Option Investor

Daily Newsletter, Saturday, 5/30/2015

Table of Contents

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

Market Wrap

Economic Reality Hits Equities

by Jim Brown

Click here to email Jim Brown

Volatility returned after Friday's economic reports suggested a weakening economy. The economy contracted in Q1 and Consumer Sentiment fell to a six-month low. The Fed may want us to believe that the economy is rebounding but reality has a nasty habit of spoiling best laid plans.

Market Statistics

The U.S. markets were already poised for a decline following market drops in Europe and the weak economic reports just added weight to an already heavy futures session.

The Chicago Purchasing Managers Index (PMI) for May fell from 52.3 to 46.2 and well under consensus for a rise to 53.1. The Chicago PMI has now been in contraction territory under 50 for three of the last four months. All five components dropped into contraction territory with employment falling to the lowest level since April 2013. The February drop to 45.8 was a five year low and May was only slightly higher at 46.2. This is for May so analysts can't blame it on the weather.

New orders declined -13.8% to 47.5 while prices paid spiked to the highest level since December. Orders falling and prices rising are never a good combination. More than 42% of companies said their inventory levels were too high compared to only 12% several months ago.

On top of the lousy Chicago numbers the GDP revision for Q1 declined from +0.25% growth to a -0.75% contraction. This was widely expected by knowledgeable analysts but the investing public was apparently out of the loop as futures plunged on the news. Weak exports, government spending and consumer spending were a drag on the headline number. Corporate profits declined -5.9% after declining -1.4% in Q4. Consumer spending rose only +1.23% in Q1 after a +2.98% rise in Q4. Gross domestic income rose only +1.43% after a +3.71 rise in Q4. Exports declined -1.9%.

Analysts continue to blame winter weather in Q1 for the slowdown but that had nothing to do with the drop in exports and fall in corporate profits. They also correctly put some of the blame on the decline in the energy sector since a 55% drop in drilling activity is a major drop in capex spending.

The Atlanta Fed real-time GDPNow is still only forecasting +0.8% GDP growth in Q2. All we need is a few weak economic reports in June and it could go negative as well. The textbook definition of a recession is two consecutive quarters of GDP contraction. You can bet the pencil pushers will be doing everything they can to keep the Q2 number positive.

It was not only the U.S. GDP that contracted. Canada reported a -0.6% contraction in Q1 after +2.2% growth in Q4. This was the first quarterly contraction in Canada since Q2-2011. It was also the third consecutive quarter of declines from a high of +3.4% growth in Q2-2014. Analysts said "the decline in Q1 was attributable to a reduction in domestic demand due to lower business investment and private consumption of goods." They did NOT say it was due to winter weather.

Final domestic demand (consumer spending) declined -1.6% after a +1.6% rise in Q4. Household consumption rose only +0.4% in Q1. Goods production (manufacturing) declined -5.5%. Spending on structures fell -19.7%, machinery and equipment -7.4% and investment in intellectual property fell -21.2%.

I think we can safely say the economic decline was not specifically a U.S. problem but a North American problem and that makes it more difficult for the Fed to stimulate. It also suggests the Fed is not going to be raising rates in the near future.

Moody's Canadian GDP Chart

Consumer sentiment for May declined -5.2 points to 90.7 but that was much better than the initial release at 88.6. It is still a six month low and that does not bode well for consumer spending in the months ahead. The present conditions component declined from 107.0 to 100.8 and the expectations component declined from 88.8 to 84.2.

With gasoline prices rising and consumer sentiment declining the retail sales numbers for the next couple of months could be disappointing.

In Yellen's speech last week she said "growth in many other parts of the global economy, including China and some other emerging market economies, has slowed. Weak growth abroad and the strong dollar has dented U.S. exports and weighed on our economy." I think that is a safe bet that is broadly evident today.

Yellen also said, "If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise." I think Yellen is on to something. Despite the Fed's desire to raise rates they are struggling with the fact that the economic reality is not cooperating. Investors are also catching on to the fact that the economy is not recovering as fast as the Fed has promised and equities may suffer as a result.

Economists had fallen into the trap of expecting cheap oil to power a sharp uptick in consumer spending and a period of economic acceleration. What we are seeing is the reverse. Companies have announced capex reductions or postponements of roughly $800 billion in the form of reduced drilling, cancelled or postponed projects. This has caused the loss of roughly 100,000 high paying jobs in industries directly related to energy and tens of thousands more in industries that depend on the spending from energy companies and their employees.

Consumers are not spending their gasoline windfall and instead using the money to pay down credit cards or pay bills. With drilling activity still declining the economic weakness spreading out from the energy sector could continue to weigh on the U.S. economy all year.

The economic calendar for next week could go a long way towards changing the economic view. If the payroll reports come in lower than expected the Fed is going to have to temper its rate hike posture. Whether that has any impact on the markets at this point is unknown. They have warned of their plan to hike rates for so long that easing off that warning could be more of a problem. They may be forced to keep their pro hike posture just to prevent having to start all over from square one when/if the economy begins to grow again.

The ISM Manufacturing report on Monday could be disappointing given the recent weakness in the regional reports. The Fed Beige Book on Wednesday will try to keep up the economic cheerleading even if conditions have deteriorated. Conditions would have to be bleak before the Fed economists that prepare that report would actually say anything negative. Going from "moderate growth" to "modest growth" and back again every other month is hardly a real analysis of regional conditions.

The weekly jobless claims have been rising for the last four weeks and that suggests trouble in the employment reports. However, analysts are expecting a big jump in the ADP numbers from 169,000 last month to 192,500 for May. I wish them luck.

The Nonfarm payrolls surprised to the upside last month and analysts are expecting a gain of +220,000 for May. With all the regional reports showing declines in their employment components I would not be surprised to see a number under 200,000.

Lastly the OPEC meeting begins on Friday and nobody expects them to change their current stance of "produce everything possible" but there are some really irate countries in the cartel. These are the ones that can't produce any more and depend on oil for the majority of their national budget. I would not be completely surprised if there are not some kind of concession to those minorities. Meanwhile Saudi Arabia and Iraq are producing at record levels and promising more to come. You never know how much of the headlines ahead of the meetings are posturing rather than reality.

The split calendar gained another entry with Nippon Telegraph (NTT) announcing a 2:1 split. This should have no impact on the stock and should be ignored. The Exponent 2:1 split was approved by shareholders and the split date will be June 4th. Shares are testing a four-month low so I doubt there will be any impact on the stock.

Shares of Humana (HUM) spiked +20% late Friday after the company said it was approached by Cigna (CI) about a potential takeover. Humana said it had hired Goldman Sachs (GS) to advise them on the process. The Wall Street Journal said Aetna had also expressed interest in Humana. The company has almost 14 million members. A Morningstar analyst said Humana was interested in selling itself because it was very dependent on Medicare and the government is trying to impose additional cost cutting measures. Humana needs to be part of another company that has a broader customer base.

The rest of the insurance sector also spiked higher because nobody knows who will step up to try and capture Humana or be acquisition bait themselves. Aetna (AET) gained +1.4%, Anthem +2.2%, Wellcare (WCG) +4%, Healthnet (HNT) +1.5%, Centene (CNC) +4%, Molina (MOH) +1.4%, Anthem (ANTM) +2.2% and Cigna +3.7%.

Bristol Myers Squibb (BMY) declined -7% after the company reported some trial results at the American Society of Clinical Oncology (ASCO) conference. A lung cancer drug approved by the FDA in December showed a doubling of life expectancy in one class of patient but there was no benefit in other classes. After the report analysts said this could open the door for Merck (MRK) and Roche when they release their own drugs targeting the same cancers in the coming months.

Gamestop (GME) rallied +6% after reporting earnings of 68 cents that easily beat estimates for 59 cents. Revenue of $2.061 billion also beat estimates for $2.01 billion. The company also raised its full year guidance. Gamestop is the most shorted stock in the S&P at 47% and those shorts paid the price today.

ITT Educational Services (ESI) reported the results of an audit of their 2014 financials and the stock soared +81%. Yes, +81%. The key point here is that the company now believes the Department of Education composite score for measuring an institution's financial stability rose to 2.0 and the score must be above 1.5 to be deemed financially stable and not require governmental oversight.

Shares had fallen from $10 to $2 after the SEC filed fraud charges claiming the company hid financial information from investors relating to student loan programs that were deemed risky. The company rebutted the charges and filed the audited financial to prove their case. I think the gain today is simply another short squeeze since many traders expected them to fail.

Rosetta Stone (RST) rallied 18% after it received an "expression of interest" from RDG Capital Fund Management. The company said the board will carefully evaluate the expression if interest and declined further comment. Rosetta offers language learning courses in 30 different languages. Shares had declined -22% year to date.

EPlus (PLUS) reported earnings of $1.22 per share on revenue of $267.3 million. The company is a computer products reseller. Apparently that was not good enough for investors and the stock fell -8% on the news.

Heron Therapeutics (HRTX) reported their drug Sustol significantly reduced chemo symptoms in patients in late stage trials. The drug eliminates nausea and vomiting, which are common side effects of chemotherapy. Nearly 8 out of 10 people experience these symptoms while taking chemo. The drug Sustol is injected about 30 minutes before the chemo and is "remarkably effective." The company said it will file an application with the FDA in a "couple of months" and approval should take as little as 6 months. The drug will be ready to market two months later and could bring $850 million a year to Heron.

Prothena (PRTA) shares were initiated with a buy rating by UBS and the stock rallied +14% on the news. UBS said early data on the drug NEOD001 are clearly suggestive of an active therapy in a high unmet need indication. Near term data is positioned to increase investor confidence on the outcome of the phase-3 trial. The drug treats AL Amyliodosis. A second drug, PRX002 in the treatment of Parkinsons is also under appreciated. UBS said for multiple reasons we see Prothena as a "top M&A target" in biotech. Shares rallied +14%.

The Chinese markets crashed over the last two days after brokers tightened margin requirements in the overheated market. On Thursday the Chinese markets declined -6.5% on record volume. That was the biggest one day decline since the financial crisis. The Shanghai Stock Exchange traded a record $193.57 billion in shares on Thursday. The Chinese market has risen +140% over the last 12 months despite a slowing economy. The market rules change several months ago opened the door for anyone to own stocks and brokerage accounts were being created at the rate more than one million a week. Stocks bought on margin hit a record 2 trillion yuan on Tuesday. On Thursday morning three brokerages hiked margin requirements ahead of what is expected to be a similar move by regulators. Two other brokerages hiked requirements earlier in the week.

Crude oil had a rough week. After dropping to the low for the month at $56.51 on Thursday the futures rebounded to nearly $61 on Friday. The movement on Friday came from the falling dollar and news that active oil rigs declined -13 for the week. Investors had been expecting a positive gain in the rigs after only a minimal decline the prior two weeks. This suggests the bleeding may not have stopped.

Earlier in the week Iraq said it was going to ship 26% more oil in June or roughly an additional 800,000 bpd to 3.75 mbpd. This may be posturing ahead of next Friday's OPEC meeting because the oil minister said export capability is capped at 3.1 mbpd. The headlines still weighed on oil. Also, a sudden surge in the demand for supertankers caused a spike in rates from $52,987 per day on May 6th to $83,412 per day on May 20th. That is the highest rate since 2008.

At the start of June OPEC members will have nearly 485 million barrels in transit to buyers and the most at any time so far this year. Another 20 million barrels are stored on ships at sea. OPEC produced 31.3 million barrels per day in April and probably more than that for May. Their official quota is for 30 mbpd but they threw that out at their last meeting when they decided to punish high cost producers and try to grab as much market share as possible at lower prices. That is not expected to change.

However, since the November OPEC meeting Saudi Arabia has a new king and a new oil minister. They burned through $36 billion in forex reserves in March/April. That is the budget for the entire year. The new king may have a different outlook on low oil prices. In order for Saudi Arabia to agree to production cuts Russia would also have to agree. Assuming Russia did agree how would anyone police their production since Putin lies about everything?

For the week ended on the 29th the active rig count in the U.S. declined -10 to 875, down from a high of 1,931 in December. Oil rigs declined -13 to 646, down from 1,609 at their high. That is a drop of -963 oil rigs or -59.8%. Gas rigs gained +3 to 225. Offshore rigs were unchanged at 29, down from 60 in January.

If Iraq really ships that additional oil and OPEC continues flooding the market with crude the rig count could go a lot lower. Investors were expecting oil prices to rebound over the summer and producers to begin putting rigs back to work in July. Depending on the OPEC news next week that may not happen and crude prices could move lower.


Tuesday's drop was erased by Wednesday's M&A generated short squeeze but sellers returned in volume on Friday. The economics were blamed but it may have been simply end of month profit taking. The first trading day of June has the worst record of any month in four of the last seven years. Since 1998 the Dow has averaged a loss of -87 points on the first day of June. Source

I don't know what causes that June swoon but it is regular enough that traders could profit from exiting in advance and then buying the dip.

June has not been kind to the major indexes over the last ten years. The Dow has posted losses in 8 of the last 10 years with an average -1.6% decline. The S&P lost 6 out of 10 with an average decline of -1.3%. That is the worst month of the year for the S&P over the last ten years. The Nasdaq lost in 7 of 10 with an average decline of -0.9%.

Another factor impacting the last day of May and first trading day of June is the Russell index rebalance. On Friday Russell re-ranks their stock universe for the Russell 3000. That is the Russell 1000 and Russell 2000 combined in one index. The ranking sets up for the actual rebalance that happens after the market close on June 26th.

There is roughly $4.4 trillion indexed to the Russell 3000 index. The R3K includes more than 95% of the U.S. market cap. That means whenever Russell changes the ranking some stocks leave, some are added and some move from the Russell 2000 to the 1000 and others move backwards.

The Russell 3000 is the top 3,000 stocks by market cap in the USA markets. The Russell 1000 is the largest of those 3,000 stocks and the Russell 2000 is the bottom 2,000 stocks in the index. As stocks grow they move into the top 1,000 and if they shrink they move from the 1,000 back down to the 2,000. Quite a few other stocks fall out of the index altogether because their market cap declined and other stocks not currently in the index take their place. Analysts expect more than $43 billion in rebalance related trades over the next three weeks.

Now that you have the ground rules you are free to game the system. Numerous hedge funds have developed this to an art. Large organizations like Deutsche Bank have an entire group of certified strategists that attempt to predict the ranking and therefore predict which stocks are moving in or out of the indexes. Knowing this in advance is very advantageous because those leaving will decline and those being added or upgraded will rise.

The formulas are complex and it takes a serious amount of effort by a lot of people to come even close to the same results as the Russell analysts. Some stocks are easy. For instance Shake Shack (SHAK) will be added because it did not exist in the 2014 rankings. Stocks that have IPOed recently and have a significant market cap are definitely going to be included. Each one that is added means somebody gets ejected. Another addition would be Vista Outdoor (VSTO), they were spun off from Orbital ATK several months back.

Other new stocks would include Cyberark (CYBR), Box Inc (BOX) and Radius Health (RDUS). Any company that was acquired or merged with another like Forest Labs (FRX) or Fresh Del Monte (FDP) will be removed from the indexes and the surviving entity will have a larger weighting.

Here is a complete list of stocks expected to be added and deleted from the Russell 3000 as composed by H.C. Wainwright. Russell Addition/Deletion List

The speculation over who will be deleted and added could easily account for the unusual string of negative trading days on the first day of June.

For those of us without access to super computers and unlimited download capability of all the data on each individual stock we get to sit on the sidelines and watch the big boys make the trades. Fortunately Russell does publish the actual list of proposed additions and deletions on June 12th and a revised list on June 19th. Anyone that wants to game the actual rebalance on the 26th can do so with a couple weeks left in the process.

Volume on Friday rose to 7.16 billion shares and the most since May 6th. However, much of that gain was rebalance related with 40% of the volume coming at the close. Thursday's volume was 5.68 billion shares.

Last week we saw a continued decline in the Dow Transports, which are now down about 10% from their highs in 2015. The Dow Industrials are up +1% over the same period. This divergence is becoming more extreme as each day passes and has the potential to drag the industrials significantly lower.

This could be one of the reasons the Dow weakened over the last couple of days. Eventually divergences matter and we may have reached that point on the transports.

The S&P posted four consecutive lower highs and missed out on five only because Monday was a holiday. This is not bullish. However, the low from Tuesday at 2099 was not repeated the rest of the week. Friday's -13 point decline came despite the $2.50 gain in oil prices or maybe I should say as a result of the rise in oil prices. Energy stocks did not rise with oil.

Bond yields declined sharply all week with the yield on the ten-year closing at a five-week low of 2.095%. Stocks declining and treasuries rising sounds an awfully lot like investors are starting to decide the economy is actually weakening and it is time to move to safety.

Since the primary uptrend on the S&P has not failed and the index is just slightly more than -1% (-23 points) from a new high it is hard to paint a bearish scenario just from the charts. Dips happen and this one has been very minor so far. Stocks do tend to retrace their moves when they fail at new high levels. They drop back to consolidate and then make another run at the highs. If that happens and those highs are not broken then we really do have something to worry about. So far this has been just some weak profit taking.

If the S&P declines below that 2099 low from Tuesday then the 2075-2080 level becomes the target. The 100-day average is 2080.

The Dow did make a new low for the week on Friday at 17,967. In round numbers the 18,000 level held as support but the lower low suggests there may be trouble ahead. The financial sector is declining since the odds of a rate hikes are slipping farther into future as each day passes. The industrials are fighting lower demand and the high dollar and it appears to be a losing battle.

The key support level IF this is going to be just a garden variety dip is 17,800 or possible 17,600 but that lower level is critical. Initial resistance remains 18,200 and despite Wednesday's short squeeze that level was not tested.

On the bullish side the Nasdaq refuses to drop. The -28 points on Friday was just a haircut and not even a decent trim. Wednesday's new high close at 5106 is only 36 points away and the Nasdaq is showing no signs of collapsing. However, a lot of that strength is due to the biotechs and the merger activity in the chip sector.

The biotechs are up +21% for the year and they are holding at their highs. The chip sector was lifted to a new high by the Broadcom acquisition and speculation that Intel will buy Altera (ALTR) next week.

The Nasdaq could vault to a new high at any time as long as it continues to hold at that 5100 resistance. This is the most bullish of all the indexes but there is a lot of drag from those others. Rarely does one index breakout to new highs while the other indexes are setting new monthly lows. There is solid support at the 5000 level so a protracted decline would be a major change in market sentiment.

The AAII sentiment saw a slight adjustment from neutral to bullish because of the Wednesday rebound that saw the Nasdaq close at a new high. That lured about 1.8% of the survey respondents away from neutral and into the bullish camp but by far the neutral category is still the winner.

The Russell 2000 only declined -0.45% last week and was the second best performing index behind the Nasdaq 100 ($NDX) at -0.41%. The R2K did post a lower high but there was no real weakness. Monday will be the day for the Russell as the rebalancers begin selling those stocks they believe will be ejected from the R3K. Russell futures dropped -3 at the close on Friday. The Russell is not showing us any direction despite the lower high. It is still in an uptrend and still holding above that 1230 support. If we do see the Russell begin to decline next week it could provide additional drag on the large cap indexes. Likewise a rebound over resistance at 1260 would be very bullish.

Last week I suggested we could see some fund managers begin to put some of their extra cash to work in June as they window dress the midyear statements. A decent dip this week would give them a buying opportunity and we will see if that window dressing theory plays out. Just remember, I am expecting June to finish higher rather than go higher in the next week or two.

I remain in the cautiously long until proven wrong mode. I would be a dip buyer at any of the clear support levels like 17,800 or 17,600 on the Dow. Watch for a bottom to form rather than just jump in if those levels are touched. That would be 2075-2080 on the S&P and 5000 on the Nasdaq. If we dip below those levels I would wait for a rebound back above them before testing the water.

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Random Thoughts

The U.S. GDP fell into contraction in Q1 and the third time in contraction since the financial crisis. The last time that has happened was in the mid 1950s. The recovery is so lackluster and erratic that the Fed has not hiked rates since 2006. I reported last week that the U.S. government is going to change the way they calculate GDP in order to erase the negative numbers for the last two first quarters. If you don't like the numbers just change the way they are calculated. The general public will never know and everybody can be happy. Unfortunately in deciding what calculations to change they found out that by changing the parameters for Q1 to raise the growth the same calculations would probably lower growth for Q2 and Q3 so the bottom line would remain nearly the same. I guess 2+2 = 4 regardless of how you try to change it.

Since 2010 the U.S. has averaged +2.2% growth. That is only 65% as fast as the national average since the 1930s. A slow growth economy is at risk for all kinds of shocks that can push it back into contraction. Weather, dock strike, strong dollar, etc can all significantly impact growth. In the last three major expansions the economy never had a negative quarter. You have to go back to 1973-1975 to find a negative quarter in an expansion period.

The Greek tragedy continues to play out despite several deadlines that have come and gone. Greece has a flurry of payments due to the IMF in June and they claim they can only pay the first one.

Payments due to the IMF

June-5th 300M euros
June-12th 300M euros
June-16th 558M euros
June 19th 335M euros

Not making those payments when due does not constitute an immediate default. They have until the end of June to make the payments without defaulting. If they do fail to make the payments to the IMF it does not trigger default clauses in other debt classes. The odds are about 100% that Greece will not make all these payments without a bailout from the Troika.

The bigger problem is the 7 billion in euros due to the ECB in July and August.

Greek citizens continue to withdraw money from banks at a record rate. Banks have received more than 80 billion euros from the Emergency Liquidity Assistance program extended to the Bank of Greece in order to offset the withdrawals and prevent bank failures. Deposits have fallen from 240 billion euros to 142.8 billion since the Greek economic problems began. Bloomberg Article

Bloomberg Chart

Treasury Secretary Jack Lew warned the G7 last week there was the potential for an accident in the global economy if Greece and its creditors did not reach a deal before the existing bailout expires on June 30th. Lew said, "There is great uncertainty in there at a time when the world needs greater stability and certainty" Source

The NYSE said margin debt hit a new record high at $507 billion as of the end of April and $30 billion more than March. It is now about 50% higher than it was in 2007 just before the market crash. Despite more than $100 billion in funds flowing out of the market so far in 2015 the market is still making new highs. If we ever do have a decent dip that monster margin debt could accelerate any decline. Source

Adjusted pretax corporate profits fell -5.9% in Q1 and the second consecutive quarter of declines. Profits declined -$125.5 billion in Q1 for the biggest decline in seven years. In Q4 profits declined -1.4% or a drop of -$30.4 billion. This is not the same profit numbers you are used to seeing in a company's quarterly reports. These figures are adjusted for depreciation and the value of inventories. How much longer can corporations continue to post slowing profits before the equity market figures it out? Source

Amazon (AMZN) is planning on producing and marketing its own brand of foods under the Elements brand. Earlier in May Amazon filed for trademark protection for more than two dozen categories under the Elements brand. Amazon has been selling diapers and baby wipes under the brand and is going to greatly expand its offerings to include coffee, soup, pasta, water, milk, cereal, baby food, vitamins, dog food and assorted household items. Amazon has approached private-label food manufacturers like TreeHouse Foods over a partnership. The company also has other product lines marketed under the Basics, Strathwood and Pinzon brands. Market research firm Information Resources said private label goods were a $120 billion market in 2014. Source

Costco (COST) loses $40 million a year selling $4.95 rotisserie chickens. The company sold 76 million of those chickens in 2014 because customers love them and like the $1.50 hotdog at the snack bar they come into the store because of the cheap snacks and then purchase a cart of regular products. Most other stores have raised their prices to $5.99 because the price of chickens had been rising. With the ban on exports to some countries because of the bird flu epidemic the cost of chickens could actually decline in 2015. Source

May set a record for M&A with $241.6 billion of deals already announced. That tops the prior record of $225.8 billion in May 2007 according to Dealogic. January 2000 is in third place at $212.7 billion. PricewaterhouseCoopers (PWC) said the deal train is showing no signs of slowing. They believe 2015 could be a record year and that will not be a small feat since 2014 is the current record holder.

June may rocket off to a fast start if the rumored Intel/Altera (ALTR) acquisition is announced next week. Add in the potential deal for Humana (HUM) and we could be off to a fast start.

Notable deals in May included Verizon buying AOL, Charter buying Time Warner Cable and Bright House Networks. Ann Inc (ANN) being acquired by Ascena Retail (ASNA). Avago (AVGO) buying Broadcom (BRCM).

Michael Feroli of JP Morgan said the Fed is in such a hurry to hike rates that the economic bar has been lowered dramatically. According to Feroli the Fed will hike rates in September if the economy is on pace for annual growth of at least 2% and nonfarm payrolls rise by at least 175,000 per month. Krishna Guha, vice chairman of Evercore ISI said GDP growth could average as little as 2.25% to allow the Fed to hike in September as long as payrolls averaged about 200,000 per month. Payrolls in 2015 have averaged +194,000 compared to +260,000 in 2014.

Yellen continues to remind us that a rate hike "will be appropriate at some point this year." The fed funds rate has been at zero since December 2008. Vice Chair Stanley Fischer did express some caution last week when he said "If the economy is growing very, very slowly we will wait" to hike rates. With -0.8% in Q1 and the Atlanta Fed GDPNow showing only +0.8% growth in Q2 or zero for the first six months that should qualify as "very, very slowly."

Google announced ten new products and innovations at its developer's conference last week. Read about all of them Here

The growing number of Russian military soldiers captured in the Ukraine makes it nearly impossible for Putin to continue claiming Russia was not involved in the conflict. Despite the growing number of soldiers injured and/or captured claiming they were there under orders with their units, Putin claims they deserted and went to the Ukraine on their own or were there helping out while on vacation. Obviously anybody with a fifth grade education can see through that BS but Russian citizens still believe Putin. Family members of the captured soldiers are being forced to say on Russian television that the men had deserted and left their families to go fight for Ukraine in order for Putin to keep the ruse alive. Source

Meanwhile Russia is massing heavy firepower consisting of tanks, artillery and hundreds of mobile rocket launchers on the Ukrainian border. All identifying number plates and marks have been removed as well as the insignias on the soldier's uniforms. The amount of weaponry is three times the buildup in March that eventually moved into Ukraine and joined the fight. Reuters article

Global central banks have printed the equivalent of $5.7 trillion to stimulate markets. That is enough cash to pave a six-lane highway circling the world TWICE with $100 bills according to Mark Haefele of UBS. Betting against that infusion of cash has been suicidal. Even worse, because of the very low interest rates everyone under the sun has been selling debt. Since 2010 global banks have added $22 trillion in bonds to their balance sheets.

Anyone that does not believe there will be a selling panic in the bond market once the Fed begins to normalize rates is living in a fairytale world. Source


Enter passively and exit aggressively!

Jim Brown

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"It is better to be out of the market and wishing you were in, than in and wishing you were out."

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New Plays

Biotech & Natural Gas

by James Brown

Click here to email James Brown


Relypsa, Inc. - RLYP - close: 36.79 change: +0.77

Stop Loss: 34.70
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 30, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 526 thousand
New Positions: Yes, see below

Company Description

Trade Description:
Biotech stocks showed relative strength in May. One biotech that might be worth looking at is RLYP. This is a small cap stock but it's in the upper range of small caps with a market capitalization around $1.5 billion.

According to the company, "Relypsa, Inc. is a biopharmaceutical company focused on the development and commercialization of non-absorbed polymeric drugs to treat disorders in the areas of renal, cardiovascular and metabolic diseases. The company's two-part pivotal Phase 3 trial of its lead product candidate, Patiromer for Oral Suspension, for the treatment of hyperkalemia, a potentially life-threatening condition defined as abnormally elevated levels of potassium in the blood, has been completed and the primary and secondary endpoints were met. A New Drug Application for Patiromer for Oral Suspension for the treatment of hyperkalemia was accepted by the U.S. Food and Drug Administration and is currently under review. Relypsa has global royalty-free commercialization rights to Patiromer for Oral Suspension, which has intellectual property protection in the United States until at least 2030."

Stocks like RLYP can be binary trades for long-term investors. You either win big or lose big depending on the company's pipeline. Right now RLYP's patiromer FOS is the main product in development. The FDA is expected to come out with a decision on RLYP's new drug application (NDA) by October this year. It's worth mentioning that RYLP does have competition from ZS Pharma who is working on a similar treatment. As RLYP doesn't have any significant sales yet the earnings news doesn't really help us as traders. Generally speaking biotech earnings for companies without any sales tend to be lumpy due to milestone payments from partners.

RLYP rallied on its recent earnings report even though they don't have sales. The net loss for 2015 Q1 was $0.78 per share versus $0.54 a year ago. Analysts were expecting a loss of $0.87. The news appeared to spark some short covering.

Shares of RLYP are trading technically. They bounced near the 38.2% Fibonacci retracement. They were showing relative strength on Friday with a +2.1% gain. You could also argue that RLYP has produced an inverse head-and-shoulders pattern, which is bullish. If the stock can rally above $38.00 it will produce a new triple-top breakout buy signal on its point & figure chart. We are suggesting a trigger to launch small bullish positions at $37.30. This should be considered a higher-risk, more aggressive trade.

Trigger @ $37.30 *Small positions to limit risk*

- Suggested Positions -

Buy RLYP stock @ $37.30

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

Buy the SEP $40 CALL (RLYP150918C40) current ask $3.20
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:


Gulfport Energy Corp. - GPOR - close: 43.16 change: -0.79

Stop Loss: 45.35
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 30, 2015
Time Frame: 8 to 12 weeks (option traders should exit prior to expiration
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Trade Description:
Normally a weaker dollar is bullish for commodities. Yet the U.S. dollar's decline from March into May did not help the price of natural gas very much. The price of natural gas did bounce for three weeks in May but it's already reversed much of these gains. Now the U.S. dollar is on the rise and expected to keep climbing thanks to weaker foreign currencies.

Another problem for oil and gas explorers like GPOR is falling demand for natural gas. Weather has been mild this spring and that has decreased demand for natural gas from utilities, who are big consumers. At the same time inventories for natgas in the U.S. are building.

The EIA, the U.S. Energy Information Administration, said that current natgas inventories is up +59% from the same time a year ago and it's up +1.7% from the five-year average. Right now natural gas futures are trading around $2.64 per MMBtu (British thermal units in millions) and they look like they're headed for the 2012 lows near $2.00.

GPOR is in the basic materials sector. According to the company, "Gulfport Energy Corporation is an Oklahoma City-based independent oil and natural gas exploration and production company with its principal producing properties located in the Utica Shale of Eastern Ohio and along the Louisiana Gulf Coast. In addition, Gulfport holds a sizeable acreage position in the Alberta Oil Sands in Canada through its 24.9% interest in Grizzly Oil Sands ULC."

Their exposure to Canada's oil sands isn't helping them at the moment. In their most recent earnings report GPOR said that their production in Canada is currently halted due to low commodity prices.

Speaking of earnings, the company has delivered some strong results in recent quarters. Back in November they reported Q3 results above expectations. Revenues soared +146% from the year ago quarter. They reported similar results in February (their Q4 report). This is because GPOR's production has surged. In the fourth quarter of 2014 their oil and gas production was up +282% from the year ago period.

GPOR's most recent earnings report was announced on May 5th. The company reported a loss of ($0.08) per share. Analysts were expecting a loss of ($0.09). Revenues did come in above expectations but traders sold the news. Shares plunged and broke their three-month bullish trend of higher lows.

GPOR's stock price has been unable to recover. Traders have been selling the rallies. Goldman Sachs didn't help when they downgraded GPOR from "neutral" to a "sell" rating on May 18th. The point & figure chart on GPOR is bearish and forecasting at $36.00 target.

This past week was technically bearish with GPOR's relative weakness and breakdown below support in the $44.00 area. Tonight I am suggesting a trigger to open bearish positions at $42.75.

Traders should note that OPEC does have a meeting coming up next Friday. Their decision on oil production could influence the price of natural gas. GPOR produces both oil and gas but most of its business is natural gas.

Trigger @ $42.75

- Suggested Positions -

Short GPOR stock @ $42.75

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

Buy the JUL $40 PUT (GPOR150717P40) current ask $1.25
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Slump Into The Weekend

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. markets end the month of May with gains but they were fading lower into the weekend. The combination of weak economic data in the U.S. and rising concerns over Greece weighed the market down.

We want to exit our MBLY trade on Monday morning.

Current Portfolio:

BULLISH Play Updates

GoPro, Inc. - GPRO - close: 55.46 change: -1.35

Stop Loss: 51.45
Target(s): To Be Determined
Current Gain/Loss: +9.3%
Entry on May 14 at $50.75
Listed on May 13, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.5 million
New Positions: see below

05/30/15: After big gains on Thursday GPRO was definitely a target for some profit taking ahead of the weekend. Shares slipped -2.3% on Friday.

GPRO might fill the gap from Thursday morning and that could mean a dip into the $53.50-54.00 zone. I am not suggesting new positions at this time.

Trade Description: May 13, 2015:
GPRO looks like a short squeeze waiting to happen. This company is the premier brand for wearable "action" cameras.

Here's the company's rather self-confident description, "GoPro, Inc. is transforming the way consumers capture, manage, share and enjoy meaningful life experiences. We do this by enabling people to self-capture engaging, immersive photo and video content of themselves participating in their favorite activities. Our customers include some of the world's most active and passionate people. The quality and volume of their shared GoPro content, coupled with their enthusiasm for our brand, virally drives awareness and demand for our products.

What began as an idea to help athletes document themselves engaged in their sport has become a widely adopted solution for people to document themselves engaged in their interests, whatever they may be. From extreme to mainstream, professional to consumer, GoPro has enabled the world to capture and share its passions. And in doing so the world, in turn, is helping GoPro become one of the most exciting and aspirational companies of our time."

GPRO came to market with its IPO in June 2014. The stock opened for trading at $28.65 and by October 2014 shares were nearing $100 per share. That proved to be the peak. GPRO spent the next six months correcting lower and finally bottomed near $37 in March this year. Now the stock is building on a steady trend of higher lows as investors digest the company's massive growth.

GPRO reported their 2015 Q1 results on April 28th. Wall Street was expecting a profit of $0.18 per share on revenues of $341.7 million. GPRO beat estimates with a profit of $0.24 a share. Revenues were up +54% from a year ago to $363 million.

Management said it was their second highest revenue quarter in history. Their GAAP results saw gross margins improve from 40.9% in Q1 2014 to 45.1% today. Their net income attributable to common stockholders increased 98.2% compared to the first quarter of 2014. International sales surged +66% and accounted for just over half of total sales in Q1 2015. GPRO shipped 1.3 million devices in the first quarter. This was the third quarter in a row of more than one million units.

GPRO management raised their guidance. They now expect 2015 Q2 revenues in the $380-400 million range with earnings in the $0.24-0.26 region. Analysts were only forecasting $335 million with earnings at $0.16 a share.

The better than expected Q1 results and the upgraded Q2 guidance sparked several upgrades. Multiple analysts raised their price target on GPRO. New targets include: $56, $65, $66, $70, and $76.

There are plenty of bears who think GPRO is overpriced with P/E above 47 and rising competition. The biggest argument against GPRO is competition from a Chinese rival Xiaomi who has produced a competitive action camera that they're selling for less than half of GPRO's similar model. GPRO critics are worried this could kill GPRO's growth in China and the rest of Asia. It's too early to tell who will be right but momentum is currently favoring the bulls.

The most recent data listed short interest at 24% of the 55.5 million share float. That's plenty of fuel to send GPRO soaring. Right now the stock is hovering around the psychological resistance level at $50.00. We are suggesting a trigger to launch bullish positions at $50.75.

- Suggested Positions -

Long GPRO stock @ $50.75

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

Long JUL $55 CALL (GPRO150717C55) entry $2.00

05/28/15 new stop @ 51.45
05/20/15 new stop @ 49.25
05/14/15 triggered @ $50.75
Option Format: symbol-year-month-day-call-strike


Hanesbrands Inc. - HBI - close: 31.86 change: -0.07

Stop Loss: 31.45
Target(s): To Be Determined
Current Gain/Loss: -1.5%
Entry on May 21 at $32.35
Listed on May 20, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.74 million
New Positions: see below

05/30/15: HBI posted declines every day last week. On the plus side the selling pressure was very mild. I'd like to see HBI break the short-term trend of lower highs before considering new bullish positions.

Tonight we are raising the stop loss to $31.45.

Trade Description: May 20, 2015:
HBI was founded back in 1901. Today you will find Hanes products in more than 80 percent of U.S. homes.

HBI is in the consumer goods sector. According to the company, "HanesBrands, an S&P 500 company, is a socially responsible leading marketer of everyday basic apparel in the Americas, Europe and Asia under some of the world’s strongest apparel brands, including Hanes, Champion, Playtex, DIM, Bali, Maidenform, Flexees, JMS/Just My Size, Wonderbra, Nur Die/Nur Der, Lovable and Gear for Sports.

We sell bras, panties, shapewear, sheer hosiery, men's underwear, children's underwear, socks, T-shirts and other activewear in the United States, Canada, Mexico and other leading markets in the Americas, Asia and Europe. In the United States, we sell more units of intimate apparel, male underwear, socks, shapewear, hosiery and T-shirts than any other company."

What makes HBI different than most of its competitors is that HBI owns and operates its own manufacturing facilities. About 90% of their apparel comes from company-run plants. That helps them control costs throughout the production process.

This year the company has been very shareholder friendly. Back in January they raised their dividend 33% and announced a 4-for-1 split. The stock split took place in March this year.

HBI's most recent earnings report was April 23rd. HBI reported their Q1 earnings were up +16% from a year ago to $0.22 a share. That missed estimates of $0.23. Revenues were up +14% to $1.21 billion. This was just below expectations of $1.22 billion.

In the company press release HBI Chairman and CEO Richard Noll commented on their results, saying, "We are off to a great start in 2015, once again delivering a double-digit increase in EPS, while tracking to our full-year growth plans. Our acquisition strategy continues to create value with DBApparel, Maidenform and Gear for Sports all contributing substantially to our double-digit growth. In addition, we are raising our 2015 performance outlook to reflect the recent acquisition of Knights Apparel."

Management raised their earnings guidance for 2015 from $1.58-1.63 to $1.61-1.66 per share. Wall Street estimates were at $1.64. HBI also raised their 2015 revenue guidance from $5.78-5.83 billion to $5.90-5.95 billion. Consensus estimates were already at $5.95 billion.

The stock was hammered on the earning miss as investors ignored the improved earnings and revenue guidance. The stock corrected from about $34.60 to under $31.00 in four days (-10 correction).

Analysts' reaction to HBI's results have been positive. Some have noted that Q1 is normally a slower season for HBI. They see the pullback in HBI's stock as a buying opportunity. Multiple firms have raised their price target since the earnings report (new targets are $37, $38, and $40 per share).

Technically HBI has been consolidating sideways in the $30.50-32.00 zone the last several days and have just recently started to breakout from this trading range. We want to hop on board if this bounce continues. Tonight we're suggesting a trigger to open bullish positions at $32.35.

Long HBI stock @ $32.35

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

Long JUL $32.50 CALL (HBI150717C32.50) entry $1.05

05/30/15 new stop @ 31.45
05/21/15 triggered @ 32.35
Option Format: symbol-year-month-day-call-strike


Mobileye N.V. - MBLY - close: 47.08 change: +0.22

Stop Loss: 44.95
Target(s): To Be Determined
Current Gain/Loss: -3.2%
Entry on May 15 at $48.65
Listed on May 14, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.2 million
New Positions: see below

05/30/15: MBLY still has a bullish trend of higher lows. Yet the stock has struggled to build on this pattern. Momentum seems to be slowing. We are suggesting an immediate exit on Monday morning to cut our losses.

- Suggested Positions -

Long MBLY stock @ $48.65

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

Long JUL $50 CALL (MBLY150717C50) entry $2.10

05/30/15 prepare to exit on Monday morning
05/15/15 triggered @ $48.65
Option Format: symbol-year-month-day-call-strike


Paylocity Holding Corp. - PCTY - close: 33.48 change: -0.49

Stop Loss: 31.45
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 28, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 206 thousand
New Positions: Yes, see below

05/30/15: PCTY was another target for profit taking on Friday. After two big days of gains the stock reversed with a -1.4% decline ahead of the weekend. I don't see any changes from the Thursday night new play description. Our suggested entry point is $34.15.

Trade Description: May 28, 2015:
PCTY is delivering strong double-digit revenue growth and has consistently been raising guidance. This has pushed shares to new highs this year.

PCTY is in the technology sector. According to the company, "Paylocity is a provider of cloud-based payroll and human capital management, or HCM, software solutions for medium-sized organizations. Paylocity's comprehensive and easy-to-use solutions enable its clients to manage their workforces more effectively. Paylocity's solutions help drive strategic human capital decision-making and improve employee engagement by enhancing the human resource, payroll and finance capabilities of its clients."

Back in November they reported their 2015 Q1 results that beat estimates on both the top and bottom line. Revenues were up +38.8% from a year ago. Management raised guidance.

PCTY delivered a similar performance in February. The company reported its Q2 results that beat Wall Street's estimates on both the top and bottom line. Revenues were up +54.9% and managed raised guidance.

Their most recent report was May 7th. You can see the stock's big reaction on the daily chart (likely a short squeeze). Analysts were expecting a profit of $0.05 on revenues of $44.5 million. PCTY delivered $0.11 per share with revenues up +40% to $47.3 million. This time management raised their Q4 revenue guidance above analysts' estimates.

Technically the stock has spent the last several days building a bull-flag consolidation pattern. Today's display of relative strength looks like a breakout from the flag. The point & figure chart is forecasting at $53.00 target. If this rally continues PCTY could see some short covering. The most recent data listed short interest at 12% of the 15.47 million share float.

Bears could argue that PCTY is near the top of its long-term bullish channel (see weekly chart). This would suggest that short-term upside would be limited to a couple of dollars.

NOTE: PCTY does have options but the spreads look too wide to trade them.

Trigger @ $34.15

- Suggested Positions -

Buy PCTY stock @ $34.15

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.


Starbucks Corp. - SBUX - close: 51.96 change: +0.15

Stop Loss: 48.40
Target(s): To Be Determined
Current Gain/Loss: +1.8%
Entry on May 18 at $51.05
Listed on May 15, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.8 million
New Positions: see below

05/30/15: SBUX briefly tagged a new all-time high on Friday. Traders bought the dip midday around its rising 10-dma. As long as the broader market cooperates SBUX looks poised to breakout past the $52.00 level soon.

Trade Description: May 16, 2015:
The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX is having a pretty good 2015 so far with the stock up +23%, outperforming the broader market. A lot of this gain was thanks to a post-earnings pops. SBUX reported its Q1 2015 results on January 22nd. Adjusted earnings, backing out one-time charges, were $0.80 a share. That's in-line with estimates. Revenues were up +13.3% to $4.8 billion, also in-line with estimates.

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week. Investors applauded the news in spite of the in-line results and sent SBUX soaring to new all-time highs the next day.

This earnings scenario, where SBUX delivers results in-line with estimates and rallies anyway, just happened again in late April. Of course it's worth noting that even in-line results still represent exceptional growth.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

SBUX popped to new highs following its results and then spent the next week consolidating lower. Investors started buying the dips again at its bullish trend of higher lows. It looks like the consolidation is over and SBUX is pushing higher. We want to hop on board. Tonight we are suggesting a trigger to open bullish positions at $51.05.

- Suggested Positions -

Long SBUX stock @ $51.05

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

Long JUL $50 CALL (SBUX150717C50) entry $2.07

05/18/15 triggered @ $51.05
Option Format: symbol-year-month-day-call-strike


Super Micro Computer - SMCI - close: 33.46 change: -0.31

Stop Loss: 31.65
Target(s): To Be Determined
Current Gain/Loss: -0.6%
Entry on May 22 at $33.65
Listed on May 18, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 622 thousand
New Positions: see below

05/30/15: SMCI is retreating from its trend line of lower highs (see chart). Fortunately shares found short-term support near its 10-dma and 50-dma on Friday.

More conservative traders may want to use a higher stop loss. I am not suggesting new positions at this time.

Trade Description: May 18, 2015:
Sometimes the market's expectations get too high. When a company fails to meet these rising expectations the stock can get punished.

SMCI is in the technology sector. According to the company, "Supermicro® (SMCI), the leading innovator in high-performance, high-efficiency server technology is a premier provider of advanced server Building Block Solutions® for Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data, HPC and Embedded Systems worldwide. Supermicro is committed to protecting the environment through its 'We Keep IT Green' initiative and provides customers with the most energy-efficient, environmentally-friendly solutions available on the market."

It's easy to see why investors might have big expectations for SMCI. Looking at three of their last four earnings reports SMCI has beaten Wall Street estimates on both the top and bottom line and raised guidance three quarters in a row. It was their most recent report where results seemed to stumble.

SMCI report its fiscal Q3 results on April 21st, after the closing bell. Earnings were up 25% from a year ago to $0.47 a share. Yet analysts were expecting SMCI to report earnings in the $0.49-0.50 range. Revenues were up +26% from a year ago to $471.2 million, but this also missed expectations.

Guidance was also a little soft. Traders were used to SMCI raising their guidance. This time guidance for the current quarter (their Q4) was generally below consensus estimates.

The market overreacted to the disappointment. Shares crashed from $35 to almost $28 following its earnings news. Then traders started buying SMCI in the $29-30 region a couple of weeks ago. The rebound has lifted SMCI back above technical resistance at its 200-dma and back above price resistance near $32.00. We are betting this rebound continues. Tonight we're suggesting a trigger to open bullish positions at $33.65.

- Suggested Positions -

Long SMCI stock @ $33.65

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

Long JUL $35 CALL (SMCI150717C35) entry $1.50

05/22/15 triggered @ 33.65
Option Format: symbol-year-month-day-call-strike


Thoratec Corp. - THOR - close: 45.39 change: -0.38

Stop Loss: 43.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 602 thousand
New Positions: Yes, see below

05/30/15: THOR shot lower at the open but traders bought the dip midday. THOR managed to pare its losses by the closing bell. The stock managed a gain for the week in spite of Friday's dip. Shares are now up four weeks in a row and poised to breakout past resistance near $46.00. Our suggested entry point is $46.15.

Trade Description: May 27, 2015:
Shares of THOR are trading at multi-year highs thanks to a bullish outlook for 2015 results. THOR is in the healthcare sector. They make medical instruments.

According to the company, "Thoratec is a world leader in therapies to address advanced-stage heart failure. The company's products include the HeartMate II® and HeartMate III™ LVAS (Left Ventricular Assist Systems) and Thoratec® VAD (Ventricular Assist Device) with more than 20,000 devices implanted in patients suffering from heart failure. Thoratec also manufactures and distributes the CentriMag®, PediMag®/PediVAS®, and HeartMate PHP™ product lines. HeartMate III and HeartMate PHP are investigational devices and are limited by US law to investigational use. HeartMate PHP is currently in development and not approved for sale. Thoratec is headquartered in Pleasanton, California."

The last couple of earnings results have come in better than expected. You can see the rally in THOR's chart back in February. This was a reaction to the company's 2014 Q4 results. Analysts were expecting a profit of $0.24 a share on revenues of $106.8 million. THOR's results came in significantly above estimates with a profit of $0.39 on revenues of $127.9 million. Gross margins were 70.5% versus 65.5% a year ago.

The stock popped again on May 8th following another better than expected earnings report. Wall Street was expecting a profit of $0.26 a share on revenues of $111 million. THOR managed to beat estimates with a profit of $0.38 on revenues of $121 million. More importantly management raised their 2015 revenue guidance above estimates. THOR now expects revenues of $465-475 million versus consensus estimates around $463 million.

Yesterday the company announced that the FDA had provided a conditional approval for an IDE clinical trial to "investigate use of the HeartMate PHP acute catheter-based heart pump in patients undergoing a high-risk percutaneous coronary intervention."

Aside from a two-week correction in the second half of April the up trend in THOR's stock price has been pretty steady. The point & figure chart is bullish with a long-term target of $86.00. Currently shares of THOR are hovering just below potential resistance near $46.00. We are suggesting a trigger to launch bullish positions at $46.15.

Trigger @ $46.15

- Suggested Positions -

Buy THOR stock @ $46.15

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

Buy the JUL $45 CALL (THOR150717C45)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


BEARISH Play Updates

CenturyLink, Inc. - CTL - close: 33.24 change: -0.28

Stop Loss: 35.05
Target(s): To Be Determined
Current Gain/Loss: +1.2%
Entry on May 26 at $33.65
Listed on May 23, 2015
Time Frame: 8 to 12 weeks (less for option traders)
Average Daily Volume = 4.4 million
New Positions: see below

05/30/15: CTL underperformed on Friday. The stock plunged at the opening bell. Shares managed to trim their losses to -0.8% by the close. More conservative traders may want to start adjusting their stop loss lower.

Trade Description: May 23, 2015:
The earnings picture for CTL appears to be deteriorating and the stock has fallen as a result. CTL is in the technology sector.

They are part of the telecom services industry. According to the company, "CenturyLink (CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses and their lives through innovative technology solutions. CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network."

Looking at the last few earnings reports the guidance picture has been getting worse. Back in November 2014 they reported their Q3 results that beat the bottom line estimate by one cent but management lowered guidance. Then in February this year CTL reported their Q4 results that missed estimates. Revenues were also below estimates and managed lowered their guidance.

Their most recent earnings report was May 5th. CTL delivered their 2015 Q1 report with earnings of $0.67 per share. That was nine cents better than expected. Yet revenues fell -1.9% from a year ago to $4.45 billion and that was below Wall Street estimates. If that wasn't bad enough they also lowered guidance again (if you're counting, that's the third quarter in a row they lowered guidance).

The stock is nearing bear-market territory, down about 19% from its 2014 highs near $42.00 (not counting the spike in July). Bulls could argue that CTL is an income play. They do have a big dividend yield, currently about 6.3%, but their dividend has been this high for weeks and shares have not managed a sustainable rebound.

Technically CTL looks poised to breakdown below support in the $34.00 area and could drop toward the $30-28 region. We are suggesting a trigger to open bearish positions at $33.65.

- Suggested Positions -

Short CTL stock @ $33.65

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

Long JUL $32 PUT (CTL150717P32) entry $0.55

05/26/15 triggered @ $33.65
Option Format: symbol-year-month-day-call-strike


World Fuel Services - INT - close: 50.03 change: -0.48

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 26, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 468 thousand
New Positions: Yes, see below

05/30/15: INT also underperformed the broader market on Friday with a -0.95% decline. This stock is down five weeks in a row and is on the verge of breaking through major support near the $50.00 level.

Friday's intraday low was $49.77. Our suggested entry point to launch bearish positions is $49.75, which could be hit on Monday if INT sees any follow through lower.

Trade Description: May 26, 2015:
The correction in shares of INT is not over yet. The stock saw a big run from its 2014 lows near $36 to all-time highs near $58 in March this year. That proved to be the peak.

INT is in the basic materials sector. According to the company, "Headquartered in Miami, Florida, World Fuel Services is a global fuel logistics, transaction management and payment processing company, principally engaged in the distribution of fuel and related products and services in the aviation, marine and land transportation industries. World Fuel Services sells fuel and delivers services to its clients at more than 8,000 locations in more than 200 countries and territories worldwide."

Their 2014 Q4 earnings were better than expected with a profit of $0.96 per share versus estimates for $0.77. Yet revenues fell -6.0% from a year ago to $9.78 billion. Analysts had been forecasting $11.36 billion. That's quite a miss.

We see the same pattern in INT's Q1 results. The company reported on April 30th. Analysts were expecting a profit of $0.82 a share on revenues of $9.2 billion. INT delivered $0.83 a share but revenues plunged -30% to $7.34 billion. This time investors took notice and shares of INT dropped sharply on its results.

The stock has been trying to find support near the $50.00 level but traders keep selling the bounces. Now the bearish trend of lower highs is about to push shares of INT through this critical support level at $50.00. Tonight we are suggesting a trigger to launch bearish positions at $49.75.

NOTE: The option spreads are a bit wide. INT does have July options but there's no volume and no open interest on the puts yet.

Trigger @ $49.75

- Suggested Positions -

Short INT stock @ $49.75

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

Buy the AUG $50 PUT (INT150821P50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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