Option Investor

Daily Newsletter, Tuesday, 5/27/2014

Table of Contents

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

Market Wrap

Short Squeeze Monday

by Jim Brown

Click here to email Jim Brown
Tuesday was Monday this week and the short squeeze appeared as expected.

Market Statistics

The S&P gapped to 1,911 at the open and that is exactly where it closed after investors failed to chase stocks higher. The short squeeze came after overseas markets reacted to the positive outcome from the Ukraine elections. The good guy won the election, Putin is backing off and Europe said it was going to postpone new sanctions against Russia. The markets celebrated as shorts fearing the worst in Ukraine were forced to cover but that is as far as it went. There was no follow through and the S&P, Dow and Russell 2000 closed where they opened or slightly lower.

The Nasdaq was the exception with a strong spike higher at the close. I suspect traders in the Nasdaq momentum stocks were the most short after their big gains last week. However, the gains today pushed the Nasdaq 100 right to major resistance.

Today was a busy day for economics and while the results were mixed there was a slight positive bias. The Durable Goods orders for April rose +0.8% compared to +3.6% in March and +2.6% in February. The slightly positive number was better than the consensus estimate for a decline of -0.5% and the Moody's estimate for a decline of -1.4%. This is another one of those numbers where bad news was priced in and even a weak gain was a positive surprise.

Excluding transportation orders (planes, trains, autos) the rise was only +0.1%. Excluding defense the new orders actually fell -0.8%. Machinery orders declined -1.4%. Defense orders rose +39.3% after a gain of +18.8% in March.

The Richmond Fed Manufacturing Survey for May came in at 7 and the same as April. The headline activity flattened but the components were mixed. New orders declined from 10 to 3 but backorders rose from -9 to +1. The employment component rose sharply from 4 to 10 and the average workweek rose slightly from 2 to 3. Wage increases spiked from 6 to 22. Those components suggest manufacturers have a brighter outlook for the future if they are willing to hire and pay more.

The Services survey roared higher from 1 to 13 thanks to surging retail sales. Excluding retail the headline number would drop to 7. However, the employment index declined from 6 to 4 as a result of the retail component falling from 20 to 10. Excluding retail it would have risen from 1 to 3. The expected demand for the next six months spiked from 3 to 20 for retail and 11 to 13 excluding retail.

The surge in retail can't be emphasized enough. This suggests the consumer is improving and that is the driver for the entire economy. It remains to be seen if this will be reflected all across the country or if this is just a winter weather snapback in the Richmond area.

The Texas Manufacturing Outlook Survey declined from 11.7 to 8.0 for May. The net percentage of positive responses did decline in May from April levels. The internal components were not as positive. The new orders component declined from 21.3 to 3.8 and inventories fell from 5.6 to -1.0. Backorders dropped from 3.1 into contraction territory at -8.1. The average workweek fell from 13.9 to 2.8. Prices paid nearly tripled from 10.2 to 26.3. The manufacturing outlook for Texas remains positive but there was a definite weakening in the components.

Consumer Confidence for May rose slightly from the downwardly revised 81.7 to 83.0 but below the Moody's forecast at 84.4. April was revised lower from 82.3 to 81.7. The present conditions component rose from 78.5 to 80.4 and the expectations component eased up from 83.9 to 84.8. Those respondents planning on buying a home declined from 5.6% to 4.9%. Auto buyers increased from 10.6% to 11.3% and appliance buyers declined from 45.9% to 45.1%.

Those that thought jobs were plentiful rose from 13.0% to 14.1% and those expecting a higher income jumped from 16.8% to 18.3%. However, those expecting a drop in income rose from 12.9% to 14.5% for an interesting conflict in trends.

There is nothing on the economic calendar for Wednesday that will move the market. The next important report is the Q1-GDP revision on Thursday. There is a wide range of estimates from -0.8% to +1.5% so it would be hard to produce a surprise. However, a negative reading could promote some selling by those expecting positive growth. Some people simply refuse to believe the negative factors and they could be shocked by a decline.

I think everyone should have adjusted to the "weather ate the economy" excuse for sharply lower GDP readings and earnings. However, the expectations for Q2 are rapidly getting out of hand. Earnings growth is now expected to rise more than 7% in Q2 and GDP growth is being quoted as high as 5%. Those are some big estimates to live up to and reality is likely to be somewhat different.

Stock news was pretty muted with everyone still mentally on vacation. The headline for the day was the $6.4 billion offer for Hillshire Brands (HSH) by Pilgrim's Pride (PPC) that could upset the Hillshire $4.23 billion offer for Pinnacle Foods (PF). Pilgrim is the world's second largest poultry producer behind Tyson Foods (TSN).

Hillshire makes Jimmy Dean sausage, Ball Park hot dogs, Hillshire Farms lunch meats and Sara Lee brand frozen baked goods. The Pilgrim CEO said the combination of Hillshire and Pilgrim would create "the most powerful branded combo of meat products in the industry." Analysts expect Hillshire to resist the offer. Hillshire shares spiked +22%, Pilgrim shares were up slightly and Pinnacle shares fell -5% on worries Hillshire would pull the bid for Pinnacle. Pilgrim said they would pay the $163 million termination fee owed Pinnacle if Hillshire terminates its offer.

Expedia (EXPE) shares rallied +3% after FBR said they experienced a sharp uptick in room volume in April. FBR said the weakness in Q1 bookings was due more to weather and the Easter calendar than weakness in the sector. Last week Cantor Fitzgerald raised their price target from $80 to $82 citing strong click volume for April that indicated hotel spending was increasing. Also, David Tepper started a new position in Expedia in Q1. Expedia shares gained +3% on the news.

In the same sector Booking.com, owned by Priceline (PCLN), was the recipient of a legal complaint filed by French Economic Minister Arnaud Montebourg claiming the contracts between hotels and Booking.com were unfair. He said the contracts prevent the hotels from renting a room at a price lower than the Booking.com price even if the customer did not come from Booking.com. There was a similar complaint against Expedia that resulted in fines in 2013.

Obviously Booking.com does not want customers surfing prices and availability online and then calling the hotel directly trying to get a lower price without paying the commission to Booking.com. Apparently investors thought the complaint demonstrated Booking.com's control of the marketplace and they immediately piled into Priceline shares for a +5% gain. Priceline rebounded off the 200-day average last week and closed just above resistance on Friday. This was probably as much short covering as anything else.

Autozone (AZO) shareholders got a nasty surprise when shares declined -4% after a decent earnings report. AZO said revenue rose +6.2% to $2.3 billion. Earnings rose +16.4% to $8.46 on a 52% gross margin compared to estimates for $8.44 per share. Same store sales rose +4%. They repurchased $420 million in shares. They have increased earnings per share by 10% or more for 31 consecutive quarters. Sounds like a great earnings report but investors keyed in on the +12% rise in inventory and they sold the stock. That has to be frustrating for the CEO to produce such a good quarter and get punished for one line item. I suspect some of the decline was related to investors getting out of the stock after it failed to break through resistance from February. They were hoping earnings would do it but when the selling started everybody piled on.

Biotech stocks were up strongly after multiple companies released announcements about drugs in process ahead of the ASCO meeting that starts on Friday. The sector was seriously oversold earlier this year but several of the most beaten down companies are now in rally mode. Stocks in this sector are either feast or famine depending on their latest press release. This is a very volatile sector but one where the rewards can be great if you pick the right company ahead of important drug news.

Biotechs were a major supporter of the Nasdaq rally today.

After the bell cloud computing company Workday (WDAY) reported a loss of 13 cents compared to estimates for a loss of 15 cents. Revenue rose +74% to $160 million compared to estimates of $152 million. They also issued guidance for the current quarter for revenue between $173-$178 million and analysts were expecting $172 million. Shares rallied $5 in afterhours trading.

Qihoo 360 (QIHU) posted earnings after the close of 54 cents compared to estimates of 34 cents. Revenue increased +141% to $265 million. The number of PC users rose +5% but smartphone users almost doubled. QIHU is a network security company in China. Daily clicks on the QIHU website rose +58%. The company issued guidance for revenue of $300 million or more in the current quarter compared to analyst estimates for $270 million. Shares rallied $5 in afterhours.

In geopolitical news the good guy won in Ukraine and Putin agreed to support the winner. Ukraine forces launched a violent attack against the remaining separatists and made it clear they were going to retake the country at any cost. It is not a good time to be a rebel this week. Europe said they were going to postpone any new sanctions against Russia. Assuming Russia does not bring back its troops and invade Ukraine this news story is over as far as the market is concerned.

Iran appears to have backed out of the nuclear discussions and they are not just over but the country has returned to its hard line roots. Iran's supreme leader, Ayatollah Ali Khamenei, all but said on Sunday that negotiations over the country's illicit nuclear program are over and that the Islamic Republic's ideals include destroying America. "Those Iranians who want to promote negotiation and surrender to the oppressors and blame the Islamic Republic as a warmonger in reality commit treason," Khamenei told a meeting of members of parliament. Khamenei emphasized that without a combative mindset, the regime cannot reach its higher Islamic role against the "oppressor's front" led by America.

"The reason for continuation of this battle is not the warmongering of the Islamic Republic. Logic and reason command that for Iran, in order to pass through a region full of pirates, needs to arm itself and must have the capability to defend itself." In response to a question by a parliamentarian on how long this battle will continue, Khamenei said, "Battle and jihad are endless because evil and its front continue to exist. This battle will only end when the society can get rid of the oppressors' front with America at the head of it. This requires a difficult and lengthy struggle and need for great strides." And, "The accelerated scientific advancement of the last 12 years cannot stop under any circumstances," he said, referring to the strides the regime has made toward becoming a nuclear power.

Iran presented new "red lines" to the negotiators at the P5+1 talks in Vienna. Those red lines that could not be crossed, including the expansion of the country's research and development for its nuclear program, the need of the country to continue enrichment, and the fact that the country's ballistic missile program — despite U.N. sanctions — is not up for negotiation.

Apparently the new openness towards negotiation and the permanent removal of sanctions has faded. Nearly every military analyst has warned for the last year that the six month agreement that ends in July was just a plan by Iran to secure the release of the $6 billion that was being held plus an opportunity to buy needed spare parts for their military and commercial equipment. After that six-month window opened they traded furiously with everyone possible and now they are ready to go back to work on their nuclear program and to heck with the sanctions.

Iran also failed to complete the seven "transparency steps" agreed on to occur by May 15th. Those included resolving IAEA questions on Iran's work on nuclear detonators and disclosure of Iran's secret nuclear sites and capabilities. Did anyone really expect that to happen?

This does not bode well for the Obama administration's goal to be able to claim a win in Iran ahead of the midterm elections. Al Qaeda is not dead and Iran is still on the path to nuclear weapons.

U.S. security firm FireEye (FEYE) reported last week that the Iranian Ajax Security Team was targeting U.S. defense companies in a cyber-espionage campaign that showed increasing sophistication by hackers in Iran. FireEye discovered the campaign and 77 victim companies in the course of analyzing malicious code disguised as anti-censorship tools. The Ajax team dates back to 2009 when it appeared on popular Iranian hacking forums.

Don't think that Iran is not going to be a problem in the future. They are growing stronger in their technical capabilities and they will acquire a bomb unless the deterrent methods used against them increase in severity and number.

China began to pressure companies to replace IBM servers with a local brand due to fears over spying. Since the spying scandal broke thanks to Snowden, IBM has been having trouble selling servers overseas. There are repeated rumors that the NSA has intercepted shipments of servers, routers and network hardware and installed tracking chips and software that give the NSA backdoor access into the boxes wherever they are installed. Cisco routers have been modified by the NSA in the past in the Tailored Access Operations (TAO) unit where they are intercepted in transit and "upgraded" with Trojan horse firmware. A NSA manager said the TAO operations were "some of the most productive operations because they preposition access points into hard target networks around the world." That is now backfiring against U.S. technology firms because of declining sales overseas and especially in Asia.


Short covering pushed the S&P to a new high well over the 1,900 close on Friday but there was no follow through. The real question today is what will happen on Wednesday. We have had a lot of bears come out of the woodwork suggesting we are going to see a correction in the near future. So far that has not happened. When those bearish projections are so prevalent it scares the weak holders out of the market. They can actually produce a stealth correction because the fear of a drop forces selling and that allows new investors to take positions.

I am not going to claim the S&P is headed higher because we really don't know. In theory there are plenty of shorts that have not covered. They are convinced the anticipated correction will occur and are willing to wait for it. However, as I warned last week the "correction anticipation" trade has been in play for several weeks. When so many people are expecting the market to go in one direction it rarely occurs.

Bank of America said that over the last two weeks speculators exited S&P longs at the fastest rate in two years. They are now net short the S&P. Another survey of 1,200 fund managers showed they had reduced longs and raised cash in anticipation of a large decline in July and August. To summarize there are a lot of investors expecting a decline and it is not happening.

That means if the market slowly grinds higher those same fund managers will be forced to chase prices because they can't afford to lag the other funds in performance. Managers live and die on their performance relative to other funds. That is how they attract new money is by bragging about their outstanding performance.

Since nearly everyone is expecting a correction that means almost everyone is positioned for a decline with shorts in their portfolio. If the S&P rises a few more points that should weaken the resolve of the short community. If the market does not decline on Wednesday we could see that resolve begin to fade.

However, there are no major events on the calendar to push the market in either direction. That means we could languish here for several days without a big move as traders try to read the technical tea leaves for market direction. Without any material news I think the trend is to grind higher.

For the S&P the new resistance target is the converging resistance at 1,925. Support is now 1,900 and 1,885.

The Dow has been the laggard over the last week. The gap open to 16,688 was the high for the day with the close at 16,675. There was very little movement after the opening spike indicating no follow through by new money. It was pure short covering.

The Dow's historic closing high was 16,715 and until the Dow joins the S&P at new highs the bullish market sentiment will not be complete. We already have the transports at new highs so once the Dow breaks out again the trio can lead higher. Interim support should be 16,650 followed by 16,600.

The Nasdaq 100 has stretched its breakout gains to close right at the resistance band from 3,720 to 3,740. These are the big cap tech stocks that have been leading the Nasdaq rally higher. If they can punch through to 3,750 we could have a real breakout on our hands with all the indexes surging to new levels. Just remember that Apple shares are a big contributor and they have a 7:1 split next week. That could cause some serious volatility if the post split depression occurs on schedule.

The Nasdaq Composite clearly exploded higher on short covering. The gap open to 4,225 was well over resistance at 4,183. In theory there should be more shorts left to cover followed by some price chasing by fund managers. However, the composite has a long way to go before making a new high at 4,357.

Support should be 4,183 and 4,150.

The Russell 2000 mirrored the Nasdaq with a strong +1.4% gain and breakout over downtrend resistance. The next hurdle for the Russell is resistance at 1,150 and 1,165. The Russell and the Nasdaq are both becoming a little over extended and should be due for a rest even if they are going to continue higher.

The markets could be positioned to grind slowly higher until the Dow breaks out to a new high. If that happens we could see the gains accelerate. We are not out of the woods for a potential summer correction but with the S&P over 1,900 the lure of a bullish breakout is in play. I am sure there are a lot of bullish investors laser focused on that breakout and poised to pull the trigger if it moves higher. There are probably just as many bears looking for any hint of failure to reopen their shorts.

Volume was light at 5.5 billion shares so despite the new highs there was no conviction.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Underperforming Retail

by James Brown

Click here to email James Brown


The TJX Companies, Inc. - TJX - close: 54.66 change: -0.49

Stop Loss: 57.10
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
TJX is in the services sector. The company runs off-price apparel and home fashion retail outlets with brand names under T.J.Maxx, Marshalls, HomeGoods, and more. TJX has over 1,000 locations.

Retail has had a tough time this year. Disappointing Q4 Christmas shopping season results were then followed by one of the worst winter seasons in years. TJX has not been immune to the issue. The company reported Q4 earnings results and missed estimates and then lowered guidance for Q1 and full year 2015. They did it again just a few days ago when they reported their Q1 results. TJX missed estimates on both the top and bottom line and then management lowered their guidance for 2015 again.

Shares collapsed last week following the new earnings earning and the oversold bounce has already failed. TJX has also broken down through some long-term bullish trend lines (see weekly chart below).

There are a few analysts saying the sell-off is overdone and traders should buy this weakness but no one seems to be listening. There could be more analysts coming out and trying to call a bottom on TJX, which might spark some short-term rallies but the path of least resistance is down.

Tonight we are suggesting new bearish positions immediately with a stop loss at $57.10. I'm not setting a bearish target yet but the $50.00 level is potential round-number support. Currently the point & figure chart is bearish and forecasting at $45 target.

*Launch positions at the opening bell*

Suggested Position: short TJX stock @ (the open)

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

Buy the Oct $52.50 PUT (TJX141018P52.50) current ask $1.70

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

Annotated chart:

Weekly chart:

In Play Updates and Reviews

Small Caps Outperform Again

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 has outperformed two days in a row. The rest of the market extended last week's gains.

ARWR and DOW hit our entry triggers.
Bearish plays FNGN and JEC hit our stop loss.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $39.35 change: +0.24

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: Yes, see below

05/27/14: Airline stocks continue to rise. Shares of AAL is testing resistance at the $40.00 mark. Today's intraday high was $39.93.

I do not see any changes from last weekend's newsletter new play description.

Earlier Comments:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. I am suggesting a trigger to launch bullish positions at $40.25. We'll start with a stop loss at $37.25, just under this past week's low. I'm not setting an exit target yet but probably somewhere in the $45-50 zone.

Trigger @ $40.25

Suggested Position: buy AAL stock @ (trigger)

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

Buy the Aug $40 call (AAL140816C40)

option format: symbol-year-month-day-call-strike

Arrowhead Research - ARWR - close: 12.85 change: +1.46

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +6.6%

Entry on May 27 at $12.05
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

05/27/14: Biotech stocks were in rally mode today. Shares of ARWR was leading the charge with a +12.8% gain. The stock broke through resistance at $12.00 and hit our suggested entry point at $12.05.

If you missed our entry point you might want to wait for a little pullback before jumping in.

Earlier Comments:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Current Position: Long ARWR stock @ $12.05

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

Long Sep $12.50 call (ARWR140920C12.5) entry $3.40*

05/27/14 triggered @ 12.05
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Delta Air Lines - DAL - close: 39.46 change: +0.30

Stop Loss: 36.45
Target(s): to be determined
Current Gain/Loss: + 4.8%

Entry on May 05 at $37.65
Listed on May 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.5 million
New Positions: see below

05/27/14: DAL briefly traded to a new all-time high at $39.60 before paring its gains. There is no change from my earlier comments.

The $40.00 mark could be round-number, psychological resistance. We should not be surprised if DAL tags $40 and then pulls back.

More conservative traders may want to adjust their stop higher. I am not suggesting new positions at this time.

Current Position: long DAL stock @ $37.65

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

Long Sept $40 call (DAL1420i40) entry $2.20*

05/12/14 new stop @ 36.45
05/07/14 new stop @ 35.75
05/05/14 triggered @ 37.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

The Dow Chemical Co. - DOW - close: 50.93 change: +0.25

Stop Loss: 47.90
Target(s): To Be Determined
Current Gain/Loss: - 0.6%

Entry on May 27 at $51.25
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.5 million
New Positions: see below

05/27/14: Our new trade on DOW is open. Shares broke out to new multi-year highs and hit our suggested entry point at $51.25. DOW did trim its gains by the closing bell. The intraday high was $51.28. I suggest investors wait for a new rally past $51.25 before initiating new positions.

Earlier Comments:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. As Wall Street searches for returns and yield DOW will likely continue to show up on their radar screen.

The company has been doing a good jog on maintaining cost controls and returning capital to shareholders. The Q1 2014 earnings report showed net profits surged +75% from a year ago. The first quarter was their sixth consecutive quarter of year-over-year earnings growth.

Dow has raised their dividend by 15% and now sports a 3.0% yield. They plan to complete a $4.5 billion stock buyback program in 2014.

In spite of higher feedstock and energy costs DOW still managed to see margins grow. They expect 2014 to see this margin growth gain further momentum.

Wall Street has been upgrading the stock and raising earnings forecasts.

Shares of DOW are in a long-term up trend (see weekly chart below). Yet the last couple of months have seen shares consolidating gains in a sideways move near $50. This consolidation looks like it's about over. DOW is poised for a breakout higher.

Current Position: Long DOW stock @ $51.25

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

Long Sep $50 call (DOW140920C50) entry $2.88*

05/27/14 triggered @ 51.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Aegerion Pharma. - AEGR - close: 32.35 change: +0.69

Stop Loss: 32.55
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 20, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

05/27/14: Goldman Sachs slapped a "sell" rating on AEGR this morning. The stock gapped open lower in response at $30.56. Yet traders bought the dip at $30.33 and AEGR rebounded sharply thanks to widespread gains in the biotech industry.

We are still on the sidelines.

Earlier Comments:
AEGR is in the healthcare sector. The company is a biotech firm that develops treatments for rare diseases. This stock delivered a tremendous rally from October 2012 to October 2013. That's when shares revered at the $100 level and it's been downhill ever since. Exacerbating AEGR's decline has been the company's earnings warning. They lowered guidance back in January and they lowered guidance again when they reported earnings on May 7th.

The stock gapped down sharply following the May 7th report and there has been no oversold bounce. Wall Street was expecting revenues of $33.6 million for the quarter. The company only reported $27 million.

AEGR seems to be facing challenges with its only marketed product, Juxtapid. This is an oral treatment for homozygous familial hypercholesterolemia. This is a genetic disorder characterized by extremely high levels of cholesterol, especially the LDL (bad) cholesterol.

Most of the company's sales are in the U.S. Last quarter a large chunk of its sales in Brazil evaporated with a -70% decline due to an investigation into anticorruption laws in Brazil.

There are concerns that AEGR may have to lower the price for its Juxtapid treatments, which currently cost in the $250,000-$300,000 a year range. There are competing treatments for a lot less money. There is also a worry that there may be fewer customers than previously believed. There were some claims that Juxtapid might have the potential to treat 3,000 patients in the U.S. Yet homozygous familial hypercholesterolemia only affects one in a million people. That means there are closer to 300 potential patients in the U.S.

The company is also facing an investigation from the U.S. Department of Justice for comments made by AEGR's CEO when he appeared on CNBC's Fast Money program last year.

The company seems to be facing a lot of negatives and is clearly in a bear market with lower as the path of least resistance. Currently shares of AEGR are testing round-number support at $30.00. We want to wait for a breakdown below $30.00 and launch bearish positions at $29.50. If triggered we will try and limit our risk with a stop loss at $32.55.

Traders should consider this an aggressive, higher-risk trade. Not only can AEGR see big intraday swings but there is a risk of a short squeeze. The most recent data listed short interest at 30% of the small 28.39 million share float. So far the shorts have been right.

We're not setting an exit target tonight but the $20.00 level looks like it could be significant support.

Trigger @ $29.50

Suggested Position: short AEGR stock @ (trigger)

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

Buy the Sep $30 PUT (AEGR140920P30)

The Fresh Market, Inc. - TFM - close: 29.85 change: +0.70

Stop Loss: 31.55
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 995 million
New Positions: Yes, see below

05/27/14: Shares of TFM produced a bounce today but the rebound stalled near round-number resistance in the $30.00 area. I do not see any changes from the weekend newsletter's new play description.

Earlier Comments:
TFM is in the services sector. The company is considered a specialty retailer in the grocery industry. It's been a rocky, painful road for TFM investors as the stock has produced a roller coaster ride lower from its 2012 highs. This past week saw TFM shares fall to new all-time lows and breakdown below round-number support at the $30.00 level. Shares did pop more than +10% higher on Friday morning as investors reacted to the company's earnings report out Thursday night.

TFM reported Q1 earnings of 43 cents a share. That was down -6.5% from a year ago but was in-line with analysts' estimates. Traders were likely expecting a miss and when TFM met estimates it sparked some short covering. The stock does have a high amount of short interest. Unfortunately for the bulls the rally didn't last and TFM's +10% gains faded to just +1.5% on Friday.

TFM's Q1 revenues did come in better than expected and management reaffirmed their 2014 guidance (near the low end of Wall Street's estimates). Investors were not happy with the big drop in TFM's margins. Q1 gross margins fell from 35.3% a year ago to 34.4%.

TFM is facing the same pressures that its larger rival Whole Foods Market (WFM) is facing. More and more grocers are getting into the fresh and organic food market. Sprouts Farmers Market, Kroger, Wal-mart, and regional competitors like HEB and Trader Joe's are all hopping on the natural food bandwagon. All this competition is going to continue to squeeze TFM's margins.

At least one analyst firm thinks TFM's 2014 outlook is too optimistic and does not take into account tougher competition and the impact that rising food inflation will have on margins.

The trend is down but this could be a volatile short to play. There are already a lot of bears in the name. The most recent data listed short interest at 19% of the small 44.3 million share float. That raises the risk of a short squeeze. TFM can see these sharp three or four day rallies that lift shares more than 10% before they run out of steam again.

Tonight we are suggesting a trigger to open bearish positions at $28.45. That's just below Thursday's all-time low. If triggered we'll use a stop loss at $31.55, above Friday's high. We're not setting an exit target tonight. It's worth noting that the point & figure chart is bearish and forecasting at $20.00 target.

Consider using small positions or use the put option to limit your risk. I want to remind you that this could be a volatile trade.

Trigger @ $28.45 *small positions*

Suggested Position: short TFM stock @ (trigger)

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

Buy the Sep $30 PUT (TFM140920P30)

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


Financial Engines, Inc. - FNGN - close: 42.07 change: +1.07

Stop Loss: 42.25
Target(s): to be determined
Current Gain/Loss: - 9.0%

Entry on May 14 at $38.75
Listed on May 13, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 567 thousand
New Positions: see below

05/27/14: The market's sharp rally at the open helped FNGN gap open higher at $41.36, above resistance at its 20-dma, and then surge to a +2.6% gain. Our stop loss was hit at $42.25.

closed Position: short FNGN stock @ $38.75 exit $42.25 (-9.0%)

05/27/14 stopped out
05/14/14 triggered @ 38.75


Jacobs Engineering Group - JEC - close: 54.52 change: +1.17

Stop Loss: 54.55
Target(s): to be determined
Current Gain/Loss: - 0.1%

Entry on May 15 at $54.48
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

05/27/14: I have been warning readers that JEC was due for a bounce. Until today the stock was just not participating in the market's rally. Shares shot higher this morning, rallied past their 10-dma, and hit our stop loss at $54.55.

closed Position: short JEC stock @ $54.48 exit $54.55 (-0.1%)

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

Jun $55 PUT (JEC140621P55) entry $1.65** exit $1.15 (-30.3%)

05/27/14 stopped out
05/22/14 new stop @ 54.55
05/17/14 new stop @ 56.15
05/15/14 trade opened at $54.48
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.