.85 exit $1.40 (-50.9%)

07/02/15 stopped out
06/27/15 new stop @ 41.85
06/18/15 triggered @ $43.10
Option Format: symbol-year-month-day-call-strike

chart:


PacWest Bancorp - PACW - close: 47.03 change: +0.27

Stop Loss: 46.40
Target(s): To Be Determined
Current Gain/Loss: -4.4%
Entry on June 25 at $48.55
Listed on June 23, 2015
Time Frame: Exit prior to earnings in late July
Average Daily Volume = 771 thousand
New Positions: see below

Comments:
07/04/15: Financial stocks had an ugly week. They were hammered lower on Monday as the market reacted to Greece on the verge of a default. The regional banks should have fared better than the rest of the financials since theoretically they don't have any exposure to the Greek debt crisis. Yet it was the regional banks that underperformed on Thursday. PACW pierced its 50-dma and 100-dma and hit our stop loss at $46.40 on Thursday.

- Suggested Positions -

Long PACW stock @ $48.55 exit $46.40 (-4.4%)

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

SEP $50 CALL (PACW150918C50) entry $1.20 exit $0.40 (-66.7%)

07/02/15 stopped @ 46.40
06/25/15 triggered @ $48.55
Option Format: symbol-year-month-day-call-strike

chart: