Option Investor

Daily Newsletter, Tuesday, 7/15/2014

Table of Contents

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

Market Wrap

Yellen Sell Signal

by Jim Brown

Click here to email Jim Brown

Janet Yellen put a sell rating on social media and biotech stocks. Who knew she was a stock analyst and a Fed head?

Market Statistics

The Empress of the Doves showed her hawkish side today by calling out two sectors as being overvalued. The exact statement in the report was this. "Valuation metrics in some sectors appear substantially stretched particularly for smaller firms in the social media and biotech industries, despite a notable downturn in equity prices for such firms early in the year."

The statement was in a report that accompanied her prepared testimony to the Senate Banking Committee this morning. The market did not catch it immediately but eventually some analysts noticed it and the opening rally was immediately reversed.

The Biotechnology Index ($BTK) dropped -2% on the news. Some analysts said they appreciated her comments because it showed the Fed was concerned about a market bubble as a result of five years of Fed stimulus. Other analysts were dismayed by the comment since the Fed has failed nearly 100% of the time in projecting future economic events. Why should we think they will have a better record in predicting stock movement? Stocks are valued differently by different people. Some biotech stocks may be undervalued because of their future drug pipelines while others may be permanently overvalued. For the Fed to basically issue a sell signal on two sectors was a shock to the investment community. The last time the Fed Chairman tried to burst a stock bubble was in 1996 when Greenspan gave his "irrational exuberance" speech.

The break from tradition by Yellen poses a new problem for investors whenever she speaks. You never know when she might say the "ABC sector is overvalued now." For example if you are in energy and she dumps on that sector it will not be fun. On the flip side I doubt she is ever going to say "(XYZ sector is now oversold and undervalued."

We can always speculate the Fed was short Russell futures going into the announcement. I am joking of course.

If the Fed believes biotechs and social media are overvalued then what do they think is fair value? You can't just throw out a comment like that without finishing the thought. If you are going to play stock analyst then give us a complete report.

We have entered a new era in Fed communications and it may be laced with market potholes. Instead of just worrying about rate announcements now they may be making market calls with no track record of success. That means the market will be even more tentative ahead of important speeches.

Obviously Yellen is aware of the criticism against the Fed creating asset bubbles and she is trying to take some wind out of the markets with the call on social media and biotechs. It worked today but will it work in the future? Do we really want the Fed making market calls? Personally I would appreciate it if they would just stick to the economy and try to get that forecast right for a change.

Economic reports were mixed again with the good news coming from the NY Empire State Manufacturing Survey. The headline number spiked from 19.3 to 25.6 for July. This was a four-year high. This was well over expectations for a decline to 17.1 although the internals were not that positive.

New orders were flat at 18.4 and inventories declined from 9.7 to -3.4. Backorders declined from -1.1 to -6.8 and well into contraction territory. Prices paid rose from 17.2 to 25.0 and prices received rose from 4.3 to 6.8. However, the employment component rose from 10.8 to 17.1 suggesting employers were hiring. Unfortunately the hours worked component declined from 9.7 to 2.3. This suggests companies are cutting back on hours per person and hiring more "less than 30 hours a week" workers to avoid the Obamacare expenses.

The six-month outlook component fell from 39.8 to 28.4 and that is really negative when coupled with the sharp rise in prices paid.

Retail sales for June came in below estimates at +0.2% compared to the consensus for a +0.6% gain. However, April was revised higher from +0.5% to +0.6% and May was revised up from +0.3% to +0.5%. Autos were the major drag with the ex-autos headline number rising +0.4%.

The big decliners were building materials -1.1%, food service and drinking -0.3%, motor vehicles and parts -0.3%, furniture and home furnishings -0.1%. Winners were clothing and accessories +0.8%, sporting goods +0.6%, gasoline stations +0.3%, general merchandisers +1.1% and nonstore retailers +0.9%.

The report showed the consumer is still weak and housing may be slowing further with the decline in building material sales. This is one more report providing evidence of a slow growth economy.

Business Inventories for May rose only +0.52% compared to +0.63% in April and estimates for +0.6%. Business sales growth slowed to +0.4%, which should make businesses slow to rebuild inventories. Nobody wants to be stuck with a warehouse of stale products if sales continue to decline. Inventories can rise two ways. They can rise because companies buy more on speculation or they can rise because sales slow and normal reordering starts to push inventory levels higher. Businesses have to forecast sales and order replacement inventory based on those forecasts. If sales continue to slow you can bet they will cancel or delay those orders.

Economics for Wednesday include the Producer Price Index (PPI) and Industrial Production. Neither is expected to move the market. The Fed Beige Book in the afternoon could be a market mover if it shows economic activity declined from the prior report. Analysts expect continued improvement but at a snail's pace.

The big event is the Janet Yellen testimony in the morning. The House members will have had 24 hours to analyze her comments from the Senate testimony today and she will probably be questioned on the bubble call on social media and biotechs. I would expect some more fireworks from the testimony and that normally drags on the market. However, she may try to smooth over the impact from the stock comments and that could remove the investor worry.

The earnings headlines are starting to heat up and some of them are not good. However, so far the impact has been neutral. After the bell today Intel (INTC) reported earnings of 55 cents that rose +40% compared to estimates for 52 cents. Revenue rose +8% to $13.83 billion compared to estimates for $13.7 billion. The company forecast revenue for Q3 of $14.4 billion compared to estimates for $14 billion. Gross margin is expected to be 66% and +3 points above analyst estimates. Intel said it was going to buyback an additional $20 billion in stock over time with $4 billion this quarter.

The CFO said Intel was firing on all cylinders and revenue growth for the full year was now expected to be +5% compared to flat estimates earlier this year. They estimate there are more than 600 million PCs in the U.S. that are more than 4 years old. That is a polite way of saying they are running Windows XP or older operating systems and need to be upgraded.

Intel shares rose +1.30 in afterhours and will lift the Dow at the open on Wednesday.

Yahoo (YHOO) reported earnings after the close of 37 cents that missed estimates by 2 cents. Revenue declined -3% to $1.04 billion compared to estimates for $1.08 billion. Nearly everything said on the conference call was negative except for the Alibaba news. Yahoo said they had signed another agreement with Alibaba to reduce the number of shares they are forced to sell in the IPO from 208 million to 140 million. This is the second reduction they have announced. They entered into an agreement last year to sell a specific number of shares in the IPO and that has been reduced twice. This will leave Yahoo with 75% of their current stake. Yahoo currently has a 23% stake in Alibaba. The company said they were planning on returning to shareholders 50% of the IPO proceeds through buybacks and dividends.

The company forecast revenue in the current quarter of $1.02-$1.06 billion and analysts were expecting $1.1 billion. Ad sales have been declining as Google and Facebook have been gaining market share. Research firm eMarketer expects Microsoft to pass Yahoo as number three in the near future. Mayer said the decline in display advertising was accelerating.

Shares of Yahoo declined from $35.61 to $34.80 in afterhours after a volatile session during the conference call.

CSX Corp (CSX) reported earnings of 53 cents compared to estimates of 52 cents. Revenues rose +7% to $3.24 billion and that was just slightly below estimates of $3.25 billion. Those were record numbers. The earnings were not the important news. CSX guidance is considered a proxy for the economy. The company said the economy was improving strongly and they were increasing their capital spending to $2.4 billion because of the strong demand. The CEO said demand for the rest of the year should be 8% growth with a +7% increase in intermodal shipments. Coal shipments were up +15% thanks to the high prices for natural gas and electric companies rebuilding inventories after a severe winter.

He said shipments of construction materials for housing were up strongly as well as sand and gravel for fracking and cement. It was a bullish call on the economy and suggests the overall outlook is improving. CSX shares were unchanged in afterhours.

After the bell IBM and Apple announced a partnership to develop new applications for iPads and iPhones for the enterprise market. Apple has typically been a consumer product manufacturer and IBM an enterprise marketer. Combining the two together will be a sword in the heart of BlackBerry, which is barely hanging on to its enterprise customers as the saving grace for the company. If IBM and Apple can combine their resources they are going to be tough to beat.

They have targeted more than 100 business applications for the iProducts that will fuse big data and analytics into Apple's ubiquity and usability. Apple's words, not mine. The companies will develop the apps and IBM will sell the iProducts to its corporate customers while Apple sells the apps to its retail customers. The initial apps will be released late in 2014 and continue throughout 2015.

This is a landmark deal with the two giants teaming up to offer products not currently available that will revolutionize the way users interact with the data at the fingertip level. IBM shares rallied +$5 in afterhours and Apple shares rallied about $2. This will be positive for the Dow and the Nasdaq at Wednesday's open. Blackberry shares declined 50 cents to $10.88.

At the open Goldman Sachs (GS) reported earnings of $4.10 or $2.04 billion. That crushed the $3.09 analyst estimates. They earned $1.25 billion in the Investing and Lending segment. That was almost double the $640 million analysts expected. This is a highly volatile segment and is not normally repeatable. Bond trading revenue fell -9% and equities trading revenue declined -11%. The bank said trading clients are the least active in several years. Goldman also received $506 million in financial advisory fees for M&A advice. That is also a volatile number.

Goldman shares only rallied $2 on the earnings report because of all the special situations earnings that are not repeatable from quarter to quarter.

JP Morgan (JPM) posted earnings of $1.46 that declined -8% as fixed income and equity trading revenue fell -15%. Analysts were expecting $1.29 per share. Revenue declined -3% to $24.45 billion. The decline in trading revenue was less than the 20% analysts had expected. Citigroup also posted a 15% decline in trading revenue. JPM said mortgage lending profits declined -38% as it pulled back from the mortgage business in fear of future foreclosures. The bank is becoming much stricter in its mortgage lending to avoid another disaster in the future. Application volumes had declined -54%. Assets at the end of June totaled $2.52 trillion. Shares rallied $2 on the news.

Michael Kors (KORS) was knocked for a 7% loss after multiple analysts stated concerns over the slowdown in retail sales. Citigroup lowered its price target from $107 to $98 saying a survey of 62 retailers suggested that Kors products lacked "newness." More than 17% of the respondents said the stores missed sales targets in the quarter. Barclays said the number of Google searches for Michael Kors declined over the same period in 2013. During the previous 4 years only one week had shown a decline in searches. Barclays reiterated an $82 price target. Maxim analyst Rick Snyder downgraded Kors from buy to hold and lowered his price target from $109 to $85.


After setting a new high on July 3rd the S&P has been relatively flat. The dip to 1,953 on the 10th was the low point and today's high at 1,982 was the high point. The index has been volatile and lacking direction. The 1,980 level has emerged as resistance and we need to close above that level on Wednesday or risk the beginning of a new trend lower.

The material resistance is still well above at 2,000 but I don't see a catalyst to push us that high this week. The earnings have been mostly positive but with the exception of Intel tonight they have been lackluster. Volume picked up slightly to 6.0 billion shares with nearly 2:1 declining over advancing volume. Declining stocks were 4,873 compared to advancers of 2,081. That is hardly a bullish day. Down volume, negative internals with all the indexes negative except for the Dow and the Transports. That does not suggest a positive week ahead.

We could hang in this 1,950-1,980 range for the rest of the week while investors look at two more days of active earnings. If those earnings don't improve significantly I see the S&P breaking support rather than resistance.

The Dow made a new intraday high for the last two days but has failed to close over the 17,068 level for a new closing high. The blue chips are attracting all the money thanks to their liquidity and relative strength.

The afterhours gains in Intel and IBM should be good for about 56 Dow points at the open if those gains hold overnight. While that should insure a positive open the rest of the day could be in doubt with Yellen at the microphone and earnings reports that could be weak.

The Dow has resistance at 17,100, 17,150 and 17,300. The narrowing uptrending wedge is providing less room for the Dow to run and a breakout is imminent. Only the direction is unknown.

The Nasdaq faded fast after the opening spike. It did rebound +26 points from its lows at 4,390 but still ended with a -24 point loss. The Nasdaq deserves to be weak after the six weeks of gains. If it can hold at this level we have a chance of another retest of the highs but the outlook is cloudy. It all depends on the earnings from this point forward.

Resistance is 4,465 and support 4,344 giving the index more than 120 points to wander without changing the trend.

Before I left for vacation last week I warned that the Russell 2000 was at the perfect place for a double top after it closed at 1,208 on July 3rd. Don't look now but the Russell has been the weakest index for the last 7 days and closed at a new 5 week low today.

The Yellen sell signal for biotechs and social media stocks hit the Russell hard. That was like kicking an index when it was already down. The biotechs were already in the ditch with a lot of really steep declines last week. The Yellen comments just pushed them and the Russell 2000 lower.

The Russell closed below the 100-day at 1,157 and right above the 50-day at 1,150. The 200-day is jsut below at 1,130. Any further declines could trigger some serious technical sell signals.

The Russell futures are declining again tonight. It is not a big drop but simply a continuation of the trend. As long as the Russell is weak we can't expect the big cap indexes to surge higher. They may post minor gains but I doubt they are going much higher. We know from experience these things can reverse at any time. We could see the Russell reach a point where traders think it is worth buying and we could be off to the races again. I don't see a catalyst for that this week.

I would be cautious about adding to long positions until the Russell begins to rebound. July is normally the best month in Q3 because of the earnings cycle. If the earnings continue to be lackluster we could see the late summer doldrums arrive early.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Technology Stars

by James Brown

Click here to email James Brown


Micron Technology - MU - close: 34.02 change: +0.43

Stop Loss: 31.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 31 million
New Positions: Yes, see below

Company Description

Why We Like It:
The group of "old tech" stocks have been outperforming the market. Names like Microsoft (MSFT) and Intel (INTC) and Micron (MU) are seeing a lot of interest, especially has PC sales come in a lot better than expected. There appears to be a revival of the PC at least from business clients. One thing all of those PCs need is memory.

Micron Technology describes themselves as a global leader in advanced semiconductor systems. Micron's broad portfolio of high-performance memory technologies—including DRAM, NAND and NOR Flash—is the basis for solid state drives, modules, multichip packages and other system solutions. Backed by more than 35 years of technology leadership, Micron's memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.

DRAM prices have been rising and that's good news for MU. The memory making industry has changed significantly in the last few years. Instead of multiple firms all beating themselves up on pricing the DRAM market is down to just three big companies. The major players are Samsung, Hynix, and Micron.

MU reported earnings back on June 23rd. Analysts were expecting a profit of 70 cents a share on revenues of $3.88 billion. MU delivered 79 cents a share and revenues rose +71.8% to $3.98 billion. The better than expected results has sparked some analyst upgrades and new price targets in the $38.00 to $50.00 range. MU is considered too cheap by some analysts. They're currently trading at just 10.5 times forward earnings. The broader market is trading for about 15.5 times. Shares of MU have been playing catch up the trend will likely continue.

After the closing bell tonight Intel reported earnings and beat analysts estimates thanks to better than expected demand for business computers. The mobile phone and tablet revolution has cannibalized PC sales for years. According to Intel tonight it looks like PC sales have stabilized and the "worst is over". That should be good news for companies like Micron.

Shares of MU are already in an up trend. The stock looks poised to breakout past its early July highs near $34.50. Tonight we're suggesting a trigger to launch bullish positions at $34.60, which would be a new twelve-year high for the stock.

Trigger @ $34.60

Suggested Position: buy MU stock @ (trigger)

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

Buy the Oct $35 call (MU141018C35) current ask $2.36

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

Annotated chart:

In Play Updates and Reviews

Old Tech Rallies

by James Brown

Click here to email James Brown

Editor's Note:
Old technology names like Intel (INTC) and Microsoft (MSFT) were outperforming the major indices today.

STE has been removed.

Current Portfolio:

BULLISH Play Updates

Microsoft Corp. - MSFT - close: 42.45 change: +0.31

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: + 1.4%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

07/15/14: MSFT was showing relative strength today with a +0.7% gain and a new multi-year closing high. After the bell Intel (INTC) had good things to say about the PC market and that gave shares of MSFT a boost after hours. If you're willing to hold over MSFT's earnings report then a rally past $42.50 could be a new entry point.

MSFT is due to report earnings on July 22nd.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike

SoftBank Corp. - SFTBY - close: 37.63 change: -0.19

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +2.6%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

07/15/14: SFTBY has stalled at the $38.00 level. Shares reversed with a dip back toward simple 30-dma. I don't see any changes from my prior comments. The $38.00-38.50 zone remains overhead resistance.

Keep in mind that Alibaba is still expected to IPO this summer. There has been some speculation it could happen later this month. Others believe Alibaba wants to IPO on the "lucky" date of August 8th. The number eight is considered a lucky number is Chinese culture.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

07/11/14 News hits that SFTBY might buy T-Mobile soon.
06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

BEARISH Play Updates

Coach, Inc. - COH - close: 33.59 change: -0.40

Stop Loss: 34.60
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 14, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.7 million
New Positions: Yes, see below

07/15/14: COH continues to sink as expected. This is a new multi-year closing low for the stock but the intraday low was only $33.51. Our suggested entry point is $33.45. More aggressive traders may want to jump in early now.

Earlier Comments: July 14, 2014:
Coach started in a Manhattan loft back in 1941. Their focus on high-quality leather goods has expanded to handbags, men's bags, women's and men's small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry and related accessories. As of last year COH had almost 1,000 stores with more than 500 in North America and more than 400 in Asia.

It used to be that COH was the big brand in luxury items. It seemed like they could do no wrong with strong growth. It appears they out grew their exclusivity. It did not help that rival Michael Kors (KORS) was beginning to hits its stride and steal the spotlight from Coach.

It has been a tough year for retail companies. 2014 started with a very harsh winter that kept consumers indoors. COH was not immune to this effect. However, normal retailers could lay blame at the rising cost of gasoline or food items. That shouldn't apply to COH, which was always seen as a retailer to the higher-end consumer.

Desperate to stop the slide in sales COH resorted to promotions and discounts. This seemed to backfire. While the promotions may have increased foot traffic in their stores it helped sully their appearance as a luxury brand. Today COH is trying to turn things around. They're going to revamp their stores and go back to full luxury pricing. This could be expensive and pressure their margins as they try to turn things around.

COH held an investor day on June 19th. They told analysts that Coach would close 70 underperforming stores in North America as part of the turnaround plan. Most analysts leaving the meeting with COH turned bearish. In the three weeks following the analyst day shares of COH were downgraded six times.

Analysts have been reducing their earnings estimates on COH and that's never a good sign. Yet that could set up for an upside surprise when COH does report earnings on August 5th. Thus we do not want to hold over the announcement.

The June 2014 low was $33.60. I am suggesting a trigger to launch bearish positions at $33.45. Short-term traders may want to target a drop toward $30.00, which might be round-number support.

Trigger @ 33.45

Suggested Position: short COH stock @ (trigger)

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

Buy the AUG $33 PUT (COH140816P33) current ask $1.10

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

DSW Inc. - DSW - close: 27.29 change: -0.11

Stop Loss: 29.15
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

07/15/14: DSW closed on its low for the session. That doesn't bode well for tomorrow. We could see shares hit our suggested entry point at $26.90 soon.

Earlier Comments: July 12, 2014:
DSW Designer Shoe Warehouse runs over 400 company-owned stores. They also participate in hundreds of other shoe departments in regional department stores through their Affiliated Business Group.

There appears to be a bear market in designer shoes. At least that is the picture if you're looking at shares of DSW Inc. The stock has actually been a big winner for investors if you have owned it the past few years. On a post 2-for-1 split adjusted basis DSW traded down to $3.33 in 2009. It peaked in 2013 with a close at $47.22 in November last year. That's a huge run (more than 1,400%). Unfortunately last November was indeed the peak. DSW has been stuck in a bearish trend of lower highs and lower lows since then.

DSW lowered its earnings guidance back in February 2014. Of course back then just about all of the retail companies were warning about lack of sales and blaming it on the extremely cold winter weather. That was after weeks of worry over the 2013 holiday shopping season.

The U.S. economy is slowly recovering but consumer spending has not. There are still large chunks of the consumer who continue to struggle. The sharp rise in food prices this year combined with elevated gasoline prices has not helped. There seems to be a bifurcation in the consumer spending. There has been strong demand for big ticket items like housing and cars. Yet smaller discretionary spending is just not there.

The overall retail industry saw some improvement in May. There was hope that June same-store sales would come in better than expected. Analysts and investors were a bit disappointed when the retail industry delivered June numbers that were only in-line with estimates.

Meanwhile DSW continues to struggle. The company reported earnings on May 28th. Wall Street was expecting a profit of $0.48 per share on revenues of $622.9 million. DSW announced earnings of 42 cents on revenues of $599 million. A miss on both counts. Management then lowered their 2015 guidance. The company blamed the weather (again) and said they were facing an intense promotional retail environment. The Container Store (TCS) has a completely different product mix but recently mirrored DSW's troubles and said they were experiencing a retail "funk" (i.e. lack of sales).

Shares of DSW dropped from $32.50 to $23.60 on its earnings miss and earnings warning late May. Since then the stock has bounced but it has found new resistance in the $28.50 area. Now DSW looks like it is rolling over again.

Friday's low was $27.20. I am suggesting a trigger to open bearish positions at $26.90. If triggered I'm expecting DSW to at least test its May lows if not breakdown to new lows.

We will plan on exiting prior to DSW's late August earnings report.

Trigger @ $26.90

Suggested Position: short DSW stock @ (trigger)

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

Buy the OCT $25 PUT (DSW141018P25) current ask $1.00

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


Steris Corp. - STE - close: 53.49 change: -0.70

Stop Loss: 52.65
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 246 thousand
New Positions: see below

07/15/14: STE is not cooperating. Shares are down two days in a row. Given its relative weakness this week we're choosing to remove STE as an active candidate. Our trade did not open.

If you like the story on STE I would wait for a close above $55.00 before considering bullish positions.

Trade did not open.

07/15/14 removed from the newsletter. suggested entry point was $55.50