Option Investor

Daily Newsletter, Saturday, 8/23/2014

Table of Contents

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

Market Wrap

Where's the Beef?

by Jim Brown

Click here to email Jim Brown

Janet Yellen and Mario Draghi took to the microphone in Jackson Hole but neither created any market moving headlines.

Market Statistics

Janet Yellen could have been named Janet Greenspan or Janet Bernanke for all the good her speech did the market. Yellen, known for her dovish views, appeared to move to the center as she lectured on the state of the labor market. The speech was more like a lecture by a professor where she laid out the case using arguments from all sides and then ending it with a "what do you think" type of close.

Analysts did not want to be given the opposing positions and then forced to draw their own conclusions. They wanted Yellen to tell them where she stood so they could then formulate an investment thesis based on her position.

Spending 45 minutes talking around the subject without really saying anything suggests she has finally grown accustomed to the role of Fed chairman and she was channeling her predecessors Greenspan and Bernanke.

Art Cashin said it best. He called it "A speech fit for a medieval philosopher. We got everything but angels dancing on the head of a pin." Full text here.

Yellen continued to claim the job market has "yet to fully recover." Although there has been "considerable progress" there is still "considerable slack" in the labor markets. She said the unemployment rate may not be telling the right story and the Fed should consider the 35 year low in the labor force participation rate and the problem of forced part time employment along with the pace of hires and quits. She said the Fed would take a more holistic view of the labor market in determining the pace of the recovery.

One thing Yellen did do was try to explain in Fedspeak that the current method of calculating the unemployment rate was producing incorrect results. Of course everyone reading these pages for very long already knows that but the common folk are oblivious. She tried to shed some light on the reality of the broader U6 unemployment rate, currently 12.6%, but explaining it in Fedspeak is the equivalent of talking in Latin. I give her credit for trying but her education and position got in the way.

The new casino SLS Las Vegas opens this weekend and it is a prime example of Janet Yellen's unemployment quandary. The 1,600 room hotel/casino hired 3,400 people to run the business and they received 117,000 applications. The City Center development hired 12,500 people to open a couple years ago and they had 62,000 applications. There are far too many people looking for jobs than there are jobs.

Yellen said if progress in the labor market "continues to be more rapid than anticipated" a rate hike could come sooner than currently expected and further increases could be more rapid. Conversely, "if the Fed's goals of full employment and stable prices remain elusive, policy would be more accommodative." That is actually a more balanced assessment than she gave in prior quarters and suggests a move to the middle in her policy stance.

Her comments did not change the consensus view of the first rate hike in late Q1 or early Q2. However, she did not appear as dovish as in the past and that could suggest she is moving closer to a neutral position on future hikes. Since she was the most dovish person on the FOMC that means the overall view of the committee may be moving to rate hikes sooner rather than later.

In any case nobody expects hikes before Q1 with the last Fed meeting in the quarter on March 18th the first date likely. It will probably be done at an end of quarter meeting that is followed by the Chairman's normal press conference. If nothing happens at that meeting the next possibility would be June 17th. Nothing prevents them from using a non-quarter end meeting to raise rates but they will want to use the normal press conference to answer the hundreds of questions that will be raised by the decision and try to quell the worries the Fed is going to ramp up quickly. This will tame the market response rather than just drop the bomb in a post meeting announcement with no explanation.

The low key presentation on Friday did not give the market any reason to rally or to sell off. It was a confusing factor rather than an illuminating speech. Volume was very low and volatility was nonexistent.

There were no economic reports of note to move the market on Friday. The Risk of Recession declined from 15% to 12%. Yawn! The ECRI Weekly Leading Index was flat at 134.3 and Household credit rose +1.6% in July after a +1.3% rise in June. All of this data was ignored.

The economic calendar for next week starts the normal monthly series of regional Fed activity reports with the Richmond Fed Survey the first on the calendar. The national manufacturing ISM is on Friday.

The next revision of the Q2 GDP on Thursday will be closely watched by the market. The Q1 GDP showed a drop of -2.93% and the last release of the Q2 GDP showed +3.95% growth. Obviously if you average those two you get +0.51% growth year to date. However, the consensus estimate for this revision has fallen to +2.6% and averaging results in -0.33% contraction for the first half. Analysts were all bubbly after the prior 3.95% print saying continued growth at 3% or better for the rest of the year would still be on trend for a slowly growing 2% economy BUT a sharp drop in the Q2 estimates will derail those hopes. This is going to be a pothole for the market to dodge on Thursday.

The market will be closed next Monday for Labor Day and volume is going to be extremely light all week.

Mario Draghi, also speaking at the Fed's Jackson Hole conference begged central bankers and politicians to play their part in safeguarding the EU recovery. Draghi has pledged to "do whatever it takes" including QE but so far he has failed to follow through on his promise. The EU recovered from recession a year ago but is on the verge of falling back into another one. Inflation is the weakest in five years and unemployment remains near a record high. The sanctions against Russia are going to be a major drag, which will put even more pressure on Draghi to act. Eventually the markets are going to call Draghi's bluff if he does not deliver on his promise.

If it is Friday it must mean Russia is in the news. The markets opened lower after the Russian aid convoy streamed into the Ukraine without permission and without Red Cross monitors. Putin finally gave up trying to find a way around the Red Cross inspection and/or offloading onto Ukrainian trucks and instead just plowed across the border towards the rebel held area of Luhansk. Putin strongly warned the Ukraine not to interfere with their transit through the Ukraine.

Ukrainian officials did not attack the trucks for multiple reasons. Attacking trucks loaded with food and medical supplies would have been a public relations disaster. Ukraine still believes the trucks also contain military supplies but they could not be stopped and verified without incurring Putins' wrath. The government called it an invasion and a "flagrant violation of Ukraine's sovereignty" and warned Russia there would be additional sanctions if the convoy was not immediately removed. I am sure Putin was laughing about that threat.

Since the convoy of aid went directly to rebel controlled areas it was impossible to determine if other "non aid" material was on the trucks but you can bet there was an ulterior motive. Putin did not hastily repaint 280 army trucks white and rush them to the border with stops at four military bases without some ulterior motive.

NATO secretary General Anders Fogh Rasmussen said the alliance has observed an alarming buildup of Russian ground and air forces on the border with Ukraine. They also monitored transfers of large quantities of advanced weapons including tanks, armored personnel carriers, artillery and anti-aircraft missile systems to the rebels in the Ukraine. The U.S. administration said it was "very concerned" about the buildup and violation of Ukrainian sovereignty and if Russia did not withdraw there would be additional "costs." I bet Putin got a good laugh out of that wimpy warning. Putin is playing chess while the rest of the world is playing checkers.

As has been the case the prior two weeks the Russian headlines had the most impact on the markets.

In stock news Keurig Green Mountain (GMCR) scored another win on a deal with Kraft to make their coffee brands available for the Keurig brewers. This includes Maxwell House, Yuban, Gevalia and McDonald's McCafe brands. They already have deals with Starbucks, Dunkin Brands, Peet's Coffee, Nestle's Coffee-mate, Costco's Kirkland Signature, Target's Archer Farms and many others. Kraft had been a hold out and the addition of their brands is a real plus for GMCR. The company recently scored a partnership with Coke (KO) for its carbonated beverage dispenser due out in the next couple months.

With nearly 10% of GMCR shares sold short the news caused a +13% spike in the stock.

Gamestop (GME) reported earnings of 22 cents that beat estimates of 18 cents. Revenue rose +25% to $1.73 billion. Same store sales rose +21.9%. They credited the strong sales to demand for new Xbox One and Playstation 4 game consoles. Hardware sales more than doubled and sales in the mobile and consumer electronics segment were up +85%. The company forecast earnings for the current quarter between 58-64 cents compared to analyst estimates for 58 cents. Sterne Agee said 2015 is likely to be a breakout year for the industry with potential double digit growth in new software. They recommended GME because of their lead on these next generation positions. Shares of GME had been depressed since peaking in November.

Discount retailer Ross Stores (ROST) reported earnings of $1.14 compared to forecasts of $1.05-$1.09 and analyst estimates of $1.09. The gains came from aggressive cost controls and better than expected gross margins. Net sales rose +7% to $2.729 billion. Same store sales rose +2% compared to +4% in the year ago quarter. Margins improved 70 basis points to 14.3%. They opened 53 new Ross outlets and 14 discount stores. They plan on adding 95 new stores for the full year with 28 in Q3.

The Gap Inc (GPS) reported earnings of 70 cents compared to estimates of 69 cents. Revenue income rose +9.6% to $332 million and revenue rose +2.9% to $3.98 billion. Same store sales were flat system wide but the Old Navy chain rose +4% and Gap branded stores declined -5%. Online sales rose +11%. The Gap is opening its first Gap store in India in 2015 with pans to have 40 stores in the country.

Intuit (INTU) reported a loss of 14 cents, 9 cents more than the year ago quarter. The predicted a Q3 loss of 36 cents compared to -4 cents in Q3-2013. The company said the losses came from a continuing restructuring effort, acquisitions and the effort to expand its tax services business in India. Intuit shares declined on the news as shareholders are getting tired of the never ending restructuring losses.

Foot Locker (FL) posted earnings that rose +39% to 64 cents. This beat estimates of 54 cents. The company is improving performance by closing underperforming stores, revamping store layouts and merchandising and adding more running shoes, which are the best part of the athletic-footwear market. Citigroup said the restructuring was working along with strong inventory management. The analyst said Foot Locker was excelling in a "challenging mall environment." Revenue rose +13% to $1.64 billion and same store sales rose +7%. Analysts were only expecting a 5.4% gain. Shares of Foot Locker rallied to an all time high but based on the chart it may be time for a rest.

We had a major yearend estimate revision on Friday by Barry Bannister at Stifel Nicolaus. Bannister revised his yearend target for the S&P from 1,850 to 2,300, a whopping +450 point increase. That takes him from one of the three major analysts tied for the low at 1,850 to the highest estimate in the 19 analysts tracked by Bloomberg. That implies a +17% rally by yearend and +24% gain for the year.

To explain his change in the forecast he pointed to a picture of the Four Horsemen of the Apocalypse. LINK He said the market is handling the Four Horsemen much better than he expected. The Four Horsemen in his way of thinking are the Federal Reserve (conquest), war (war), economic disparity/recession (famine) and bear markets (death).

He said the absence of recession triggers such as an overheating economy and inverted yield curve should lengthen the growth cycle. He reminded that the strongest and least risky returns in the equity market occurred in the first 65% of the economic cycle. However, he believes those returns were already made since March 2009 and the +191% gain in the S&P. He still believes there are a lot of bullish stragglers that will push the market higher but it will be accompanied by an increase in volatility. Bannister said bull markets are made up of three phases, intrepid, mainstream and stragglers. We are in the straggler phase now. He said the three previous bull markets that lasted more than six years each "coalesced at this exact point before moving higher," which means the sideways market this summer appears to be following the playbook. The current bull will turn 6 in March. "Those four horsemen just can't keep up with this raging bull." He expects foreign investors to buy more U.S. equities because of the uncertainty in their home markets.

Others don't share his optimism. Jonathan Gilonna of Barclays said overseas markets are generating too little demand for the S&P to end the year any higher than current levels. Barclays recently upgraded their forecast from 1,900 to 1,975.

I updated my forecast table with the latest revisions. The shaded entries have all revised their yearend numbers. The original forecast follows the analyst name.

Note the average of all the forecasts is 1,998 and just under the psychological 2,000 level. That suggests we could see some decent selling when that level is hit.

Bank of America Merrill Lynch said there were inflows of $17.9 billion into equity funds for the week ended Wednesday. That was the most in one week since October. There was another $3.1 billion that flowed into high yield bond funds so the high yield risk is back on along with equities. This was the biggest inflow into high yield in 2014. Lipper said there were outflows of $7.1 billion the week ended August 6th and $12.6 billion over the four weeks leading up to last week.

When the Fed starts raising rates it will have to borrow "hundreds of billions" from money market mutual funds in order to anchor the federal funds rate. St Louis Fed President James Bullard said it would take "several hundred billion" in loans to keep rates from taking off. The Fed will do this with reverse repos where the Fed borrows cash overnight from counterparties like money funds. In exchange they give the funds collateral like treasuries. The next day the Fed returns the cash and reclaims its collateral.

The Fed has been testing this program with a limited number of counterparties since February. So far in August the Fed has borrowed an average of $128.1 billion a day. The Fed pays 0.05% interest for the loans. The Fed had to come up with a tool to anchor the Fed funds rate after U.S. banks increased their capital on hand after the recession. The new rules require a lot more capital and the banks no longer need to borrow from the Fed funds window.

In other words if the Fed hikes the Fed funds rate next year and nobody is borrowing from the Fed then the hike has less value. Real rates will still go up just because the Fed raises the benchmark rate but without an anchor for that rate there could be a lot of volatility.

The Fed plans to use the rate of interest it pays on excess reserves deposited at the central bank as the "primary tool used to move the Fed funds rate into its target range" with only a "temporary use" of the overnight reverse repo facility.

The Fed admits it does not know if it will need the reverse repo strategy until they actually start raising rates. Charles Plosser warned about creating a program that could become too big to manage and its unexpected impact to the financial system. "We want to be cautious about creating a facility that we can't get ourselves out of."

The volume last week was minimal but the internals were solidly positive. Friday's volume was 4.3 billion shares and the lowest day of the week. It was also the lowest volume day of the year other than the holiday shortened July 3rd session.

The new highs were rising through Thursday but the last time the S&P was at a new high back in early July the individual new highs were over 800. There is far less conviction today than there was back in early July. Volume in July was over 6 billion shares.

However, the AAII Investor Sentiment Survey last week showed that 46.11% of retail investors were bullish. That is the highest level of the year.

Next week is a holiday week. Labor Day is not until the following Monday but the entire week will have holiday volume. This is the last week of summer and very few traders will be sitting in front of their PCs. In theory we should see a melt up but the Yellen speech may have soured sentiment. The biggest economic speech of the summer was a disappointment. Yellen could have given some solid guidance but instead she reverted into Fedspeak to keep the markets off balance.

That could mean some lethargic markets for next week. We do have some important economic reports but there will not be many traders around to hear them.

Technically we saw the S&P spike over the prior resistance high at 1988 and close at 1992 on Thursday. That was not enough of a breakout to be convincing. However, Friday's decline closed right on that 1988 level, which should now be support. If that support holds on Monday we could see buyers come back into the market. I am pretty sure there are quite a few shorts that did not cover on that slight close over 1988 on Thursday. With Yellen on tap and the potential for a foot in mouth event they probably held their shorts. When the market weakened on Friday they may have even added to those shorts.

Next week could be choppy if Monday starts off bad. The dip buyers are still there but their numbers will be diminished because of the holiday week. There may not be enough buyers around to push the market to new highs and even if there are buyers there is a huge sell signal hanging on 2000. This highly visible round number, especially when it is the average analyst target for all of 2014, makes it an inviting target for sellers. I wish I could see into all the brokerage accounts this weekend to see how many have sell orders waiting at 1998-1999 in anticipation of a profit taking event.

I think putting a sell trigger on the SPY at 199.95 is a very valid strategy. The September 199 put option on the SPY had volume of 19,904 contracts on Friday against open interest of 43,033. Nearly half the open interest was traded on Friday. I can't tell without a lot of work how much of that volume was new positions but I would bet it was the vast majority.

If we get a decent bout of profit taking initial support is 1960 followed by 1940.

Like the S&P the Dow is closing in on serious resistance between 17,075-17,140. It closed at 17,039 on Thursday and gave back -38 points to close at 17,001 on Friday. This was a fingernail grip on the cliff face but it held in spite of the Russian invasion of Ukraine and Yellen's confusing speech.

The Dow is very over extended with a +640 point gain over the last two weeks. We could stand to give back a few points and then take a new run at the resistance highs. Support is 16,600 but that is -400 points from Friday's close. I doubt the dip buyers would let us slip that far before they showed up in volume.

Historically, most low volume holiday periods tend to post gains. For some reason there are fewer sellers than buyers in the days leading up to holidays. Let's hope that holds true next week.

The Nasdaq continued its climb but the rate of ascent slowed over the last several days. The NDX stuck like glue to the red uptrend resistance line. I love it when the price action reacts to the lines exactly the way it should.

Like the Dow the Nasdaq is over extended and needs at least an intraday bout of profit taking to ease the pressures. Normally a breakout to decade highs on any security does not come on minimal gains like the Nasdaq over the last four days. Normally breakouts tend to catch fire and run. However, I am encouraged there was no material dip on the Russian headlines. That suggests everyone holding longs are content with their positions and expect higher highs.

The narrow range over the last several days did establish initial support at 4515 and that give us a clear line in the sand for market direction. A break below that level could gain speed as sell triggers are hit.

The Russell 2000 is not setting the world on fire with its blazing speed but it is moving higher. The index has been really choppy since the August 1st low but the direction has been up.

The 1160-1165 level has returned as resistance but there is a pattern of higher lows that suggests that resistance will be broken.

Despite the overextended conditions the historical trend favors a continued move higher next week. I would be surprised if it was dramatic and I do expect some choppy trading due to lack of volume.

This is a week when program trading is likely. Some hedge funds like to push the market around in thin volume when they think they can trigger a significant move. Be prepared for a highly directional day. If it is to the downside I do expect the dip buyers to appear.

Random Thoughts

I am sure you have heard that ISIS is going to bring its terror attacks to the USA. You probably ignored those comments like most everyone ignores the headlines about Russia driving aid trucks into the Ukraine. However, the ISIS threat is real. If you doubt it you only need to scan the videos from Ferguson Missouri for the homemade ISIS signs and Muslim flags.

On Friday the U.S. government issued a security bulletin to all U.S. law enforcement warning them of potential ISIS threats. On Twitter (#AmessagefromISIStoUS) there is a picture of the Old Republic Building at 307 N Michigan Ave in Chicago and of the White House with a person holding up a handwritten note saying, "We are in your state. We are in your cities. We are in your streets. You are our goals anywhere." Having an individual hold the handwritten notes in front of these landmarks is proof there are individuals in the U.S. that would like to do us harm. They are just waiting for the right time and place.

Chicago has become a top target for international terrorists according to security expert Ross Rice, a former FBI agent. It is known as Obama Town and high on the list of targets as payback for President Obama's various acts against al-Qaeda and now ISIS.

With discarded Korans and prayer rugs repeatedly found along the border with Mexico it does not take a leap of faith to understand there is a growing army of terrorists in the USA. If you don't think life as we know it will change, just wait until there is a string of car bombings in the U.S. targeting our business districts and shopping centers. When that happens the resulting bear market will be the least of our worries.

One reply posted on the #AmessagefromISIStoUS thread was:

Armed, Patriotic Americans are:
In our states
In our cities
In our streets.
You are our #1 enemy. Bring it!

Relations with Russia are declining so how is the administration's pivot to Asia going. On August 19th a Chinese J-11 fighter jet flew within 20 feet of a U.S. Navy P-8 surveillance aircraft. The fighter pulled to within 20 feet of the wingtip and then lifted its wing to show that it was armed with missiles. The plane then executed a barrel roll around the U.S. plane at a distance of 45 feet. The incident took place 135 miles east of Hainan Island at the southernmost tip of China. The pentagon reported there have been several close encounters over the sea since March. The U.S. called the incident a serious provocation and complained strongly to Beijing.

In 2001 a Chinese fighter collided with a U.S. Navy surveillance aircraft on Hainan Island. The collision, caused by similar stunts by the Chinese fighter, caused the Chinese plane to crash killing the pilot and forced the U.S. plane of make an emergency landing on the island where it was impounded by China.

The Pentagon said Russian artillery units manned by Russians and previously firing into Ukraine from Russian territory have now moved into Ukraine and they are using their new location to fire deeper into Ukrainian territory. NATO said this was evidence of "direct Russian involvement" and represents a serious escalation of the conflict.

The U.S. warned Russia to immediately remove its aid vehicles and military equipment from Ukraine or face further costs and isolation. With Putin's favorability ratings now in the high 80% range the odds of him doing anything to reduce his "costs" are about zero. Like Crimea the eastern Ukraine is gone. Russia is occupying it and nobody can do anything against them. The provinces of Luhansk and Donetsk are heavily populated by ethnic Russians and they have never been fans of the Ukrainian government. Putin has given them a way to separate from Ukraine and ally themselves with mother Russia.

By sending the aid convoy into Ukraine without permission Putin has called the West's and Ukraine's bluff. Putin knew Ukraine would not fire on the convoy or risk an even larger pretext for Russia attacking Ukraine forces. Putin knew the U.S. and EU are not going to intervene because they are trying to calm the situation not escalate it. Putin has won the war against the eastern Ukraine. Now all he has to do is run out the clock.

However, Putin's goal is a land route to Crimea and the Black Sea deepwater port of Sevastopol. Even if he does get control of Luhansk and Donetsk there are still two more provinces between Russia and Crimea. Those are Zaporizhzhya and Khersonska. In the map below Russia is in gray. Crimea = Respublika Krym.

Russia closed four McDonalds stores in Moscow on Wednesday for "health reasons" in the latest retaliation against the Russian sanctions. By shutting the stores in the heart of Moscow they are making a statement to the Russian people that Putin can't be bullied and the people should refuse to be bullied by the West. There are 431 other McDonalds stores in Russia but they are not in the high profile locations like Moscow's Pushkin Square. Closing stores on the square made a public statement without making a lot of consumers mad.

Forming an inclusive government in Iraq just became even more difficult. Sunni lawmakers quite talks on forming a new Iraqi government after gunmen from a Shiite militia killed at least 73 Sunni men, women and children at a mosque in the village of Bani Wais. The slaughter came after a gathering of Shiites was targeted by roadside bombs. The odds of getting a truly inclusive government are practically zero. The odds of the Sunni-Shia violence continuing are about 100%. The Shiite militias are growing in response to the Sunni population joining with ISIS terrorists against anyone that is not Sunni. Don't expect an end to the violence in Iraq any time soon, if ever.

Bank of America, Merrill Lynch, Countrywide, et al, added another settlement to its monster penalty locker. They agreed to pay $16.65 billion for an assortment of misdeeds during the mortgage crisis. Most of the problems were related to their acquisition of Countrywide Mortgage, an acquisition that will live in infamy forever. This brings their total announced mortgage settlements to just under $70 billion according to Bloomberg's calculations. That number is mind numbing. How does a corporation pay $70 billion in fines and settlements and continue in business? Why are shareholders being penalized for "reported" misdeeds of the company instead of the people in charge of the deeds going to jail? Obviously it all has to do with penalizing Wall Street for their sins. That makes good political headlines and the results of the fines and penalties on shareholders are ignored.

The main person in the Countrywide fiasco is 75 year old "tan man" Angelo Mozilo. His constant deep tan earned him the nickname tan man. Despite him paying $67.5 million to settle a prior SEC action against Countrywide he is next up on the firing line. The Justice Department is preparing a civil case against Mozilo that is sure to strip him of many more millions. According to his lawyers Mozilo is suffering from a serious illness and may not be able to stand trial.

Apparently flat markets have been outlawed. Mike Harris at Price Action Lab produced this chart showing 10 V-shaped recoveries over the last 414 days for a net gain in the S&P of +42%. In other charts he went back to the 1990s and 2000s and illustrated the numerous periods where markets corrected and then traded sideways for weeks or months before resuming their upward moves.

He speculated this market action is due to the increased number of funds chasing alpha and causing the V-shaped dips and recoveries because they are all doing the buying and selling at the same time. I believe it is the result of the Fed and QE removing the incentive to invest in bonds and treasuries. This is the result of the "There is no alternative" or TINA trade. If equities are the only place to get a decent return on your money then all the money managers are going to buy equities. That makes any dip a buying opportunity.

This trend is going to change very soon. Once a decent yield begins to return to the bond market a lot of money is going to flee the coming post QE volatility in equities and head for the safety of treasuries.

Mike Harris at Price Action Lab Chart

Humor from Eddy Elfenbein. "The vicious bear market that rocked Wall Street for a full two weeks has finally come to an end. Measuring from close to close, the S&P 500 plunged for a massive 3.94% loss between July 24 and August 7."

Janet Yellen's move from super dovish to the middle of the Fed's outlook for rates would seem to be a step towards their eventual rate hikes. She can't go from rates will stay at zero forever to we are hiking rates next week without some gradual steps in between. This was step one towards hiking rates in early 2015. So why are treasury yields holding near 12 month lows? In theory Draghi is going to eventually launch QE to rescue the EU from the coming depression. That means rates in the EU are going lower, a lot lower. Investors moving money out of Europe are buying U.S. treasuries because our low yields are still better than no yields in Europe. The German two-year bonds recently traded with a negative yield of -0.004%. Despite the negative yield Germany sold 4 billion euros of those bonds and the demand was more than 8 billion.

The Fed is still buying massive amounts of treasuries every month and will continue to do so until at least the end of October. With the Fed buying $25 billion a month they are still the dominant buyer in the market.

Also, while some people believe the U.S. is on the road to recovery there are others that see that road leading to a cliff. The weekly economic reports are far from consistently positive and macro events are growing increasingly negative. With economic cycles typically lasting 5 years we are already overdue for an economic slump and the Fed has no ammo left in its gun. Yields are holding at the lows because the economic recovery is far from assured. Inflation is nonexistent and the GDP for the first half of 2014 could be negative. Add in geopolitical risk from multiple directions and a 2.4% yield starts to look like a good deal. Compared to the rest of the developed world that is a good yield.

109,631,000 Americans live in households that received benefits from one or more federally funded "means-tested programs" - also known as welfare - in Q4-2012. The data was released by the Census Bureau on Tuesday. That equates to 35.4% of the 309,467,000 people living in the U.S. at that time. If you add in the people getting benefits from non-means-tested federal programs like Social security, Medicare and unemployment the total rises to 150,026,000 or 48.5% of the population. 82,679,000 of the people receiving benefits lived in households where people were on Medicaid. 51,471,000 were on food stamps. 22,526,000 were on the Women, Infants and Children (WIC) program. 20,355,000 were in households where Supplemental Security Income (SSI) benefits were paid. 13,267,000 received housing subsidies or lived in public housing. 5,442,000 received Temporary Assistance to Needy Families. 4,517,000 received other forms of federal cash assistance. In Q4-2012 there were 103,087,000 full time American workers. That is 6,544,000 less workers than there were welfare takers.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"If you could kick the person in the pants responsible for most of your trouble, you wouldn't sit for a month."

Theodore Roosevelt


New Plays

Hitting new 2014 Lows

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

(bearish ideas)


Papa John's Intl. Inc. - PZZA - close: 39.32 change: +0.16

Stop Loss: 41.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 368 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Papa John's was founded back in 1985 and headquarter in Louisville, Kentucky. They have grown into the planet's third largest pizza delivery company. There are over 4,400 Papa John locations in all 50 U.S. states and 35 countries. The good news for PZZA has been their international growth. They're growing in the U.S. as well but international growth has been outperforming.

Last year was a banner year for the stock price. Shares virtually doubled from their 2013 low to their December 31st close. The rally kept going in 2014. However, momentum reversed in March when many of the momentum names were crushed. PZZA suffered a multi-week hammering with a drop from $55 to $40. Since then stock has struggled.

One of the biggest challenges for restaurant stocks has been food inflation. Food prices have been climbing sharply the past several months. In the U.S. food inflation is running about +20%. A lot of that is due to surging prices in meat, eggs, and dairy. Guess who uses a lot of cheese? PZZA does.

PZZA's earning trend has been shaky. They missed earnings last November. February's report was only in-line with estimates. May's announcement missed estimates. Their most recent earnings report was August 5th. Wall Street expected a profit of $0.42 a share on revenues of $384.8 million.

PZZA delivered a profit of $0.40 with revenues up +9.1% to $380.9 million. That's a miss on both counts. The company said same-store sales in North America were up +6% and overseas up +8.6%. That looks healthy. Yet their 40-cent profit lines up with a 39-cent profit a year ago. Sales are up but profits are flat? The biggest culprit is probably rising ingredient costs. Management did raise their 2014 guidance but even after they raised guidance it was still below Wall Street's consensus.

The company is still expecting relatively decent sales growth but it doesn't seem to be fast enough to satisfy Wall Street. The recent breakdown under support near $40.00 is bearish. The point & figure chart is bearish and forecasting a $32 price target.

Tonight we are suggesting bearish positions immediately. We're not setting an exit target yet. I will point out potential support on the weekly chart (see below). The path of least resistance for PZZA definitely looks lower.

FYI: PZZA does have options but the spreads are too wide to trade them.

*Launch bearish positions on Monday morning*

- Suggested Positions -

Short PZZA stock @ (the opening bell)

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Market Rally Stalls On Friday

by James Brown

Click here to email James Brown

Editor's Note:
With the exception of the NASDAQ Composite the market's rally stalled on Friday.

The S&P 500 index is nearing what could be major resistance at the 2,000 level. Now would be a good time to double check your stop loss placement.

DB and FNGN hit our new stop losses.

Current Portfolio:

BULLISH Play Updates

Delta Air Lines - DAL - close: 40.41 change: +0.50

Stop Loss: 37.65
Target(s): To Be Determined
Current Option Gain/Loss: -0.8%
Entry on August 21 at $40.75
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11 million
New Positions: see below

08/23/14: DAL managed to recover a good chunk of Thursday's dip with a +1.25% gain on Friday. DAL's relative strength is encouraging but if the market retreats DAL will likely follow it lower.

Earlier Comments: August 20, 2014:
Delta is the world's second biggest passenger airliner on the planet. They serve almost 165 million customers a year. Believe it or not but they started back in 1924 as an aerial crop dusting company called Huff Daland Dusters. Now they have almost 80,000 employees and a fleet of more than 700 planes that fly to 334 destinations in 64 countries on six continents.

A lot of investors look at the airline stocks as value plays. That's easy to see given their cheap multiples. DAL has a P/E of 3.1. Yet the company is seeing growth as well. Last year the airlines were big winners with the market's 2013 rally. This year could be another strong one thanks to falling oil prices. There has been a lot of geopolitical headlines but none of them seem to be pushing oil prices higher. Instead crude oil prices are falling. That's a huge deal for the airline companies because fuel is their largest expense. DAL has the lowest fuel costs in the business because they own their own refinery. The company expects that their fuel hedging and refinery operations should cut their fuel costs by $350 million this year.

More than 60% of DAL's business is in the U.S. The country's slow economic improvement has helped fuel gains for DAL. The airline has beaten Wall Street's bottom line estimates four quarters in a row. Back in June they raised guidance. Their most recent earnings report was July 23rd where they delivered a profit of $1.04 a share, one cent above estimates. DAL management that said their pre-tax profit was $1.4 billion, which is a +70% improvement from a year ago. They ended the second quarter with debt at less than $8 billion, which is a 20-year low. DAL's margins have been improving. Management expects margin improvement to continue and should see a jump from 13.5% to 15-17% in the third quarter.

Technically DAL saw a correction from $42 to $35 (-16%) from its June highs. Investors bought the dip again near $35.00 in early August. Now DAL has built what appears to be a bullish double bottom. The current bounce from its August lows is breaking through resistance.

If this trend continues we want to hop on board. Tonight we're suggesting a trigger at $40.75. The 2014 high near $42.50 could be short-term resistance but longer-term DAL looks poised to breakout.

- Suggested Positions -

Long DAL stock @ $40.75

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

Long 2015 Jan $45 call (DAL150117C45) entry $1.70*

08/21/14 triggered @ 40.75
*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


Green Plains Inc. - GPRE - close: 44.13 change: +0.29

Stop Loss: 40.95
Target(s): To Be Determined
Current Option Gain/Loss: +8.2%
Entry on August 11 at $40.77
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: see below

08/23/14: GPRE also displayed relative strength on Friday but shares have been consolidating sideways in the $43.00-44.50 zone for the last three days in a row.

The $44.50-45.00 zone could be significant resistance so I'm not suggesting new positions at this time.

The simple 20-dma is at $41.19. We will raise our stop loss to $40.95. More conservative investors may want to raise their stop higher.

Earlier Comments: August 09, 2014:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

- Suggested Positions -

Long GPRE stock @ $40.77

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

Long Dec $45 call (GPRE141220C45) entry $2.95*

08/23/14 new stop @ 40.95
08/14/14 GPRE announces $100 million buy back and doubles dividend to 8c.
08/13/14 new stop @ 39.25
08/11/14 trade opens on gap higher at $40.77, trigger was $40.75
*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


Microsoft Corp. - MSFT - close: 45.15 change: -0.07

Stop Loss: 42.90
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

08/23/14: MSFT closed virtually unchanged on Friday. The stock remains under resistance near its 2014 highs from July. A sharp reversal here would look like a possible bearish double top.

We will try and reduce our risk by raising the stop loss to $42.90, which is just below what should be technical support at the 50-dma.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

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

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike


RF Micro Devices Inc. - RFMD - close: 11.81 change: -0.18

Stop Loss: 11.20
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 14.5 million
New Positions: Yes, see below

08/23/14: RFMD has been struggling with short-term resistance near $12.10 the last few days. Traders did buy the dip on Friday near its 10-dma. Currently we're on the sidelines waiting for a new relative high. Our suggested entry point is $12.15.

Earlier Comments: August 19, 2014:
We are more than halfway through 2014 and it's shaping up to be another bullish year for stocks. The S&P 500 index is up +6.6% year to date. The NASDAQ composite is up +7.9%. That's because the NASDAQ is getting a boost from strong groups like biotechs and semiconductors. The SOX semiconductor index is up +17.2% in 2014. Yet one stock in this industry has been sprinting past the competition. That is RFMD with a +128% year to date gain.

According to the company website, "RF Micro Devices, Inc. is a global leader in the design and manufacture of high-performance semiconductor components. RFMD's products enable worldwide mobility, provide enhanced connectivity and support advanced functionality in the cellular handset, wireless infrastructure, wireless local area network (WLAN), CATV/broadband and aerospace and defense markets. RFMD is recognized for its diverse portfolio of semiconductor technologies and RF systems expertise and is a preferred supplier to the world's leading mobile device, customer premises and communications equipment providers."

What you may not know is that RFMD is a big supplier of components to Apple Inc. They provide components and chips for AAPL's iPhones. AAPL is expected to announce their iPhone 6 in September and could sell tens of millions of phones before year end. That could be a boon for companies like RFMD.

This year has also been bullish for mergers and acquisitions with Wall Street applauding a number of deals. One winning deal so far has been RFMD's merger with TriQuint Semiconductor (TQNT). RFMD announced this deal in February this year and the stock soared on this news. Since then both RFMD and TQNT stock have been outperformers. The company expects synergies of $150 million in just the first two years.

Meanwhile RFMD is developing a bullish trend of beating earnings estimates, rising margins, and raising guidance. Back in April they beat estimates and raised guidance. They did it again at their last report on July 24th. Wall Street expected a profit of $0.17 a share on revenues of $304.8 million. RFMD delivered $0.24 cents a share on revenues of $316.3 million. Margins surged to 42%. Management raised their EPS and revenue guidance for the current quarter.

Technically the stock is marching higher and just recently broke out from a two-week consolidation. Today's display of relative strength (+2.0%) left RFMD at multi-year highs. The shorts are getting killed. The most recent data listed short interest at 16% of the 266.7 million share float. If this rally continues the stock could get a boost from short covering.

Today's high was $12.10. We are suggesting a trigger to open bullish positions at $12.15.

NOTE: We will tentatively set a time frame of 8 to 12 weeks but we might choose to exit at Apple's iPhone 6 announcement in September.

Trigger @ $12.15

- Suggested Positions -

Buy RFMD stock @ (trigger)

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

Buy the NOV $12 call (RFMD141122C12)

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


Skyworks Solutions - SWKS - close: 55.15 change: -0.11

Stop Loss: 49.95
Target(s): To Be Determined
Current Option Gain/Loss: +4.7%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

08/23/14: SWKS ended the week near 14-year highs. If the market sees a dip we can watch SWKS for support near $54, $52, and $50. More conservative investors may want to raise their stop loss closer to $52.00.

I am not suggesting new positions at this time.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

- Suggested Positions -

Long SWKS stock @ $52.65

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

Long Nov $55 call (SWKS141122C55) entry $2.86

08/13/14 new stop @ 49.95
08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike


WhiteWave Foods Co. - WWAV - close: 34.31 change: +0.12

Stop Loss: 31.40
Target(s): To Be Determined
Current Option Gain/Loss: -1.7%
Entry on August 19 at $34.91
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

08/23/14: Investors started buying the dip in WWAV after it filled the gap and tagged the $34.00 level. I would consider new positions at current levels but investors may want to wait. If the S&P 500 index fails at the 2,000 mark it could spark a pullback for the whole market.

Earlier Comments: August 16, 2014:
Consumer tastes and buying habits are changing and more people are opting for more natural and organic foods.

WWAV is in the consumer goods sector. You might not recognize the name but they're behind brands like Silk, Horizon Organic, Land-O-Lakes, International Delight, Alpro, and Earthbound Farm Organic.

WWAV considers themselves "a leading consumer packaged food and beverage company that manufactures, markets, distributes, and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce throughout North America and Europe. The Company is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products. The Company's widely-recognized, leading brands distributed in North America include Silk plant-based foods and beverages, International Delight and LAND O LAKES* coffee creamers and beverages, Horizon Organic premium dairy products and Earthbound Farm' certified organic salads, fruits and vegetables. Its popular European brands of plant-based foods and beverages include Alpro and Provamel" (The Land-O-Lakes brand is licensed from the owners).

If you're looking for a company that is growing then keep an eye on WWAV. They have beaten Wall Street's estimates on both the top and bottom line at least four quarters in a row. The last three quarters management has been raising their guidance. In Q4 2013 WWAV's revenues were up +11.5%. The first quarter of 2014 saw revenues soared +36.5%.

Their latest report was August 7th. Analysts were looking for a profit of $0.22 on revenues of $815.6 million. WWAV delivered a profit of $0.23 with revenues climbing +39.5% to $837.9 million.

The natural and organic retailers might be facing tougher margins and stronger competition (WFM, SFM, TFM, NGVC) but that doesn't seem to be the case for a producer and distributor like WWAV.

You can see the big surge in the stock price on August 7th as traders reacted to the bullish earnings news and guidance. After consolidating gains the last few days shares of WWAV have started to push higher again. They have been outperforming the major market indices and WWAV closed at a new all-time highs on Friday.

We believe the rally continues but I am labeling this a more aggressive, higher-risk trade due to WWAV's recent volatility. The last several weeks have seen some significant swings.

Friday's intraday high was $34.06. We're suggesting a trigger to open bullish positions at $34.15.

- Suggested Positions -

Long WWAV stock @ $34.91

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

Long OCT $35 call (WWAV141018C35) entry $1.70*

08/19/14 trade opens on gap higher at $34.91, suggested entry point was $34.15.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Cepheid - CPHD - close: 38.19 change: +0.13

Stop Loss: 40.25
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
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

08/23/14: CPHD does have a bearish trend of lower highs but momentum lower has stalled. You could argue CPHD has been churning sideways for nearly three weeks.

More conservative traders might want to lower their stop loss.

I am not suggesting new positions at this time.

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

08/13/14 new stop @ 40.25
07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike


Fifth Third Bancorp - FITB - close: 20.32 change: +0.07

Stop Loss: 20.51
Target(s): To Be Determined
Current Option Gain/Loss: - 3.9%
Entry on August 06 at $19.55
Listed on August 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 10.2 million
New Positions: see below

08/23/14: FITB inched higher again on Friday. The stock's oversold bounce has produced a two-week rebound. More conservative traders may want to abandon ship right now to minimize their losses. We're keeping the play open since $20.50 looks like the next resistance level.

I am not suggesting new positions at this time.

Earlier Comments: August 5, 2014:
Fifth Third Bancorp started as the Bank of the Ohio Valley in Cincinnati back in 1858. According to the company's press release FITB is now "a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $133 billion in assets and operates 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest

The stock market's recent dip has reduced the S&P 500 index's 2014 gains to +4.9%. Yet the financial sector has been underperforming. The XLF financial ETF is only up +2.4%. Many of the banking stocks are weighing on the group. The regional banks have performed even worse with the KRE regional bank ETF down -6.9%. If you look at weekly chart of the KRE you'll notice a big bearish head-and-shoulders pattern that has formed over the last several months. This doesn't bode well for the group.

Banks have been struggling with little to no growth. Most are willing to lend but only to customers with the best credit ratings. Even if they do lend money the interest rates today are so low it's tough to make a profit. Housing prices continue to rise but the number of mortgages is shrinking.

FITB reported earnings on July 17th. Last quarter their mortgage banking revenues collapsed -67% from a year ago. FITB's profits plunged fro $591 million Q2 2013 to $439 million Q2 2014. The company did manage to beat Wall Street's estimates by 4 cents a share. Unfortunately FITB management lowered their revenue guidance.

Technically shares of FITB are bearish. They have broken the long-term bullish trend of higher lows (see the weekly chart). They have also recently broken below key support near $20.00.

Tonight we're suggesting bearish positions at current levels (no trigger). We'll try and limit our risk with a stop loss at $20.65.

- Suggested Positions -

Short FITB stock @ $19.55

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

Long Nov $20 PUT (FITB141122P20) entry $1.20*

08/21/14 new stop @ 20.51
08/06/14 trade begins. FITB gaps down at $19.55
*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


Natural Grocers by Vitamin Cottage - NGVC - close: 18.29 change: -0.13

Stop Loss: 20.10
Target(s): To Be Determined
Current Option Gain/Loss: +2.2%
Entry on August 12 at $19.45
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 209 thousand
New Positions: see below

08/23/14: Ouch! After a three-week plunge shares of NGVC produced an oversold bounce. Earnings news from a rival sparked some short covering and the stock added +4.0% on Friday. The Fresh Market (TFM) reported earnings on Thursday night and results came in better than expected. This sparked short covering in some of the natural/organic grocery names.

I am not suggesting new positions at this time. More conservative investors might want to lower their stop loss again.

Earlier Comments: August 11, 2014:
The last six to nine months have not been good for the natural food and organic-related retail chains. Whole Foods (WFM), The Fresh Market (TFM), Sprouts Farmers Market (SFM), and Natural Grocers have all underperformed the market by a wide margin.

According to NGVC's press release the company was "founded in Colorado by Margaret & Philip Isely in 1955, Natural Grocers was built on the premise that consumers should have access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has since grown into a successful national chain with locations across Colorado, Texas, Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona and Oregon, and employs over 2000 people. Although the company went public in July 2012, Isely family members continue to manage the company day to day, building on the foundation of their parents' business."

The good news is that the natural food and organic food craze is reaching a wider audience and more and more consumers are making healthier choices. The bad news is that this previously higher-margin business, in a notoriously low-margin industry, has drawn tons of competition. That has been the biggest challenge. Big players like Wal-mart and Target in addition to major regional grocery chains are all starting to offer more natural and organic wares. Meanwhile those already in the space are competing with each other as well. Margins are shrinking as competition heats up.

Shares of NGVC plunged back in May after the company lowered its same-store sales forecast for 2014. The stock dropped again on August 1st following its earnings report. Earnings were in-line with estimates but guidance was soft.

The path of least resistance is down and NGVG looks headed for its all-time lows in the $17.00 area.

The biggest risk with this bearish positions on NGVC is the crowd. There are a lot of investors already bearish on this stock. The most recent data listed short interest at 33.3% of the very, very small 5.1 million share float. That significantly raises the risk of a short squeeze.

We are suggesting bearish positions with a trigger to short NGVC at $19.45 but I am labeling this an aggressive, high-risk trade. NGVG does have options but most of the option spreads are too wide. We will try and limit our risk with a stop loss at $21.05.

*Aggressive Trade* Use small positions. - Suggested Positions -

short NGVC @ $19.45

08/21/14 new stop @ 20.10
08/12/14 triggered @ 19.45


Sprouts Farmers Market, Inc. - SFM - close: 30.34 change: +0.74

Stop Loss: 30.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below

08/23/14: SFM is another natural-organic grocery style company and the better than expected earnings results from rival The Fresh Market (TFM) on Thursday night fueled short covering on Friday. Shares of SFM rallied +2.5% before stalling near its 20-dma.

We are still on the sidelines waiting for a new relative low. Our suggested entry point is $28.95.

Earlier Comments: August 18, 2014:
There is a growing pile of evidence that Americans are starting to eat healthier. It's about time. 66% of Americans are overweight and 33% of us are clinically obese. This new trend of healthier eating helps explain falling sales at restaurants like McDonalds and strong sales for rivals like Chipotle (which many consider to be a healthier choice). Today's trade isn't about restaurants. It's about the natural and organic trend in grocery stores.

Most people think of Whole Foods Market (WFM) when they consider natural and organic grocery chains. WFM is a dominant player with 388 stores. Sprouts (SFM) is catching up. The first Sprouts store started in Arizona back in 2002. Today they have more than 180 stores. Unfortunately for SFM they are facing the same issues WFM is.

Natural and organic foods used to offer higher margins in a notoriously low-margin business - grocery. It wasn't long before everyone has started promoting their natural and organic options. Traditional food chains as well as major nationwide players like Wal-Mart and Target. All of this competition is pressuring margins and sales growth.

Keep in mind, SFM is still growing. Their latest earnings report was August 7th and SFM beat estimates with a profit of 20 cents a share. That's a +43% jump in earnings from a year ago. Revenues were up +19.5% to 743.8 million, also above estimates. SFM management raised their 2014 guidance although this didn't have much impact since they only raised guidance to match Wall Street's consensus.

This issue doesn't seem to be growth. Investors are bearish on rising competition. It doesn't help that SFM isn't cheap with a current P/E of almost 52. It also didn't help that several major shareholders just sold 15 million shares at $30 a few days ago. This big sale doesn't breed confidence for investors.

Technically SFM appears to be in a major down trend of lower highs and lower lows. The P&F chart is bearish and forecasting at $23.00 target. SFM barely moved today in spite of a relatively widespread market rally.

Currently SFM is hovering just above support near $29.10. If this stock breaks down it could test its 2014 lows and potentially hit new ones. Tonight we're suggesting a trigger for bearish positions at $28.95.

Trigger @ $28.95

- Suggested Positions -

short SFM stock @ $28.95

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

Buy the DEC $27.50 PUT (SFM141220P27.5)

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



Deutsche Bank - DB - close: 33.29 change: -0.07

Stop Loss: 33.55
Target(s): To Be Determined
Current Option Gain/Loss: -0.3%
Entry on August 04 at $33.45
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.9 million
New Positions: see below

08/23/14: We turned cautious on the financial stocks Thursday night and lowered our stop loss on DB to $33.55. Naturally DB spiked higher on Friday morning and hit our stop loss before reversing lower.

- Suggested Positions -

Short DB stock @ $33.45 closed $33.55 (-0.3%)

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

Oct $33 PUT (DB141018P33) entry $1.45* exit $1.02** (-29.6%)

08/22/14 stopped out
08/21/14 new stop @ 33.55
08/07/14 new stop @ 35.55
08/04/14 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


Financial Engines, Inc. - FNGN - close: 35.88 change: +0.04

Stop Loss: 36.25
Target(s): To Be Determined
Current Option Gain/Loss: -4.5%
Entry on August 15 at $34.70
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: see below

08/23/14: FNGN is another financial stock that spiked higher on Friday only to roll over by the closing bell. Our new stop loss was hit at $36.25.

- Suggested Positions -

Short FNGN stock @ $34.70 exit $36.25 (-4.5%)

08/22/14 stopped out
08/21/14 new stop at $36.25
08/15/14 triggered @ 34.70