Option Investor

Daily Newsletter, Wednesday, 7/16/2014

Table of Contents

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

Market Wrap

Going Up?

by Thomas Hughes

Click here to email Thomas Hughes
The Dow Jones Industrial and Transportation Averages make new all time highs while the S&P 500 is still flirting with resistance.


After another volatile day of trading the major indices moved to close at the highs of the days. Data, earnings and more testimony from Janet Yellen were all in the mix. The morning started off on a positive note with better than expected GDP data from China. GDP in the 2nd quarter grew at a slightly better than expected rate of 7.5%. Chinese indices were weighed down with other worries but Japanese and other Asian indices moved higher. European markets were happy with the news thinking that expansion in China will lead to expansion in the EU. This is thought is not far off but there are still risks. Regardless, the US markets were also positive this morning, boosted of course by expectations of robust earnings and expansionary economic data.

There were 6 economic releases throughout the morning from 7:00 to 10:00AM, not counting Janet Yellen's testimony or the Beige Book, released at 2:00PM. Early futures trading put the SPX up about 5 or 6 point with that number strengthening into the open. On top of the data there was also a fair number of positive earnings surprises, including some banks, to help lift the market. The SPX opened about 5 points above yesterday's close and quickly moved higher only to find resistance just below the current all time high. After hitting the early high, about 7 minutes into the day, the indices drifted lower with the SPX hitting support just above 1975. The range between 1975 and 1985 dominated trading the rest of the day. Even with such a good start to the season there the bulk of S&P 500 companies have yet to report and that may be what kept the index in check today. Other majors including the Dow Jones Industrial and Transportation Averages and the Nasdaq Composite all made new highs.

The Economy

First on the list today, released at 7AM, is the Mortgage Brokers Index. The index fell -3.6% last month on a seasonally adjusted basis after climbing in the previous month. On an unadjusted basis mortgage applications rose by 20% on a month to month basis.

The Producer Price Index was released at 7:30AM and indicates that there is some inflation in the economy. PPI climbed 0.4% this month compared to a decline of -.2% last month. This is ahead of the expected 0.2% analysts had predicted but still tame. Core PPI climbed 1.9% on top of a 2% rise last month. This isn't alarming but does lend some weight to the idea that the Fed will increase interest rates sooner rather than later.

Net Long Term TIC Flows rose by nearly $20 billion last month after dropping by over -$24 billion in the previous month. Total inflows of foreign investment money into US securities topped $35.5 billion with more than a third of that private money. Total holdings of US securities by foreign residents also increased, by $34.6 billion.

Industrial Production and Capacity Utilization figures were released simultaneously at 9:15AM. Industrial Production rose for the 5th straight month with another 0.2% gain. There were some revisions to previous data with May revised lower to 0.5% and April revised much higher to 0.9%. June's data was slightly below the expected 0.3% but with the revisions 2nd quarter production rose 6.7%. This is the biggest gain for 2nd quarter production numbers in two years. Capacity Utilization remains basically unchanged at 79.1%. This is down 2 tenths from last month and in line with utilization over the past couple of months.

At 10AM the National Association of Homebuilders released their monthly gauge of sentiment. The index rose to 53 this month, the first time in 6 months, indicating expansion in the sector. This is a 4 point gain from last month. Within the index the current sales component also gained 4 points, rising to 57. Expected future sales rose 6 points to 69 and traffic levels also rose, gaining 3 points to 39. Traffic levels are still very low but rising.

The Beige Book was released at 2PM, as usual, and indicates that the economy is expanding at a moderate to modest pace. This is inline with expectations and current data trends. The report was optimistic about the recovery and sees labor market improvement across all districts. Also up across the board was construction spending and manufacturing.

Janet Yellen's testimony carried on and did not include anything new.

Also in the news this morning was a call from the Obama administration to congress. He wants them to act now to stop tax inversions.

After the bell the administration made moves to widen sanctions against Russia. New moves are aimed at the banks and financing structure behind state run oil giant Gazprom.

The Oil Index

The data, in particular Chinese GDP data, helped to put a bid back into oil. WTI climbed more than a $1.50 today as global demand outlook improved on the same day that crude inventories declined by more than 7.5 million barrels. Global issues persist but did not reach the headlines today. The lift in oil prices was just what the XOI needed to help it bounce from support. The index has been consolidating and testing support for about two weeks and has now made a sharp move higher. The index climbed nearly a percent and a half today and is accompanied by some bullish indicators. MACD is still in the red but has peaked and will likely make the crossover in the next few days provided prices don't fall back again. Stochastic is already signaling the early buy and it is a strong version of the weak signal. There is some fairly strong technical resistance just above the current level around 1,700 with support just below at 1,600. There may be some backing and filling but I don't see any reason why the index won't move up to at least retest the recent all time high, provided earnings and economics remain positive.

The Gold Index

Gold prices climbed today and briefly topped $1300 before moving back below before the close of the US session. Gold prices are now below $1300 for the second day, following the sharp drop from recent highs we saw on Monday. A strong stock market, improving economics, a wee bit of inflation and the prospect that sooner might mean a lot sooner when talking about FOMC interest rate hikes are weighing gold down. Not to mention that with India maintaining its 10% tariff on gold the main source of physical demand growth is out of the picture. My targets for gold include $1275 and $1250 in the near to short term.

The Gold Index was able to recapture some of its losses climbing more than 1.75% in today's session. The candle action is worth taking note of; a harami pattern and one that can often precede a reversal. The other indications do not support that but it could mean that a bounce, test of support or some form of consolidation may happen at this level. Today's action was centered around a previous support/resistance line so again, worthy of note. Looking at the indicators MACD is still highly divergent and now signaling with a bearish crossover while stochastic is moving lower following its own bearish cross. It looks like the bulls are going to put up a fight with $100 as the line in the sand but the long term trend and short term signals are bearish. Downside target on a break below $100 are $95, $92.50 and $90.

Movers And Shakers

Rupert Murdoch wants to buy Time Warner Cable. The bid was announced this morning, was unsolicited and rejected, weeks ago. We are just finding out about it now but the news was market moving none the less. Now speculation is rampant over what he will do now. In order to get the deal to pass FCC and other regulatory scrutiny 21st Fox has already offered to give up CNN due to it competing with Fox News. Shares of Time Warner barely budged but shared of FOX tumbled on the news. The stock fell more than 4.5% today on high volumes and indications it will remain trapped within its long term range.

The Banking Index

Today was another in a string of big days for the banks. This morning at least three big names in the mega and regional banking category reported better than expected earnings, in line with the trend set Monday by Citibank. Now the bulk, all but one or two, of the biggest banks have reported and all but one have beaten the expected results. Yes, revenue and earnings are down from the previous comparable period but not down nearly as much as expected. In general the bankers are reporting improvements in places like margins, deposits, loan growth and other key areas of business. Today's names included Bank of America, US Bancorp and PNC Financial. Also in the mix was Piper Jaffrey, investment bankers, with another better than expected report. Bank of American reported earnings that beat on the top and bottom lines and yet shares of stock sold off today.

The Banking Index fell today from long term resistance. This is because not all the banks are participating in the rally. JP Morgan and Citigroup were still moving higher but Bank Of America, USB and PNC all fell today with PNC at the top of the group with a near 3.5% decline. The Banking Index fell a little more than 1$ today and appears trapped inside a tight support/resistance range between $71.50 and $72.50. This may be due to the mixed nature of trading in the banking sector today and could change at any time. Indicators are indeterminate for now, stochastic is indicating the early, weak, buy signal but it is so far unsupported. Tomorrow the last of the really big financial institutions report, Morgan Stanley and Capital One.

The Indices

The Dow Transportation Average led the market again today. The index climbed a little more than a half percent, 0.62%, and set another new all time high. The indicators are bullish but the stochastic is persisting to trend sideways, creating a divergence from price that is a little troubling. This may just be a sign of caution in the market as we wait on the real onslaught of earnings report next week but in need of watching. Momentum is on the rise at this time with no resistance ahead save what might come around by way of economic data or earnings. There may be a retest of support, currently about 150 points lower than today's around 8,250.

The Dow Jones Industrial Average was right behind its cousin with a 0.45% gain and also set a new all time high. The blue chips are also making a bounce up from support and the short term moving average but with much better looking indicators. MACD momentum is rising, but so is stochastic. Both %K and %D are moving higher, indicating an upward trend in the near and short terms. Stochastic is low in the range so there is plenty of room for it, and the index itself, to trend higher providing no market reversing events take place. Near term support is just below at the now old news level of 17,000. A break below that will find the 30 day moving average about 125 points below that.

The S&P 500 gained a little shy of 0.4% in today's session. The broad market, which is loaded with financial stocks, struggled some with resistance today. The surprising sell off in the regional bank names is partly to blame. The index is also moving up from the short term average, like the blue chips and the trannies, but has not yet made another new high. The indicators are rolling into the early trend following buy sign but MACD is still below zero and stochastic is showing a very weak version of the early buy signal. I think earnings may be a hurdle for the broader market until we can say for sure that most companies are meeting or beating expectations. To date about 67% of the 85 S&P companies that have reported are beating estimates, good but not as good as in previous quarters.

The tech heavy Nasdaq Composite only gained about a quarter percent today. Although there have already been some nice reports from the likes of Intel there have also been a few that are only OK. This index made a gain from yesterday's close but traded down from the open, creating a bearish candle. Along with the indicators this is making a correction in the index look like a possibility, the Nasdaq is a little more than 10% above the long term trend line I have been tracking. Bearish momentum is persisting and stochastic is moving lower in the range. Currently, next support is just below the at the short term moving average and previous long term high. Earnings season, and guidance, will tell the tale and it's still a little early to tell I think. I will be looking for the index to hold at support in the near term until the earnings picture becomes more clear.

There is a lot for the market to ponder. The economy is improving, the Fed said so. The Beige Book sees labor improving around the country. Economic trends are up for the most part if a little hit or miss. Earnings so far are good, some a little surprising but mostly just good. Guidance is also OK, not stellar but OK. Overseas things are still muddling along. China is growing but is it really? Europe is still on shaky footing but improving in fits and starts same as us. Things in general are OK and getting better a little at a time but there still hasn't been that spark, that one surprise jump in jobs, or unemployment or housing, or earnings or a combination of several factors to really convince the market that things really are OK. Just the same old incremental, steady improvement. Tomorrow is another round of weekly jobless data along with monthly housing starts, building permits, Philly Fed and Leading Indicators. Any one of them could be the ticket.

Until then, remember the trend!

Thomas Hughes

New Plays

Tech Up But Biotechs And Social Media Struggle

by James Brown

Click here to email James Brown

Editor's Note:

Tech stocks lead the way higher yet the NASDAQ struggled.

The U.S. equity markets delivered relatively widespread gains today. The move was led by the big cap stocks. Technology stocks were up, driven by gains in the semiconductor industry. That was thanks to a +9.2% surge in shares of chip giant Intel (INTC), which reported better than expected earnings last night.

Meanwhile biotechs and social media names continued to underperform following yesterday's comments from Fed Chairman Yellen. The IBB biotech ETF, BTK biotech index, and the Social Media ETF (SOCL) all closed lower today.

Did you happen to notice how the Dow Industrials and the S&P 500 both ended the session near their morning highs. Yet the NASDAQ composite and the small cap Russell 2000 both ended the session near their lows? This divergence could be a warning signal.

I would be cautious tomorrow.

We are not adding any new trading candidates tonight.

In Play Updates and Reviews

New Plays Have Been Triggered

by James Brown

Click here to email James Brown

Editor's Note:

Our bullish play MU and our bearish plays COH and DSW all hit our entry points.

Current Portfolio:

BULLISH Play Updates

Microsoft Corp. - MSFT - close: 44.08 change: +1.63

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: + 5.3%

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

07/16/14: Shares of Intel (INTC) surged more than 9% following last night's earnings report and their comments on better than expected PC sales. This news boosted shares of MSFT too with a +3.8% gain and a new multi-year high.

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

Micron Technology - MU - close: 34.64 change: +0.62

Stop Loss: 31.75
Target(s): To Be Determined
Current Gain/Loss: + 0.1%

Entry on July 16 at $34.60
Listed on July 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 31 million
New Positions: see below

07/16/14: MU was also influenced by Intel's bullish earnings report last night. Plus there was news that DRAM memory prices were likely to rise again this month. Shares of MU gapped open higher at $34.42 and then rallied to a +1.8% gain. Our trigger to launch bullish positions was hit at $34.60.

Earlier Comments: July 15, 2014:
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.

Current Position: Long MU stock @ $34.60

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

Long Oct $35 call (MU141018C35) entry $2.59*

07/16/14 triggered @ 34.60
*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

SoftBank Corp. - SFTBY - close: 38.42 change: +0.79

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +4.7%

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

07/16/14: The rebound in shares of SFTBY continued on Wednesday with a +2.0% gain. The stock is now testing resistance near $38.50 and its simple 200-dma (currently @ 38.56). A breakout past this level would be very good news.

The June intraday high was $38.65. I would use a rally past this mark as a new bullish entry point.

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: 33.79 change: +0.20

Stop Loss: 34.60
Target(s): To Be Determined
Current Gain/Loss: -1.0%

Entry on July 16 at $33.45
Listed on July 14, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.7 million
New Positions: see below

07/16/14: COH fell to new three-year lows this morning. The stock hit our suggested entry point at $33.45. COH did manage to reverse and close in positive territory by the closing bell. The $34.00 and $34.50 levels look like they could be short-term resistance. You may want to watch for a reversal near this area before initiating new positions.

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.

current Position: short COH stock @ $33.45

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

Long AUG $33 PUT (COH140816P33) entry $1.10*

07/16/14 triggered @ 33.45
*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

DSW Inc. - DSW - close: 26.75 change: -0.54

Stop Loss: 29.15
Target(s): To Be Determined
Current Gain/Loss: + 0.6%

Entry on July 16 at $26.90
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

07/16/14: It looks like DSW is finally starting to rollover with a -1.9% decline. The stock broke down to new three-week lows and hit our suggested entry point at $26.90. I would still consider new positions now at current levels.

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.

current Position: short DSW stock @ $26.90

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

Long OCT $25 PUT (DSW141018P25) entry $1.05

07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike