Option Investor

Daily Newsletter, Thursday, 7/31/2014

Table of Contents

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

Market Wrap

The Perfect Storm

by Thomas Hughes

Click here to email Thomas Hughes
Inflationary worry and international hot spots create a perfect storm, sending the indices flying for cover.


The international indices fell in overnight trading for a variety of reasons that carried into the US session. Profit taking in Asia led to a decline in European stocks that was amplified by speculation over the impact of new and increased sanctions against Russia. The downward bias carried into the US markets, pushing the futures trade down in the pre opening session. Prior to the release of today's data the SPX was indicated down about 8 or 9 points with the decline increasing post release. Today's pieces of the employment puzzle were not as expected and suggest a dip in economic activity may have occurred in July. This is of course in the face of other more positive data seen throughout the month.

Market Statistics

So what happened? Now that the Fed meeting is over the market was able to turn its attention to other matters. Maybe first and foremost is the ongoing situation in the Ukraine. New sanctions are going into effect and there is speculation they will lead to global slowdown. On top of that the Ukrainian PM made some new comments to the effect that Putin was fomenting war and trying to rewrite the outcome of WWII. After that some weaker than expected inflation data from the EU had the market on edge there and here as it raises concern for deflation in the region. Moving on to our own news some weak earnings and economic data added to concerns the second half may not be as strong as hoped. Other negatives influencing trading include the rising risk of financial meltdown in Portugal as well as a new default by Argentina on its bond debt. The combination of factors resulted in a market that went diving to support.

Economic Calendar

The Economy

First up on the list today was the Challenger, Grey & Christmas report on planned lay offs. The number of lay offs planned in July jumped 49% from last month's long term low. The July number is 46,887 new lay offs, led by Microsoft's announcement of 18,000 job cuts, which alone could account for the gain. This month's lay off's are 25% higher than those planned last July but down a little more than 1% on a year to date basis. So far this year the tech sector leads in job cuts; Hewlett Packard is another company making big cuts this year. Both HP and MSFT are seen as making strategic cuts in order to remain competitive and are not symbolic of the sector or jobs creation as a whole. Within the report one of the analysts is quoted as saying that a “shortage of skilled workers” remains a challenge for the economy.

Initial claims for unemployment rose this week, but not as much as expected. Claims gained 23K from a downwardly revised number to reach 302,000 this week. Last week was revised down by -5,000 for a net gain of 17,000 from last week's report. The consensus expectation for claims was in the range of 310,000. Last week was revised lower to 279,000, a new low. The four week moving average also fell this week, dropping by nearly 4,000 to fall below 300,000 for the first time since April of 2006. On an unadjusted basis claims fell, by -29,839 or -10.4%. The seasonal factors had expected a decline of 17% which could account for the rise in adjusted claims. Looking at the table initial claims have been trending lower since the beginning of the year and are now just off of the lows. This along with other reports that hiring remains steady to strong lead me to believe the NFP tomorrow will still be strong. The ADP number on Wednesday was good, just not as good as hoped which is not unusual for data this year.

Continuing claims also rose this week, by 31,000 to 2.539 million. The previous weeks figure was revised higher by 8,000. The four week moving average of claims fell by -9,000 to a low not seen since early 2007. Continuing claims are also trending lower, today's gain is minute in terms of the decline seen this year and, for now at least, only a blip on the radar. Total claims rose this week as well. The total number of Americans gained by 6,244 to reach 2.618 million. This is up from last week but near the long term low. On a state by state basis increases in claims were led by Kansas with a gain of 867. Decreases in claims were led by NY and PA with declines of -18K and -7K respectively.

The quarterly employment cost index was also released today. The index rose by 0.7% in the 2nd quarter, ahead of the expected 0.5% and the previous quarter's 0.3%. This is the fastest increase in labor costs since the third quarter of 2008. The increase in costs fueled speculation of inflation in the economy. Wages and salaries rose by 0.6% while benefits such as insurance and other items increased by a full 1%. While the increase in costs is a negative in terms of inflation it is a positive in terms of labor market recovery and the consumer. I would like to point out that just about two weeks ago, and I forget exactly who, an analyst on CNBC said the next sign/stage of the recovery will be an increase in wages.

Chicago PMI was a big miss and helped to send the market to the daily low. The number, released at 9:45AM, was a full 10 points below the expectations and last month's reading of 62.6. This is still expansionary but a possible warning sign of economic slow down. The drop was due mainly to declines in production and ordering but, according to those cited in the report, seen as a lull in activity and not the start of a decline. The numbers behind the number also reveal that hiring remains steady in the region, edging higher over last month. This is not the first report to reveal hiring increases this month.

The Oil Index

Oil prices fell today in a move that was hard to predict. A variety of factors including an increase in OPEC supply, high US stockpiles and weaker than expected data overcame news of a major shut down to a mid west refinery and the ongoing geopolitical events that have had oil prices up in recent weeks. WTI had been down about $0.50 in early trading but extended that loss to $0.75, $1.50 and more, settling down by over $2.00 to close just above $98 per barrel.

The Oil Index lost more than one percent, breaking the short term moving average and the support of the previous all time intraday high. The indicators are bearish and point to a possible correction to trend. The index is about 4.75% above my trend line at the current level with shorter term supports before that. Longer term analysis of the indicators still shows there is support for the index so any correction that ensues from here may not be too severe. Further, oil prices are subject to reverse today's declines at the drop of a headline, which could help support index prices. Another factor impacting the Oil Index today is oil sector earnings. Exxon and Conoco Phillips reported today, Chevron reports tomorrow.

Exxon reported earnings that blew away the expectations but nonetheless failed to satisfy the market, at least for today. The company reported adjusted EPS of $2.05, $0.19 above the consensus but it was the production levels that grabbed trader attention. Production in the quarter was down by 5.7% leading to fear future profits would not be as robust and speculation of reserve supply. The stock dropped over 4%, breaking near term support and coming to rest just below the long term 150 day EMA.

The Gold Index

Gold prices fell today, as expected following the GDP and Fed meeting yesterday. The economic data of today, albeit not as strong as expected, is still leading to higher interest rates, and speculation of when those rates will come. The current consensus is starting to move in from mid 2015 to sometime sooner with no real indication given. Today's data, along with the GDP and other fundamental factors, outweighed any flight to safety moves that may have been inspired by the drop in stocks or geopolitical concerns focused on Ukraine, Russia or Argentina. Gold was down about $3 in the early part of the session with that loss extending to more than $13 on an intraday basis with a close near $1285.

The move in gold prices was able to drag the Gold Index back below the short term moving average to what may prove to be a critical level. The index is now sitting just above the 150 day moving average and a potential entry point for longer term traders. The indicators are bearish at this time on the daily with an indication that support along the 150 day EMA could be tested. A break below the 150 day EMA is in line with the underlying trend and could take the index down to support at $95, $90 and $85 in the long term. I see the Gold Index and gold prices closely tied together, if gold continues to decline then I expect the Gold Index to follow.

GoldCorp reported earnings today although most of the major miners report next week. The company reported strong earnings and reversed a loss to share holders experienced in the 2nd quarter of last year. The company reported adjusted earnings per share of $0.22 versus a loss of ($2.38) last year. Shares of the stock opened lower and then traded higher than yesterday's close before falling under today's selling pressure to close near the bottom of the daily range. Earnings this quarter are better than expected but gold prices are down from last quarter and declining, putting third quarter earnings in jeopardy. The stock remains at or near the middle of a longer term trading range with bearish indicators.


The VIX moved sharply higher today. The Volatility Index, which measures the value of options relative to the value of the S&P 500, climbed by nearly 27% in today's session. This is the second spike in the VIX of this magnitude this month, and like the previous one, I expect to see a sharp rebound in it tomorrow. Earlier this month the index spiked by 32% on a very similar bundle of global concerns. The very next day the index fell by roughly 20%, as it has done following each such spike over the past couple of years. The pull back does not always come the very next day, but always within a week, depending on how the fear inducing catalysts play out. The market was faced with a handful of items today that may take a few days to sort through, not to mention the fact that the Ukraine situation is likely to be resolved in the foreseeable future, so volatility may persist.

The Indices

Today's decline in stocks was broad. All 30 Dow components and all 10 S&P sectors traded into the red. The broad market S&P 500 index fell -2%, slightly ahead of the Dow Jones Industrial Average's -1.88%. The S&P began it's fall in the pre market session, driven by a number of factors that to me at least were not as bad as today's sell off was worth. However, the decline that began in the early part of the pre opening session extended into the opening and then throughout the day, with the SPX and other major indices finishing at or just off the daily low. A number of near and short term support levels have been broken so the action tomorrow will be very important.

The index is now sitting on the long term trend line. A trend line that has provided numerous profitable entry points for longer term positions over the past two years. So far, nothing appears to be any different. There is a possibility of a further retest of the trend line, but equally a chance for sharp reversal in the next one to two trading days. A break below the long term trend line could take the index down to the 1900 level in the near term. Regardless of short/long term direction I expect the index will be active along the 1930/1940 level and the trend line tomorrow.

The Dow Industrial's fell by -1.86%, coming to rest just below the previous all time high and the 150 day EMA. The near term looks pretty bearish for the index, both indicators are pointing down and today's action created a pretty nasty black candle. In the longer term the index is approaching the long term moving average and an attractive entry point for longer term traders. Over the past 12 months the 150 day EMA has supported the index four times for an average gain of 500 points each. A break below 16,500 could take the index down to the 16,000 level which is still about 1.5% above the long term trend line. However, there is strong support indicated in the 16,250 range. Until a break occurs beneath support and the long term trend line I remain long term bullish. There is risk that the sell off will continue or a consolidation may form but the trends are still up so I am looking to buy the dips.

The Tech's were today's most hardest hit sector. The Nasdaq composite, tech heavy index that it is, fell by -2.09% in today's session. This index also broke its short term 30 day EMA, coming to rest on the support of previously broken long term high levels. The index is sitting on a potentially strong support level here with indicators consistent with that support. Now, that being said, there is now a risk the index may make a short term reversal if any further declines are made. Price action over the past month has created two peaks of equal height, with current support as a baseline. A drop below this level, with a confirming retest of resistance, would constitute a double top with a target about 150-200 points below the current level. A failure to break, or hold a break on a test of support, is bullish and in line with longer trends.

The Tranports were the least affected of the major indices. The trannies fell only -1.63% today, dropping from the short term moving average and coming to rest at support around 8,140. The indicators are bearish in the near term but remain bullish in the longer term. Unless trader sentiment picks up in the next day or two the index could drift modestly lower along the down trending support line until it meets up with the long term up trend line sometime in the next month. However, the NFP will likely be a catalyst for the market to snap back or test current support levels and could have the market moving sharply before the open.

Today's headlines were not that bad on an individual basis but taken together provide a lot of reason for worry. The thing is, most of them are incredibly short term in nature and could disappear as easily as they have appeared. This could lead to an equally large bounce for the indices which are all currently indicated at longer term support.

Starting at the top of the list Portugal and Argentina are non events in my view as they have very little to do with the US marketplace. Their value as a trading catalyst comes as an aggregate of all headlines leaving them the least likely to impact trading on their own. Take for example two, three?, weeks ago when Portugal most recently came into the news, it caused a sell off but only because it was preceded by weak Chinese data and followed by weaker than expected US data. As for Argentian, this isn't the first time they have defaulted and the current default is tied to bond holders who did not swap their holding when they had the chance.

Next up as catalyst for today's drop is the data and the Fed. The economic data, the Fed and the interest rate debate is a damned if you do, damned if you don't scenario. We want better economic data because it means the economy is growing and recovering. Growth and recovery lead to higher interest rates which are seen as both good and bad for the market. We want a better economy, just not too much better and that is what we have, a slow and steadily growing economy. Today the market seemed to be scared the good data = higher rates and that bad data = bad economy. Now the market need to decide what is worse, a good economy and higher rates or a bad economy.

Russia and the Ukraine are a persistent worry. This is an ongoing risk to the market that is now beginning to show up in the market. Until now we have sit back and watched to see what would happen. What has happened is sanctions, and more sanctions that now may have a global impact on recovery and growth.

My thoughts on the NFP are as follows. I think it is going to be strong, somewhere in the 250K-300K range with the possibilities of more. This is because of a two things. First, every report on the economy I have read or covered in the last month has had positive things to say about job creation, hiring and wages. Second, unemployment claims are trending lower and have made new lows on an initial, continuing and total claim basis this month. The ADP number was not as good as expected but that is not too troublesome, it is still above 200K and firm enough to keep us on the slow and steady track. Also, it is not very accurate as an indicator of the NFP so there could be a large difference. As for the Challenger number, the pick up in jobs cuts is almost completely caused by MSFT and not really an indicator of general labor trends. Plus, everywhere I look there are job openings, maybe not the jobs people want but jobs.

The selling today was not a mad rush to get out the exits. It seemed to me to be more of a domino effect of news events that led to a break of near term technical support that may have led to some profit taking that led to additional breaks of support and more selling. Adding to the downward pressure was a lack of active buying as traders wait and see what the NFP will bring. Even though the long term trends are up and the 2nd quarter GDP supports a broad based recovery, not one centered on housing, the market is still susceptible to near term fluctuations in data and in need of lots of affirmation.

There are other important data points being released tomorrow as well. Unemployment, auto/truck sales, construction spending ISM and Michigan sentiment on all on the list too. The market needs affirmation and may get it tomorrow, or not.

Until then, remember the trend!

Thomas Hughes

New Plays

Traders Selling Everything Today

by James Brown

Click here to email James Brown

Editor's Note:

Traders were in the mood to sell and sell they did. Stocks, gold and silver, crude oil, and bonds were all sold today.

Disappointing earnings results both here in the U.S. and abroad helped spark the sell-off in stocks today.

European markets started the downturn with all of the major European markets posting losses. The German DAX was the worst performer with a -1.94% decline.

Concerns over a global economic slowdown seem to intensify on Thursday. There are also concerns about the U.S. jobs numbers tomorrow. If the jobs numbers is too low then it might suggest the economy is stalling. If the jobs numbers is too high then investors worry the Fed might hike rates faster than anticipated. Yesterday the U.S. reported a much stronger than expected Q2 GDP number but the stock market failed to react positively to it.

Today the S&P 500 and the NASDAQ Composite both fell -2.0%. The small cap Russell 2000 index lost -2.3%. The Dow Jones Industrials plunged -317 points and erased its gains for the year.

Looking at the futures trading for Asian markets it would appear that this wave of selling will continue once Asian markets open tomorrow.

The July jobs report could spark more volatility on Friday morning.

We are not adding any new trades tonight.

In Play Updates and Reviews

Thursday Delivers A Widespread Sell-Off

by James Brown

Click here to email James Brown

Editor's Note:
Stocks were seeing red on Thursday with all ten sectors sinking and the major indices down -2%.

Current Portfolio:

BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.61 change: -0.50

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: +0.7%
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

07/31/14: HPQ was due for a dip after a four-day gain. Today's loss (-1.3%) erased the last two days of the rally. Look for short-term support at the 10-dma (currently $35.32) or the $35.00 level.

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

The Charles Schwab Corp. - SCHW - close: 27.75 change: -0.75

Stop Loss: 26.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 30, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 5.2 million
New Positions: Yes, see below

07/31/14: SCHW erased yesterday's rally as traders rushed to lock in gains today. Watch the 30-dma near $27.45 as potential support. Currently we are on the sidelines with a suggested entry point at $28.75.

Earlier Comments: July 30, 2014:
The S&P 500 index is hovering at record highs and currently up +6.5% this year. Yet trading volumes have fallen. Trading was down in the first quarter this year and slowed again in the second quarter. The drop in trading activity is pressuring brokers like E*Trade and TD Ameritrade. Yet SCHW seems to be having a great year. Instead of focusing on trading activity SCHW has been focused on wealth management services and it's working.

According to SCHW's press release, "The Charles Schwab Corporation is a leading provider of financial services, with more than 325 offices and 9.3 million active brokerage accounts, 1.3 million corporate retirement plan participants, 950,000 banking accounts. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors."

SCHW reported earnings on July 16th and earnings rose +27%. They added $22.7 billion in assets in the second quarter. They're up $351 billion in assets from a year ago. That's a +17% jump from June 2013 and the company ended the second quarter with a record-setting total of $2.40 trillion in client assets. SCHW's quarterly revenues were up +10.5% to $1.48 billion, just enough to beat Wall Street's estimates.

SCHW is not a fast-moving stock but the company is executing on its plan to focus on services instead of trading and it has been a winning formula for them. Today saw SCHW outperform the major indices with a +2.0% gain. This happens to be a multi-year closing high. Tonight we're suggesting a trigger to open bullish positions at $28.75. We're not setting an exit target tonight but our time frame is 9-12 weeks.

Trigger @ $28.75

- Suggested Positions -

buy SCHW stock @ (trigger)

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

Buy the 2015 Jan $30 call (SCHW150117C30)

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

SoftBank Corp. - SFTBY - close: 36.05 change: -0.85

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: -1.8%

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

07/31/14: SFTBY is the majority owner in wireless carrier Sprint (S). They have been working on a merger with T-Mobile for a while now. Unfortunately there may be a new player involved. Iliad, a French mobile carrier, just made an offer for a majority stake in T-Mobile. Investors sent shares of Sprint (and SFTBY) lower on worries there could be a bidding war for T-Mobile.

I am concerned that if the Japanese market sells off on today's drop in the U.S. market that we could see SFTBY gap down tomorrow. Currently our stop loss is at $35.75.

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

Aaron's Inc. - AAN - close: 26.38 change: -1.24

Stop Loss: 28.55
Target(s): To Be Determined
Current Option Gain/Loss: +4.9%
Entry on July 30 at $27.75
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 809 thousand
New Positions: see below

07/31/14: The weakness in shares of AAN accelerated today with the stock plunging -4.4%. Tonight we'll adjust the stop loss down to $28.55.

I would not chase AAN at current levels.

Earlier Comments: July 29, 2014:
Shares of AAN are down -3.7% for the year. Honestly, I'm surprised it's not down a lot more. The company is in the lease-to-own space for residential furniture, consumer electronics, home appliances and more. They have over 2,000 locations in the U.S. and Canada.

Back in February this year AAN reported earnings and guided lower. On April 15th AAN issued a new earnings warning and blamed it on the harsh winter weather. AAN reported earnings just a couple of weeks later and lowered guidance again. AAN issued yet another earnings warning on July 15th. Then when the company reported earnings on July 25th they lowered guidance yet again. With this many warnings I'm surprised investors have not left this stock like rats fleeing a sinking ship.

So why in the world were shares of AAN surging in May and June? Management has been battling with its second largest shareholder for months. In May they moved to declassify the board of directors. This means shareholders can remove all of the board members all at once if they choose to, on an annual basis. Naturally board members who want to keep their job tend to produce more shareholder friendly policies in a situation like this. I suspect this was the driving force behind the May-June rally.

Then the latest round of earnings warnings in July have completely erased all of their gains. Today shares of AAN are sitting near support at the $28.00 mark. The $27.85 level appears to be the level to watch. Tonight we're suggesting a trigger to launch bearish positions at $27.75.

I would consider this more aggressive trade. AAN is down significantly this month and could see another oversold bounce. Just because the path of least resistance is now down doesn't mean AAN can't ricochet higher once in a while.

NOTE: AAN does have options, which might be a way to limit your risk instead of shorting the stock. Unfortunately the option spreads look a bit too wide to actually trade them.

- Suggested Positions -

Short AAN @ $27.75

07/31/14 new stop @ 28.55
07/30/14 triggered @ 27.75

DSW Inc. - DSW - close: 26.59 change: -0.03

Stop Loss: 27.35
Target(s): To Be Determined
Current Gain/Loss: + 1.2%

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

07/31/14: I am urging caution on our DSW trade. The stock market plunged lower on Thursday and yet DSW closed virtually unchanged. Seeing relative strength in our bearish play is not a good sign. Investors might want to tighten their stop loss again. I am not suggesting new 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

07/30/14 new stop @ 27.35
07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike

Cepheid - CPHD - close: 37.64 change: -1.05

Stop Loss: 40.51
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

07/31/14: CPHD underperformed the market today with a -2.7% drop. Shares were down -4.5% at their worst levels of the session. Tonight I am adjusting our stop loss to $40.51.

Earlier Comments: July 26, 2014:
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.

- Suggested Positions -

Short CPHD stock @ $39.20

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

Long SEP $40 PUT (CPHD140920P40) entry $2.35

07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike