Option Investor

Daily Newsletter, Saturday, 7/26/2014

Table of Contents

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

Market Wrap

Cracks in the Foundation

by Jim Brown

Click here to email Jim Brown

Despite better than expected earnings growth some high profile misses knocked the market for a loss.

Market Statistics

Earnings growth for Q2 is an astounding 8.3% based on nearly half of the S&P-500 that has already reported. However, some high profile earnings misses and guidance warnings are pressuring the indexes as we head into the summer doldrums. There may be some cracks forming in the bull market's foundation.

Visa and Amazon were the major problems on Friday. Dow component Visa (V) lost -$8 and knocked around 60 points off the Dow. Amazon, 13% of the Nasdaq 100, lost nearly 45 points at the open to help push the NDX lower by nearly 40 points at the open.

Visa's guidance was a wet blanket after they said they saw no signs of an economic recovery. That was a slap in the face to investors wanting to be long this market. Analysts may be imagining green shoots everywhere but Visa said it is not happening. Of course Visa's guidance may have been prejudiced by the very weak consumer spending. Retail sales are shrinking and high gasoline prices have kept consumers out of the malls. However, Visa also said cross border transactions were very weak. That means travelers are not spending money either. Visa's comments really weighed on the market.

Friday had only one economic report and it was neutral. The June Durable Goods orders rose +0.7% compared to a decline of -1.0% in May. After a +0.9% gain in April that gives us only a +0.2% average for the second quarter. That is not good and it will impact the Q2 GDP.

Orders for capital goods rose +1.9% but a weak rebound from the -5.3% decline in May. They are now down -10.4% for the year. Backorders rose one tenth to 0.8 and shipments were barely positive at 0.1. New orders did improve from -1.0 to +0.7.

There may be green shoots in the durable goods orders but they are growing in barren ground given the overall picture.

Next week is going to be very busy economically. This is payroll week, GDP, ISM Manufacturing and a Fed meeting all in one. The potential for volatility is very high and all the major reports are lumped into the last three days of the week.

The ADP Employment on Wednesday is expected to show employment fell from 281,000 new jobs to only 200,000 for July. The Nonfarm Payrolls on Friday are expected to show a decline from 288,000 to 247,000 new jobs. Both numbers are still in the Goldilocks zone but nobody wants to see new jobs decline.

The first look at the GDP for Q2 on Wednesday is expected to show growth of +2.5% compared to a -2.93% decline in Q1. The Q2 number is also going to be very volatile. Numerous companies have blamed weak earnings on weather in Q2 so there is the potential for a weaker than expected number. Weak retail spending and a slowing housing market could also have pushed it lower.

The first of the three estimates for GDP is normally the highest. As late data for the quarter becomes available the second revision which we will get next month is normally lower. The third report in September can go either way.

The ISM Manufacturing Index on Friday is expected to show a minor increase from the 55.3 in June so any decline there will be a surprise.

The FOMC meeting is not expected to be a market mover but anything is always possible. The data has been mild enough they are not likely to change course on the QE taper. Only three months remain with Yellen saying it will likely end in October. There is no press conference after this meeting so the announcement at 2:PM Wednesday is the only hurdle.

Earnings were driving the market all week and Friday was no different. The semiconductor sector was hard hit. On Friday Silicon Labs (SLAB) reported earnings of 58 cents that beat estimates of 46 cents. Revenue rose +10% to $154.9 million beating estimates of $149 million. However, great earnings still needs great guidance to avoid declines in the market. For the current quarter the company sees revenue in the range of $155 million, under the $156.8 million analysts expected. For earnings they forecast 45-51 cents and that was well below the 54 cent consensus. John Vinh of Pacific Crest Securities said they were buyers on the dip and they thought the company was trying to under promise on their guidance. Shares fell -14% on that weak guidance.

The Semiconductor Index ($SOX) is down -5.3% since Intel reported earnings two weeks ago. The selloff has been brutal and there was no specific reason. There were some earnings misses but most of the reports have been positive.

Texas Instruments (TXN) reported earnings that rose +3.5% to 62 cents compared to estimates for 59 cents. Revenue rose +8% to $3.29 billion and ahead of $3.28 billion estimates. Guidance for Q3 was 71 cents and $3.45 billion and analysts were expecting 68 cents. TXN shares dropped nearly $3 after the news with the biggest decline on Friday.

Arctic Cat (ACAT) did not enjoy the same boost in sales as experienced by Polaris (PII). The company said earnings declined -35% to 35 cents but that still beat estimates of 31 cents. Revenue rose +19% to $143.6 million compared to estimates of $131.8 million. It would appear they had a good quarter despite the decline in profits but the stock was sold with a 6% decline. Arctic Cat was probably too close to the blowout Polaris earnings and investors were hoping for a repeat.

On the positive side Lear Corp (LEA) reported earnings of $2.12 that beat estimates for $1.97. Revenue rose +11% to $4.59 billion and also ahead of estimates for $4.44 billion. The auto parts manufacturer said auto sales in China rose +12% and that accounts for 11% of Lear's revenue. The company raised revenue guidance to $627 million, up from $597 million. Analysts were looking for $625 million. They also raised revenue guidance ahead of consensus. Shares rose +3.3%.

Stanley Black & Decker (SWK) reported earnings of $1.43, an increase of 17.2%, compared to estimates of $1.37. Revenue of $2.885 billion rose +1% but missed the estimates of $2.939 billion. However, they raised full year guidance from $5.35-$5.50 to $5.50-$5.60. The hike in guidance overcame the shortfall in revenue and shares rose sharply by nearly 7%.

The Nasdaq decline would have been a lot worse if it were not for Baidu (BIDU). Profits rose +35% to $571.1 million and revenue rose +58.5% to $1.9 billion. Shares of BIDU rose +11% or $22 and a new high. This offset some of the decline in Amazon.

Amazon declined despite a +23% increase in revenue. The company said expenses rose +24% as the company continues to build out monster distribution centers, phone production and marketing plus numerous other improvements in services or new services being added.

Once Amazon ends the empire building they should be able to turn on profits at will because they are building millions of satisfied customers that are shifting to an Amazon lifestyle by ordering everything online.

The Amazon Fire phone finally went on sale on Friday.

Pandora (P) declined -10% after reporting the number of active listeners rose +7.5% to 76.4 million. That missed the 76.6 million estimate by Pacific Crest Securities and 77 million forecast by RBC Capital Markets. Shares fell -10% and the most ever in a single day. Other analysts were quick to call this a buying opportunity because the majority believe Pandora will eventually be acquired by somebody like Google. With a market cap of $5 billion they are a pocket change acquisition for the big players.

The earnings cycle continues unabated next week with a few high profile names. This is energy, healthcare and pharmaceuticals week. Twitter and LinkedIn also report but I would not expect a repeat of the Facebook performance. Herbalife reports on Monday and that will be interesting after the failed attack by Ackman last week. UPS reports on Tuesday and they will be another read on the economy because of package volume comments.

Zillow (Z) is about to become a monopoly in the online real estate market. It is rumored Zillow maybe preparing a $2 billion bid to acquire Trulia (TRLA). Zillow is already the largest U.S. real estate website and taking over Trulia would make competition even tougher. Together the two sites had more than 85 million unique visitors in June and accounted for 89% of all traffic to the 15 most used real estate websites tracked by ComScore.

Zillow bought StreetEasy.com for $50 million in 2013 and HotPads.com for $16 million in 2012. Trulia expects a 70% increase in revenue in 2014 to about $253 million. Zillow's revenue was expected to grow 58% to $311 million. Zillow partnered with Yahoo Homes and had 53.8 million unique visitors in June compared to Trulia's 31.6 million. Move Inc (MOVE) had 23.8 million. MOVE is the parent of Realtor.com. Real estate firms spend about $28 billion a year on advertising so these companies have just scratched the surface in terms of revenue available.

Earnings for Q2 have come in better than expected. So far 230 S&P companies have reported. Earnings growth has risen to 8.3% and well over the initial expectations for the quarter and the lowered revisions from several weeks ago. The long term average is 9% earnings growth and we could actually hit that average before the quarter is over. More than 69% of companies have beaten earnings estimates and 63% have beaten or met estimates on revenue. However, 37% of companies have missed on revenue. Even with those misses revenue growth is about +4% for the quarter and the long term average is only +6%.

Even with earnings better than expected they were not able to hold up the market. Equities declined on Friday for multiple reasons. The first was reactions to lowered guidance from multiple companies. Second was news from Ukraine that Russia was shelling Ukraine positions from across the border and U.S. claims that Russia was sending heavy caliber long range multiple launch rocket launchers and other heavy weapons. The third reason was the belief the EU and U.S. were going to launch some heavy sanctions on Monday.

Lastly there was a call by Goldman to cut equities to neutral for the next three months. Goldman believes the selloff in the bond market and the buying in the treasury market could lead to a selloff in equities over the next three months. They said the global acceleration in economic growth is "largely behind us and geopolitical risks are elevated." They "also expect the general pace of returns to slow compared to what we have seen in the last couple years." Long term, 12 months or more, Goldman is still bullish equities "by a wide margin."

The corporate bond market has sold off hard over the last three weeks and Goldman is worried the sharp rise in rates will harm corporate profits or at least the outlook for earnings.

Meanwhile the yield on the 30-year treasury has fallen to a 13 month low as people run to the safety of treasuries. I believe some of this is overseas money looking for a safe haven.

The following chart is a comparison of the High Yield ETF (HYG) in red and the S&P in black. They are very highly correlated as shown in the bottom panel. When the HYG corrects the S&P does as well. Note the top right crossover of the HYG. That is the first time since 2009 the HYG moved below the S&P.

To summarize they expect the market to decline over the next three months and they recommend buying the dip.

Lipper said equity funds saw outflows of $8.6 billion in the last week so quite a few investors are already heading to the sidelines.

The S&P closed at a new high on Wednesday and Thursday with closes over 1,987 but fell back to 1,978 at the close on Friday. We can't derive much in the way of a market change from one day of declines, especially on a Friday with geopolitical news swirling. The Amazon and Visa declines set the tone for the market early and the market swoon could have been just a normal bout of profit taking ahead of the weekend.

Volume was low at 5.0 billion shares as it should have been on a summer Friday. There were twice as many decliners at 4,676 as advancers at 2,254 in the broader market but it was 3:1 in favor of decliners on the S&P at 347:117. On the Nasdaq it was 2:1 decliners over advancers.

The S&P has seen 230 companies report and post earnings depression (PED) is a very real event. With another 140 S&P companies reporting next week that PED is going to worsen by the weekend. Even if companies beat on earnings there is a tendency for the earnings spike to fade as traders take profits and move to a new stock that has not yet reported.

With multiple analysts and firms coming out last week with a market weakness call there will probably be some reluctance on the part of investors to put their recent profits back into the market until summer is over. The heavy economic calendar next week is also a risk investors should consider.

Goldman was the big market call on Friday with David Kostin, Kathy Matsui and Peter Oppenheimer heading a group of 11 strategists predicting equity market weakness over the next three months. Kostin still has a 2,050 year end target. Jeffery Saut of Raymond James warned of an impending 10-12% selloff in the prior week.

I believe the combination of PED, economics, geopolitical issues and the summer doldrums will plague us for the month of August. While the broader market may weaken there will still be pockets of strength where investors are taking advantage of any dips to pick up bargains. The majority of fund managers would welcome a short decline to add to or start new positions. One man's trash is another man's treasure. As investors take profits others will likely be ready to step in and pick up those cast offs. I just expect it to take more than the short 3-5 day dips we have seen in the past. I would not be too eager to rush in on the first sign of weakness.

Current support on the S&P is 1950-1960 followed by 1930. The 50-day average is 1946 and the 100 day is 1906 with the 200-day at 1851. It is entirely possible we could see the 50-day tested over the next couple of weeks.

The Dow fell back to close under 17,000 and right on short term uptrend support. As long as this uptrend holds we could see new highs ahead. However, the Dow has traded in a narrow range since the short squeeze on the 14th and last week was actually a lower high. It would appear that the Dow is on the verge of breaking that uptrend.

Another problem with the Dow Industrials is that the Industrials ETF (XLI) is suddenly diverging from the S&P. Note in the top right of the chart the blue line (XLI) has broken below the S&P and could be signaling the Dow is about to follow the industrials lower. Obviously you can tell from the chart the industrials can underperform the S&P for long periods of time but the correlation tightened in late 2013 and a divergence now could be producing a market timing signal.

In the daily chart for the Dow the longer term rising uptrend support was pierced on Friday. While that one day is not a significant event ANY further decline to the 50-day at 16,847 or below would be a major warning. The Dow has support at just about every 100 point increment down to 16,600 but the uptrend really breaks down with a decline under 16,720.

The most bullish index remains the Nasdaq 100 ($NDX) with only a 0.45% decline of -18 points on Friday. Since Amazon was the majority of that decline the rest of the big cap techs were holding their own. The NDX closed right at the high for the day not counting the opening print. That shows investors were nibbling on the dip even on a Friday.

The Nasdaq Composite failed to make a new closing high by -12 points. The decline on Friday was not dramatic with only a -22 point loss. As long as it holds above the 4,344-4,350 level the rebound has the potential to move higher. A decline under that level would bring technical selling and a potential decline back to 4,050. Nothing is pointing to that possibility today but the lower high from last week is still a work in progress. If it appears to roll over then traders will probably become a lot more cautious.

Resistance is the recent high at 4,485 and support 4,344-4,350.

Last but definitely not least is the Russell 2000. The index has significantly underperformed its big cap brothers and closed only 13 points above its recent low. The Russell is diverging from all the other indexes and the four day rebound was almost completely erased by Friday's losses.

The Russell typically leads both rallies and declines so any further drop on the Russell is going to be a problem. Heading into the summer doldrums with 37% of companies missing on revenue and even more lowering guidance it could be a challenge for small cap investors.

Any decline below the prior week's low of 1,133 would setup a potential decline to 1,096.

I am starting to worry we may be coming to the end of the buy the dip trend. This is summer and the indexes are struggling at the highs. Once the earnings excitement fades we could be in for a slow, choppy decline into August. The next two months are typically the worst two of the year for the markets and while a rally is always possible we need to be on alert for an alternate reality. Markets don't go up forever and it has been more than two years since a 10% correction. Tiptoe lightly through the coming minefield. Reduce your long positions to only those with the best relative strength. We don't want to run from the market but simply manage our risk in case a decline does appear.

Random Thoughts

Late Saturday the news channels are showing video of artillery rockets being fired from inside Russia across the border into the Ukraine military positions. This is blatant use of force against another sovereign nation and this should bring about some significant sanctions on Monday. The market may not react well to those headlines. Putin refuses to acknowledge any involvement in the MH17 shoot down despite video of the SAM-11 weapons systems leaving the area and driving back across the Russian border. Putin appears to be immune to peer pressure and is going to pursue his goals whatever the cost. Eventually somebody in the EU will decide they have had enough and ratchet up the sanctions to find Putin's pain threshold and he will react accordingly by stepping up his attacks, both military and economic.

Last week he cancelled importation of milk from Ukraine because it was "unsanitary." On Friday the government told McDonalds they could no longer sell certain menu items because the nutrition contents on the menu, like calories, fat, sugar, etc were incorrectly labeled and were illegal. McDonalds said the content descriptions were approved in advance by Russia.

Putin has a habit of bring government regulations into play whenever he wants to takeover businesses or run companies out of the country. He has done it to several oil companies by claiming they failed to follow the EPA rules and their operating license was revoked. They are forced to leave and Russian takes over their operations. There is no rule of law in Russia. There is only rule by Putin, an ex KGB officer. This problem with Russia and the Ukraine is likely to worsen before it gets better.

To make this worse the Ukrainian government has collapsed. The UDAR and Svoboda parties said they were leaving the coalition government and would seek an immediate parliamentary election. Under the constitution the government has 30 days to form a new coalition or call early elections. Prime Minister Arseniy Yatsenyuk then resigned to further complicate the problem. With Russia chewing up the landscape and citizens pleading for a resolution, those in power are finding it no longer the fun job it once was.

Israel unanimously rejected all of Secretary Kerry's truce proposals over the weekend. Hamas is still firing rockets into Israel with more than 2,000 fired in the last three weeks. Clearly Hamas does not want a cease fire or they would quit firing the rockets. Israel said it is going to widen its incursion into Gaza until they find all the rockets and launchers. This battle is starting to take on a wider significance and it may eventually impact the global equity markets. The Palestinian death toll is now over 700.

Initial jobless claims fell to 284,000 and well below estimates for 307,000 last week. That is the lowest level since February 2006. The four week average declined to 302,000 and the lowest since May 2007. The average smoothes out weekly fluctuations due to vacations, auto plant shutdowns for restructuring for new models, etc. Analysts are now beginning to worry that the Fed may be underestimating the job market and they could be caught off guard by a sudden surge in hiring. One analyst said an unemployment number below 6% next week could really shake up the FOMC and possibly cause them to act out of character when deciding what to do with QE. The last time the jobless claims numbers were this low the Fed funds rate was 4.5%. Today the two-year note yields 0.49%. There is a huge disconnect in progress.

Don't forget this chart. We are three months away from the end of QE according to Yellen. The Fed may not be removing the punchbowl just yet but participants better get ready for the mother of all hangover headaches.

Greenspan warned last week about "false dawns" and the looming Fed exit from the stimulus market. Greenspan, now 88, was head of the Fed for 18 years. Now he is warning there may be trouble ahead. He said bubbles can't be stopped without a "crunch." He is also peddling his new book. Do you think his high profile headlines could be related? Trouble Ahead Article

Here is an interesting article pointing out all the various analysts predicting a market crash in 2016 and there are quite a few. Consensus Building for 2016 Crash

Last week the SEC approved a rule to force money funds to switch to a floating net asset value rather than the $1 in use today. The floating NAV means shares you bought for $1 could be redeemed later for something less than $1. If the NAV went down to 79 cents then you would lose 21 cents for every dollar you invested. The SEC also approved "gates" to prevent investors from withdrawing funds in a time of economic crisis. If you want your money back you have to wait until the crisis is over. Oh, by the way the NAV at that time could be significantly lower than $1 or whatever you paid to enter the fund. Lastly, they also opened the door for funds to charge a fee to withdraw your money.

To summarize, assume you have money in a fund today at a $1 for $1 entry price. A major bank announces a problem similar to Lehman. Suddenly the financial system is recoiling from the thought of another financial crisis. The money funds slam the gates shut to prevent hasty withdrawals. Twelve to 18 months later they open the gates for limited withdrawals at 75 cents per share and a 10% withdrawal fee. Considering the trillions invested in money funds this would be an economic catastrophe.

If the financial system is so sound today why is the SEC passing such draconian rules? What do they know that we don't? Do you have money in a money market account today? The pilots of our financial system are putting on parachutes while the stewardesses are telling us everything is fine.

Beware of a weaker than expected Q2-GDP on Wednesday. The anemic Durable Goods Orders and weakness in purchases of automobiles, homes, building materials, food, gasoline and retail sales in general may bite us in the backside when the GDP is announced. Retail sales for June were $438.47 billion without seasonal adjustments. That represents a -5.59% decline from May. However, once the numbers were "adjusted for seasonality" retail sales showed an increase of +0.25%. That is your government watchdogs at work. However, Walmart and other large retailers have not shown any improvement in retails sales but actually showed declines in retail sales. Apparently declines in government reports are not allowed. We have suddenly become China where the reports are constructed by the politicians rather than the accountants.

This page will definitely get your attention. The Business Insider compiled a list of the most important charts in the world from dozens of analysts, economists, strategists and portfolio managers. There is some really good data here. The Most Import Charts in the World

Argentina is about a week away from its second default in 13 years. Creditors claim Argentina will no longer communicate with them despite not having made the required payments. Argentina said it is not in default because it has not said it was in default. Apparently until you claim a default the lack of payments is immaterial according to Argentina. To that end Argentina has made it clear it will formally default in early August.

John Carlin, assistant attorney general for national security in the Justice Dept said "we are in a pre-9/11 moment, in some respects, for cyber attacks." He said it is clear because they said it." Al Qaeda leader Ayman al Zawahin recent issued a videotape statement indicating the group is planning major cyber attacks against U.S. infrastructure such as electrical grids or financial networks. Terrorists, nation states and sophisticated criminal groups "have the capability now to cause significant damage" through cyber attacks. He pointed to the example of 30,000 computers being damaged at Saudi Aramco. Those computers controlled much of Saudi Arabia's energy infrastructure. In "Game Over Zeus" cyber criminals used a botnet, a network of hundreds of thousands of hijacked computers, to steal U.S. corporate data and encrypt the information then extort payments from the companies that owned the data in order to release it back to them. Link to larger article

The AAII Investor Sentiment is now showing fewer bulls at 29.6% than bears at 29.9% and the lowest weekly sentiment reading since May 8th. This happened while the S&P was making new highs on Wednesday and Thursday. Apparently investors trapped in 2000 and 2008 are not going to let it happen to them again and they are running scared.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"There have been three great inventions since the beginning of time: Fire, the wheel, and central banking."

Will Rogers


New Plays

Falling On Guidance

by James Brown

Click here to email James Brown


Cepheid - CPHD - close: 39.47 change: -1.08

Stop Loss: 41.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
CPHD is in the technology sector. If you look deeper the company operates in the scientific and technical instruments industry. According to the company's website, "Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer."

CPHD, like most of the U.S. stock market, had a great 2013. Unfortunately the rally peaked in February-March 2014. This stock set its all-time highs in the $55-56 zone. Market watchers already know that momentum and high-growth names were crushed during the March-April market pullback. CPHD was no exception. The stock corrected from $55 to $40. It looked like CPHD was on the path to recovery but then the stock collapsed again in the last two weeks.

The problem is CPHD's earnings. The company reported earnings on July 17th. Their adjusted results for the second quarter of 2014 was a loss of 10 cents a share. That was better than Wall Street's estimate for a loss of 13 cents a share. CPHD delivered pretty solid revenue growth. Sales in the second quarter surged +21.4% to $116.5 million. That came in better than analysts were expecting. Yet CPHD's net results were down -40% from a year ago.

Listening to the company's management paints an optimistic outlook. CPHD's CEO John Bishop said they sold a record-setting 1,084 of their GeneXpert systems last quarter. That's more than all of 2012. Gross margins improved as well with margins rising from 45% to 49%. So why did the stock fall?

Investors sold the stock on disappointing guidance. CPHD expects 2014 revenues in the 4452-461 million zone. That's relatively close to Wall Street's $459 million estimate. Yet CPHD is forecasting EPS of 10 cents to 13 cents. That is significantly lower than analysts' estimates of 20 cents. You can see the reaction in CPHD stock with the big drop on July 18th.

The post-earnings sell-off continues and now CPHD is breaking down under significant support at the $40.00 level. The next stop could be the $36-35 area or lower. Currently the point & figure chart is bearish and forecasting at $29.00 target.

I would consider this a more aggressive trade. The latest data listed short interest at 16.8% of the 68.9 million share float.

Friday's low was $39.26. We're suggesting a trigger to open bearish positions at $39.00.

Trigger @ $39.20

- Suggested Positions -

Short CPHD stock @ $39.20

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

Buy the SEP $40 PUT (CPHD140920P40) current ask $2.40

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

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Rally Stumbles Again

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market saw its rally stumble again thanks to some disappointing earnings and geopolitical risks.

Current Portfolio:

BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.43 change: +0.39

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: +0.2%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: see below

07/26/14: Shares of HPQ were bucking the market's down trend on Friday. Shares bounced off short-term technical support at their simple 10-dma and rallied to a +1.1% gain. This is a new multi-year high for the stock. HPQ is up +26.6% year to date. Friday's move looks like a new bullish entry point.

Earlier Comments: July 22, 2014:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

- Suggested Positions -

Long HPQ stock @ $35.35

- or -

Long Sep $35 call (HPQ140920C35) entry $1.49*

07/23/14 triggered @ 35.35
*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: 36.65 change: -0.16

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: -0.1%

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

07/26/14: It was a relatively flat week for the Japanese NIKKEI index, which managed to eke out a +0.5% gain on the week thanks to a late afternoon rally on Friday. It was a different story for shares of SFTBY, which lost -3.7% for the week.

There was no news to explain the relative weakness in SFTBY. It looks like the stock ricocheted off the top of its $36.00-38.50 trading range. Now it's approaching the bottom of the range and if this trend continues the stock should bounce soon.

I would hesitate to open new positions at this time.

Alibaba IPO -- Previously there was hope that Alibaba might IPO in July. Then there was speculation that they might IPO on August 8th since the number eight is a lucky number in China. Now the most recent update suggests that Alibaba will not IPO until September.

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

07/24/14 new stop @ 35.75
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

DSW Inc. - DSW - close: 27.16 change: -0.41

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: - 1.0%

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

07/26/14: Friday was a good day for DSW bears. The stock underperformed the broader market with a -1.48% decline. Better than expected results from companies like Under Armor (UA) and Deckers (DECK) did not translate into gains for DSW. UA makes shoes in addition to athletic apparel and DECK manufacturers and markets shoes.

Looking at DSW's performance, the mid-July bounce appears to be rolling over. I would use Friday's loss as a new bearish entry point to open positions.

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

07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike


Five Below, Inc. - FIVE - close: 35.41 change: -0.38

Stop Loss: 36.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
Entry on July -- at $---.--
Average Daily Volume = 1.0 million
Listed on July 21, 2014
New Positions: Yes, see below

07/26/14: Shares of FIVE have failed to build on the July 22nd, upgrade-inspired rally. Instead the stock has stalled and that might suggest the path of least resistance remains lower. I suspect we will see FIVE retest support near $34.00 soon. We are currently on the sidelines waiting for a breakdown. Our suggested entry point for bearish positions is $33.75.

Earlier Comments: July 21, 2014:
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across a number of our category worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal (which we refer to as "Now"). We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management's experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to teens and pre-teens, as well as customers across a variety of age groups beyond our target demographic (source: company website).

FIVE has been suffering from a multi-year trend of lower same-store sales growth. The first quarter of 2014 broke that down trend with same-store sales growth of +6.2%. Management had previously guided in the 3-4% range and analysts were only expecting +3.8%. Meanwhile total sales surged +31.8% to $126 million, beating estimates of $121.9 million. The overall sales growth was a combination of adding new stores and the better same-store sales. Unfortunately FIVE guided lower in its Q1 report (June 4th). Management also guided for full-year 2014 same-store sales growth of just 4%.

FIVE opened 19 new stores in the first quarter bumping its total to 323 stores. Their long-term plan is 2,000 stores. That might be a warning signal. The FIVE co-founders have tried retail before with the Zany Brainy chain that sold toys and games. Zany Brainy eventually went bankrupt and one of the reasons blamed for the failure was growing too fast.

There have been plenty of bears claiming that shares of FIVE are too rich. The company's P/E is about 55. That is pretty expensive but growth names tend to carry high valuations. They are seeing strong revenue growth. That growth could face tough competition.

Wal-Mart (WMT) unveiled plans to start building smaller "neighborhood" stores in an effort to win back some market share. WMT plans to boost these smaller stores from 346 in 2014 to over 500 in 2015. Given WMT's strength in this industry they could squeeze FIVE's margins.

Shares of FIVE has been underperforming the major indices. The stock peaked near $55 a share back in November 2013. Since then investors have been selling the rallies and FIVE now has a bearish trend of lower highs. Today shares of FIVE are hovering above major support near $34.00. A breakdown could launch the next leg lower. The Point & Figure chart is currently bearish and forecasting at $28 target.

The February 2014 low was $33.94. We are suggesting a trigger to open bearish positions at $33.75.

Trigger @ $33.75

- Suggested Positions -

short FIVE stock @ (trigger)

- or -

buy the Nov $30 PUT (FIVE141122P30)

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


Fiesta Restaurant Group Inc. - FRGI - close: 44.47 change: +0.03

Stop Loss: 45.10
Target(s): To Be Determined
Current Gain/Loss: -1.6%

Entry on July 21 at $43.75
Listed on July 19, 2014
Time Frame: Exit PRIOR to earnings on Aug 5th
Average Daily Volume = 271 thousand
New Positions: see below

07/26/14: It was a frustrating week if you were bearish on FRGI. Losses Monday and Tuesday were erased with a nearly equal-sized bounce on Wednesday and Thursday. After breaking down below support near $44.00 and its 200-dma FRGI is now back above these levels.

I am not suggesting new bearish positions given this rebound. The simple 20-dma, currently at $44.86, should be resistance. Our stop loss is at $45.10.

Earlier Comments: July 19, 2014:
Fiesta Restaurant Group, Inc. (FRGI) specializes in fast-casual, ethnic restaurant brands. They currently own, operate, and franchise the Taco Cabana and Pollo Tropoical brands with more than 300 locations across the southern United States, the Caribbean, Central and South America. Most of their stores are located in Florida.

FRGI was the best performing restaurant stock last year with a gain of 240%. Yet shares have been seriously underperforming this year with a -15.5% decline and that's after the eight-week rally from its May 2014 lows.

The company is growing. They're expected to boost their store growth by 17 percent this year. Their latest earnings report was mixed. FRGI delivered a profit of 33 cents per share when Wall Street was looking for 30 cents. Revenues were up +8.8% year over year to $145.4 million. That's nice growth but analysts were expecting revenues of $147.5 million.

Same-store sales and traffic were up +6.3% and 4.6%, respectively at the Pollo Tropical brand. Yet the Taco Cabana brand only saw +0.8% sales growth and traffic was negative.

The U.S. restaurant industry saw first quarter traffic decline. It looks like the trend continues in the second quarter. Industry wide traffic declined -1.7% in June. That's the 19th consecutive month of negative traffic. Now FRGI does seem to be outperforming its peers in the restaurant industry but it does seem to be swimming up stream against a cautious consumer spending environment.

The rally off FRGI's May lows appears to be breaking down. FRGI has been consolidating sideways the last few days and looks poised to break support at its simple 200-dma soon.

We think it will break down. I would consider this more of a short-term technical trade than a bearish call on FRGI's fundamental business. The $35-37 area looks like it could be significant support. We'd like to try and capture the drop.

Tonight I'm suggesting a trigger to open bearish positions at $43.75 with a stop loss at $45.75.

FRGI is scheduled to report earnings on August 5th and we do not want to hold over the announcement.

Current Position: short FRGI stock @ $43.75

07/24/14 new stop @ 45.10
07/21/14 triggered @ 43.75