Option Investor

Daily Newsletter, Tuesday, 6/30/2015

Table of Contents

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

Market Wrap

Toothpaste is Out of the Tube

by Jim Brown

Click here to email Jim Brown

Greek PM Alexis Tsipras realized he has made a grave mistake not accepting the bailout and calling a referendum hoping the citizens would support him. After two days of bank closures, limited ATM withdrawals and all Greek credit cards invalid for purchases outside Greece the enormity of the mistake is hitting home.

Market Statistics

On Tuesday, Tsipras sent a two-page letter to the EU Finance Ministers saying he was willing to accept some of their conditions if they would immediately give Greece some cash and extend the Greek bailout for two more years. Unfortunately, Tsipras has already burned his bridges and you can use whatever analogy you like for his predicament. The toothpaste cannot be put back in the tube. The bell cannot be unrung. The one I like best is you cannot retrieve a grenade once it has been thrown.

The Tsipras grenade brought Greek commerce to a screeching halt and the majority of citizens are becoming hostile. Their phones are being cutoff for nonpayment, their iTunes charges are being denied and their cloud backups are being deleted for nonpayment. All of this because of the capital controls preventing citizens from transferring money out of the country. Yes, using your Greek bank issued credit card is a money transfer and is now prohibited.

With ATMs limiting withdrawals to 60 euros, most ATMs out of cash and the banks closed for a week the economy is coming to a sudden halt and Greek citizens are becoming increasingly hostile.

The Tsipras letter to the EU Finance Ministers was a Hail Mary pass and it was quickly deflected by Angela Merkel. She said there will be no checks written and no discussions held until after the Sunday vote. The EU leaders made it perfectly clear. A yes vote means staying in the eurozone and accepting the bailout conditions. A no vote means no further loans and leaving the eurozone is a likely event. With Greece in shutdown mode as a result of Tsipras actions the likelihood of a yes vote is rapidly gaining momentum. Tsipras will have failed in his campaign promises and he will probably resign.

Even while he is pleading with the EU to reopen negotiations and give Greece more money, he is still telling Greek citizens to vote no on the referendum. After a week with no banks, no money and no credit, Greek citizens are not likely to vote for economic suicide on Sunday.

The EU, ECB, IMF, known as the troika, finally had enough of Tsipras. When the deadline was looming and he decided to fight the troika with his sudden call for a referendum he forgot one important detail. You do not jump bare handed into an arena filled with gladiators and expect to win. Tsipras had no weapons to use against the troika and they had several large weapons to use against him. The troika was holding all the cards, and the money, with the ECB funding of Greek banks as their ace in the hole. When he announced the referendum the ECB countered with a halt in funding for the banks. Game over. From that point Tsipras had nothing to counter attack with and the troika will win this fight.

The market rebounded this morning on the knowledge that the outcome of the battle was already decided. It declined in the afternoon because the headlines will remain with us for the rest of the low volume holiday week and investors are worried some new headline will disrupt the market again.

The economic calendar was light with only the Texas Service Sector Outlook and Consumer Confidence. The Texas report rose from 1.1 in May to 4.1 in June. The revenue component surged from 3.8 to 13.2. This is the most important component in the index. The 3.8 reading in May was a three-year low. However, the employment component declined from 8.9 to 5.1 and the hours worked component fell from 1.9 to 0.1. The retail sales component rocketed higher from -10.7 to 13.1. Apparently, the service sector in Texas is improving despite the slowdown in the energy activity.

Consumer confidence for June soared +6.8 points from 94.6 to 101.4 thanks to a sharp spike in the expectations component. Present conditions rose from 107.1 to 111.6 and expectations rose from 86.2 to 94.6. Respondents said they were better off financially and 17.5% expected gains ahead.

The next two days are chock full of big economic news. The Nonfarm Payroll report has been moved up to Thursday because of the holiday on Friday. That means traders will have only a few hours after the ADP Employment on Wednesday to adjust positions ahead of the Nonfarm report on Thursday. In a low volume week these two reports back to back with the ISM Manufacturing report in the same period we could see some additional volatility.

This would normally be a very quiet week for stock news. Companies that are not going to warn on earnings are moving into their quiet period and press releases will dry up. Those that are going to warn would normally wait until Thursday after the bell if possible in order to escape notice by the majority of investors that have already left for the holiday.

Wynn Resorts (WYNN) rallied nearly $5 after China relaxed the visa restrictions on travelers headed to Macau. Travelers holding mainland China passports can now stay 7 days, up from the current limit of 5 days. The time was shortened last year after the government claimed citizens were cheating by claiming they were visiting other destinations but really only staying in Macau. Another change was in the time between visits. Gamblers can now visit twice every 30 days rather than twice every 60 days. Another big drag on casinos is the imposition of a total smoking ban several months ago. Since most wealthy Chinese gamblers are also smokers it further limited the number of gamblers.

June was expected to see the biggest decline in Macau casino revenue ever. Apparently, the Macau economy had fallen to the point where China had to do something to support it. Macau is relatively independent but it is still one of two "special administrative regions" that is broadly governed by China.

Casino revenue for June should be reported later this week and the rebound by WYNN and others could be short lived. The 5% rebound in WYNN was miniscule compared to the -36% decline since February.

The China stock market had a rare up day with a +2% gain. That came after yesterday's close at 4192 and an 18.8% decline from the highs. However, the intraday low today was 3847 and a -25.5% decline from the highs. The volatility was extreme but the dip was bought.

Wives are not the only people that change their minds on a whim. ConAgra Foods (CAG) announced it was selling the store brands packaged food business. This is significant because it just spent $5 billion two years ago buying Ralcorp to increase its exposure in this area. The CEO said it wants to spend the money improving the market share for its name brand products like Chef Boyardee, Slim Jim, Banquet, Healthy Choice and others. Jana Partners bought a 7.2% stake in early June because of disappointing results by ConAgra. Shares rose only slightly after a big opening drop.

Apollo Education (APOL) was expelled by investors today for bad grades. Shares declined -17% after the company provided soft guidance for 2016. Enrollments are expected to drop -25% to 150,000, stabilize in 2017 and then return to growth in 2018. That is a long-term view that is not very appealing.

Earnings of 44 cents, declined -28%. Revenue of $681 million declined -14%. University of Phoenix revenue fell -17.7%. New enrollment declined from 33,900 to 29,400. Total enrollment fell -14.5% to 206,900. With expectations for a decline to 150,000 Apollo got a failing grade from investors. Shares fell to a 15-year low at $12.88.

Bond insurers Ambac Financial (AMBC) and MBIA (MBI) are in free fall after the governor of Puerto Rico said the commonwealth was in a debt spiral and could not pay the $1.9 billion due this week. He said it was "unlikely" Puerto Rico would repay all its debt. Both companies have guaranteed billions in Puerto Rican debt and the outlook is not good.

Puerto Rico owes a combined debt of roughly $72 billion and the most per capita of any U.S. state. Puerto Rico is home to 3.6 million people. As recently as last week, some analysts expected Puerto Rico to pull out of its crisis and honor a plan to repay the debt. In theory a chapter 9 bankruptcy is not an option and hedge funds may have the most to lose.

Major funds including OppenheimerFunds, Franklin Templeton, Citigroup, Paulson & Co, Davidson Kemper, Brigade Capital, Fir Tree Partners and others have been buying up Puerto Rican debt because of the high yields and their inability to file bankruptcy. One analyst claimed 53% of U.S. open-end bond funds have exposure to Puerto Rican debt. A lot of the debt is on utilities such as their power monopoly Prepa and cannot access chapter 9 bankruptcy protection. Creditors can sue for payment. Prepa facilities are so old and outdated they still burn crude oil to generate power.

The decline in Western Digital (WDC) accelerated with another -4% loss today. The hard drive maker was downgraded last week because of slowing demand in the enterprise space and Micron's warning about falling PC demand. Western Digital makes mechanical hard disk drives and the real enterprise demand is moving to solid-state drives called SSDs. A SSD is just memory chips configured to look like a hard drive to the computer. Instead of spinning drives, it is just software to manage the data in memory. SSDs are significantly faster than hard drives and the cost per gigabyte is falling so rapidly that companies can afford to buy a faster SSD for the same price as an enterprise hard drive.

Hard drives are not going away because there are reasons why you would want to keep your long-term data on an actual drive rather than on a group of memory chips that can degrade over time. However, Western Digital may continue to decline until the Windows 10 upgrade cycle later this year.


The markets opened with a bang this morning with the Dow gaining +105 points but the selling was immediate. The Dow fell back into negative territory by 12:30 after Merkel said no to the Tsipras offer letter and no discussions at all until after the vote. This pushed the indexes to their lows but the dip buyers were ready and waiting. With the S&P at five-month lows, this appears to be a level some investors are willing to buy.

The Dow rallied back to 17,715 and the high of the day at 2:PM but sellers were still ready to unload some more shares and the rebound did not last long.

The S&P had a solid top at 2074 that ended the morning and afternoon rallies. The low for the day at 2056 was just 2 points above the 200-day average at 2054. This should be decent support with 2040 the next level if the 200-day fails.

The percentage of S&P stocks above their 50-day average declined to 27% on Monday and rebounded slightly today to 30.4%. That is hardly encouraging. The number of new 52-week lows on Monday were 620 and well above the 150 per day average the prior week.

The percentage of stocks with a P&F buy signal on the S&P declined to 58.6% and the lowest level since October. As of Friday 45% of the stocks in the S&P were in a bear market with declines of 20% or more.

Despite today's rebound, the market internals are still weak. Volume today was 7.6 billion shares and slightly higher than Monday's 7.3 billion. Advancers were only about 4:3 over decliners. That is hardly bullish considering the magnitude of the decline on Monday. Yesterday decliners were 8:1 over advancers and down volume was 9:1 over advancing volume. Monday could be considered a washout with cascading selling and grossly skewed internals. Today was not a typical rebound but I attribute that to the ongoing headline war from Greece and the desire to be flat rather than invested until after the holiday.

Support on the S&P is 2054-2056 and resistance 2074. Should either be broken on Wednesday that could be the direction for the rest of the week. Those holding losing positions now are hoping for a continued rebound so they will not have to sell. If the market continues lower, a move below 2054 could be the sell signal they are fearing and a reason to exit. Those who are looking for a signal to buy would like to see a move over 2075 as a signal the worst is over and Monday was the bottom.

One negative is the break below the 150-day average. That has been support since September and it failed. That makes the 200-day even more important for the rest of the week.

The Dow was helped the most by the rebound in Goldman, Disney and Apple. The Dow broke below the 200-day qt 17,679 on Monday and tried to move back above it with the 17,714 high but could not hold the gains.

Today's low of 17,576 was a lower low and suggests the Dow could be vulnerable to further declines. However, the 17,585 support from March is the level to watch. That was broken for a few seconds today but the rebound was immediate.

Resistance will be that 17,714 high from today, which was tested twice.

The uptrend on the Nasdaq was crushed with the -122 drop on Monday. Today's +28 point rebound was decent but resistance at 5000 was solid. Given the problems the big cap techs had over last week I am not as encouraged by the rebound on the Nasdaq. While I hope the rebound is lasting I am worried by the minor gains. The biotech sector was the only major winner for the Nasdaq and that was responsible for the majority of the gains.

Resistance 5000, support Tuesday's lows at 4970.

The Russell 2000 small caps were knocked back to the 100-day average at 1247 on Monday with a close at 1246.75. You do not get confirmation of support much better than that. Today the index tacked on +7 points to 1253 and support held.

The Russell should have a positive bias this week from left over rebalance adjustments. Let us hope the rebound continues. It was not as strong as I would have liked so there is a concern there could be more profit taking from the two-month rally.

Europe does not appear to be too concerned about Greece. The European markets were down about 1.25% on Tuesday but that is not earth shaking. The key point here is that the euro currency has been flat. There was a little spike on Monday but that was erased today. The euro is not in danger and that suggests Europe has ring fenced the Greek problem. If the European markets are up on Wednesday I would expect the U.S. markets to follow.

The rest of the week should be a whirlpool of conflicting events. The Greek headlines will continue to rule but the economic suicide is now priced into the market unless something else appears to worsen or improve the situation. If Greece votes yes to accept the creditor demands and remain in the eurozone then the market should rally on Monday, assuming the votes are counted in time. This means we could see some speculative buying ahead of the holiday weekend.

Wednesday is also the first day of the new quarter and half and there should be some month-end retirement contributions being put to work. That could help lift the markets. Offsetting that will be actively managed funds that window dressed their portfolios going into the end of the quarter. They may decide to undress those windows once into July.



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New Plays

Outperforming Its Peers

by James Brown

Click here to email James Brown


Neurocrine Biosciences Inc. - NBIX - close: 47.76 change: +1.95

Stop Loss: 44.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on June 30, 2015
Time Frame: Exit PRIOR to earnings in August
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Trade Description:
Biotech stocks remain one of the best performing groups in the market this year. Year to date the IBB is up +21% versus a +0.2% gain in the S&P 500 and a +5.3% gain in the NASDAQ composite. NBIX is outpacing its peers with a +113% gain in the first half of 2015.

NBIX is in the healthcare sector. According to the company, "Neurocrine Biosciences, Inc. discovers and develops innovative and life-changing pharmaceuticals, in diseases with high unmet medical needs, through its novel R&D platform, focused on neurological and endocrine based diseases and disorders. The Company's two lead late-stage clinical programs are elagolix, a gonadotropin-releasing hormone antagonist for women's health that is partnered with AbbVie Inc., and NBI-98854, a vesicular monoamine transporter 2 inhibitor for the treatment of movement disorders. Neurocrine intends to maintain certain commercial rights to its VMAT2 inhibitor for evolution into a fully-integrated pharmaceutical company."

I like to remind readers that biotech stocks can be tough to trade. Normally they are volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points. Due to the nature of biotech work and how many smaller companies get paid with milestone payments as they develop treatments tends to make their earnings are very lumpy.

While we normally don't focus on earnings for the smaller biotech companies, I will point out that NBIX's most recent earnings report was much better than expected. Their 2014 Q1 results were a loss of ($0.17) per share. Analysts were expecting 2015 Q1 results to be a loss of ($0.30). NBIX reported a loss of ($0.01) per share. Revenues were $19.76 million for the first quarter. Management held a successful secondary offering last quarter and raised $270 million. This increased the company's cash and cash equivalents to $518 million. Hopefully investors won't have to worry about NBIX needing to raise capital any time soon.

After NBIX's Q1 results the stock was upgraded by two analysts. One raised their price target to $64. The other raised their price target to $69. Currently the point & figure chart is forecasting at $66 target.

Technically NBIX looks bullish following its breakout past resistance near $45.00. The recent pullback among the biotech stocks saw NBIX dip back toward this area, which is now support. Today's bounce looks like a potential entry point. Tonight we're suggesting a trigger to open bullish positions at $48.15.

Trigger @ $48.15

- Suggested Positions -

Buy NBIX stock @ $48.15

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

Buy the AUG $50 CALL (NBIX150821C50) current ask $3.50
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:

In Play Updates and Reviews

Stocks Churn Ahead Of Greek Default

by James Brown

Click here to email James Brown

Editor's Note:
After big losses yesterday the market managed an oversold bounce. Gains were limited as stocks mostly churned sideways. On the plus side it was a widespread rebound today.

SBUX hit our stop loss.

Current Portfolio:

BULLISH Play Updates

Natus Medical Inc. - BABY - close: 42.56 change: +0.50

Stop Loss: 41.85
Target(s): To Be Determined
Current Gain/Loss: -1.3%
Entry on June 18 at $43.10
Listed on June 16, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 249 thousand
New Positions: see below

06/30/15: After a sharp decline yesterday shares of BABY gapped open higher this morning and managed to recoup about a third of yesterday's losses. Sadly the rally today struggled with short-term resistance near $43.00 and its 10-dma.

No new positions at the moment.

Trade Description: June 16, 2015:
Healthcare stocks are getting a lot of press because of the merger speculation among the big healthcare insurers. One area of healthcare that's doing well without the press is medical equipment makers. The S&P 500 index is up +1.8% year to date. The XHE healthcare equipment ETF is up +8.9%. BABY is in this industry and their stock is up +18% in 2015.

Here is a brief company description, "Founded in 1989, Natus Medical Incorporated is a leading manufacturer of medical devices and software and a service provider for the Newborn Care, Neurology, Sleep, Hearing and Balance markets. Natus products are used in hospitals, clinics and laboratories worldwide. Our mission is to improve outcomes and patient care in target markets through innovative screening, diagnostic and treatment solutions."

BABY has been steadily growing earnings. They have beaten Wall Street's bottom line earning estimate the last four quarters in a row. They raised guidance the last three quarters in a row. Their most recent earnings report was April 22nd.

BABY reported that their Q1 earnings were up +19% from a year ago to $0.31 per share. Revenues were up +3.7% to $94.0 million. Management raised their 2015 guidance above analysts' estimates.

Jim Hawkins, President and Chief Executive Officer of BABY, commented on his company's results, "I am very pleased with our first quarter results as we achieved record revenues and earnings. Revenue came in at the high end of our guidance while earnings exceeded our guidance. I am most satisfied that we were able to achieve these results in the face of approximately $2 million of negative currency effects on revenue during the quarter."

Earlier this month (June 5th) BABY announced they were increasing their stock buyback program. A year ago they launched a $10 million share repurchase program. They just added another $20 million to their program.

Technically BABY has been showing relative strength the last three weeks. The point & figure chart is very bullish and forecasting a long-term target of $73.00. At the moment BABY is hovering just below resistance in the $42.75-43.00 area. Tonight I am suggesting a trigger to launch bullish positions at $43.10. FYI: I am urging caution on the options. The spreads are pretty wide for all of BABY's October calls.

- Suggested Positions -

Long BABY stock @ $43.10

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

Long OCT $45 CALL (BABY151016C45) entry $2.85

06/27/15 new stop @ 41.85
06/18/15 triggered @ $43.10
Option Format: symbol-year-month-day-call-strike

Chimerix, Inc. - CMRX - close: 46.20 change: +1.43

Stop Loss: 42.95
Target(s): To Be Determined
Current Gain/Loss: +0.1%
Entry on June 26 at $46.15
Listed on June 25, 2015
Time Frame: exit PRIOR to earnings in August
Average Daily Volume = 428 thousand
New Positions: see below

06/30/15: CMRX produced a big bounce that almost completely erased yesterday's losses. However, I wouldn't get too excited yet. Technically, today's move is just an "inside day", which suggest indecision on the part of traders. On the plus side the intraday chart of CMRX would suggest shares are poised to rally tomorrow morning. A new rally past $46.50 may be a new entry point for us.

Trade Description: June 25, 2015:
Biotech stocks have been outperforming the broader market for the last couple of years. That outperformance continues in 2015. The IBB biotech ETF is up +23% in 2015 versus a +8% gain in the NASDAQ and a +2% gain in the S&P 500. CMRX has been lagging its peers with a +13.9% gain this year but that could be about to change as the stock looks poised to run.

According to the company, "Chimerix is a biopharmaceutical company dedicated to discovering, developing and commercializing novel, oral antivirals in areas of high unmet medical need. Chimerix's proprietary technology has produced brincidofovir (CMX001), a clinical-stage nucleotide analog lipid-conjugate, which has potent in vitro antiviral activity against many clinically relevant dsDNA viruses and a favorable safety profile in clinical studies conducted to date. Chimerix has completed enrollment of SUPPRESS, a Phase 3 study of brincidofovir for the prevention of cytomegalovirus (CMV) in adult hematopoietic cell transplant (HCT) recipients. In addition, Chimerix is enrolling the Phase 3 AdVise trial of brincidofovir for treatment of adenovirus (AdV) infection. Chimerix is working with BARDA to develop brincidofovir as a potential medical countermeasure to treat smallpox due to a threat of bioterror or accidental release."

In April this year CMRX was award an exclusive contract from the U.S. government to build a new smallpox vaccine. The Biomedical Advanced Research and Development Authority (BARDA) wants another treatment available just in case enemies of the U.S. try to use smallpox as a weapon or if there is some sort of accidental breakout from a lab. The 60-month contract is valued at $100 million but if all the options are awarded it could be worth up to $435 million in revenue to CMRX. The company's revenues for the trailing twelve months are only $4.5 million.

Earlier this month (June) CMRX announced they were going to raise $150 million in capital by selling 3,775,000 shares of stock. That was later bumped up to 4.3 million shares. These priced at $39.75. You can see how CMRX stock briefly dipped toward $39.00 on June 10th and investors immediately bought the dip. It's impressive to see CMRX increase its shares outstanding by 10% and the impact only lasted a few days as buyers gobble up the stock.

Technically CMRX appears to be in breakout mode. The stock consolidated sideways in the $35.00-43.50 range for five and a half months before finally breaking out a few days ago. The stock encountered some profit taking yesterday but traders bought the dip today. The point & figure chart is bullish and forecasting at $61.00 target.

Tonight we are suggesting a trigger to launch bullish positions at $46.15. Plan on exiting prior to CMRX's earnings report in August.

- Suggested Positions -

Long CMRX stock @ $46.15

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

Long AUG $50 CALL (CMRX150821C50) entry $2.10

06/26/15 triggered @ $46.15
Option Format: symbol-year-month-day-call-strike

PacWest Bancorp - PACW - close: 46.76 change: +0.08

Stop Loss: 46.40
Target(s): To Be Determined
Current Gain/Loss: -3.7%
Entry on June 25 at $48.55
Listed on June 23, 2015
Time Frame: Exit prior to earnings in late July
Average Daily Volume = 771 thousand
New Positions: see below

06/30/15: Warning! The action in PACW today looks worrisome. Shares spiked higher at the open and immediately reversed lower again. Odds are rising we could see PACW hit our stop at $46.40 tomorrow. No new positions at the moment.

Trade Description: June 23, 2015:
There has been a lot of expectations for the financial stocks to outperform once the Federal Reserve starts raising rates. While the actual date of the Fed's first rate hike since 2006 is still not clear yet it's widely believed that higher rates are coming. If not this year then early next year.

Robert Albertson, at Sandler O'Neill, was recently quoted by CNBC. Albertson said, "if the Fed funds rate goes to 0.6 percent by the end of this year, and 1.7 percent by the end of next year, which is pretty much what the Fed is projecting, you could get a 20 to 30 percent increase in the bottom line of many banks."

The XLF financial ETF is trading at multi-year highs but it's only up +1.7% this year. Meanwhile the smaller regional bank ETF, the KRE, is outperforming with a +11.4% gain year to date. PACW is a regional bank and so far it's only up +6.2% but there is a good chance it could play catch up with its peers.

According to the company, "PacWest Bancorp (PacWest) is a bank holding company with over $16 billion in assets with one wholly-owned banking subsidiary, Pacific Western Bank (Pacific Western). Through 80 full-service branches located throughout the state of California, Pacific Western provides commercial banking services, including real estate, construction, and commercial loans, to small and medium-sized businesses. Pacific Western and its CapitalSource Division deliver the full spectrum of financing solutions nationwide across numerous industries and property types."

PACW is actively growing through acquisitions. In the last fifteen years they have made 27 acquisitions and are currently digesting another one (Square 1 Bank, SQBK).

Net interest margin (NIM) is a key component to a bank's profitability. The five largest U.S. banks (U.S. Bancorp, Wells Fargo, Citigroup, Bank of America, and JPMorgan) have been struggling to build their NIM. According to Forbes, the weighted average for the five banks for fiscal year 2014 was 2.5% while Q4 2014 was 2.55%. That's down from a 2.8% average in 2012. (source). PACW's most recent quarterly results reported their NIM above 5.0%.

Technically shares of PACW have been showing relative strength the last few weeks and just broke out past major resistance at $48.00 today. The point & figure chart is very bullish and forecasting a long-term target at $64.00. Today's breakout could signal the next leg higher. We are suggesting a trigger to open bullish positions at $48.55.

- Suggested Positions -

Long PACW stock @ $48.55

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

Long SEP $50 CALL (PACW150918C50) entry $1.20

06/25/15 triggered @ $48.55
Option Format: symbol-year-month-day-call-strike

Spirit AeroSystems - SPR - close: 55.11 change: -0.14

Stop Loss: 53.75
Target(s): To Be Determined
Current Gain/Loss: -2.4%
Entry on June 22 at $56.44
Listed on June 18, 2015
Time Frame: 6 to 8 weeks, exit prior to earnings in very late July
Average Daily Volume = 1.2 million
New Positions: see below

06/30/15: SPR delivered a disappointing performance. The early morning rally failed and shares closed near their lows of the day with a -0.25% loss. SPR could be headed for the next level of support near $54.00.

No new positions at this time.

Trade Description: June 18, 2015:
Airline stocks have gotten crushed lately as investors worry about the airliner industry overbuilding capacity. It's a different story for the airplane makers. Shares of SPR just closed near all-time highs. The Dow Industrial Average is up +1.6% year to date. The S&P 500 is up +3.0%. SPR is outpacing them both with a +30% gain this year.

SPR is in the industrial goods sector. According to the company, "Spirit AeroSystems, with headquarters in Wichita, Kan., USA, is one of the world's largest non-OEM designers and manufacturers of aerostructures for commercial aircraft. In addition to its Wichita and Chanute facilities in Kansas, Spirit has locations in Tulsa and McAlester, Okla.; Kinston, N.C.; Prestwick, Scotland; Preston, England; Subang, Malaysia; and Saint-Nazaire, France.

In the U.S., Spirit's core products include fuselages, pylons, nacelles and wing components. Additionally, Spirit provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul, and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus."

On their website SPR notes that they "have long-term agreements in place with our largest customers, Boeing and Airbus. Other major customers include Bombardier, Rolls-Royce, Mitsubishi, Sikorsky and Bell Helicopter." SPR does so much business with Boeing (BA) that buying SPR is almost a stealth trade on BA's backlog. Looking at BA's most recent earnings report their backlog hit a record high of $495 billion. That's about 5,700 new planes. BA plans to significantly increase production in 2017 and again in 2018, which should mean an increase in revenues for SPR.

Earnings from SPR have been somewhat mixed. On February 3rd they reported their 2014 Q4 results with earnings at $0.87 per share. That was 10 cents better than expected. Yet revenues were only up +5% to $1.57 billion, which missed expectations.

Results improved in the first quarter. On April 29th SPR said earnings were up +18% from a year ago. Their $1.00 per share beat expectations. Revenues were almost flat at $1.74 billion but that still came in better than analysts were expecting. SPR management issued somewhat bullish guidance on 2015 earnings but their revenue estimate was soft.

The stock initially sold off on its Q1 report but traders bought the dip the very next day. SPR continues to build on its bullish pattern of higher lows. Today the stock is poised to breakout past short-term resistance at $56.20. We are suggesting a trigger to launch bullish positions at $56.35. Plan on exiting prior to SPR's Q2 earnings report in very late July or early August.

- Suggested Positions -

Long SPR stock @ $56.35

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

Long OCT $60 CALL (SPR151016C60) entry $1.60

06/22/15 triggered on gap open at $56.44
Option Format: symbol-year-month-day-call-strike

Tempur Sealy Intl. - TPX - close: 65.90 change: +0.62

Stop Loss: 64.40
Target(s): To Be Determined
Current Gain/Loss: +4.4%
Entry on June 10 at $63.15
Listed on June 08, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 890 thousand
New Positions: see below

06/30/15: Traders bought the dip in TPX midday and shares managed to recover about a third of yesterday's losses. More conservative traders might want to move their stop closer to $65.00.

No new positions at this time.

Trade Description: June 8, 2015:
Activist investors seek to influence management to incorporate major changes in a company with the expectation of unlocking shareholder value. Sometimes the mere mention of an activist investor buying a stock can get shares to move. In TPX's case the activists have won a major battle with management.

TPX is in the consumer goods sector. According to the company, "Tempur Sealy International, Inc. (NYSE: TPX) is the world's largest bedding provider. Tempur Sealy International develops, manufactures and markets mattresses, foundations, pillows and other products. The Company's brand portfolio includes many of the most highly recognized brands in the industry, including Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, OptimumTM and Stearns & Foster. World headquarters for Tempur Sealy International is in Lexington, KY."

TPX's most recent earnings report was April 28th. They announced their 2015 Q1 results with earnings of $0.55 per share. That was seven cents above estimates. Revenues were up +5.4% to $739.5 million. This was also above expectations. Management raised their 2015 forecast for both earnings and sales. The stock popped to new multi-year highs on this news. Yet the real story is probably the activist investors involved.

Hedge fund H Partners has been urging change with TPX management for months. TPX executives choose to fight. It came down to a proxy fight and shareholders voted to oust the CEO. Two more directors, who were under fire by H Partners have also left the board. H Partners built a website to inform shareholders their opinion on the company (www.fixtempursealy.com). There they posted their 90 page slideshow on why TPX needed a management change. You can see their presentation at this webpage.

The stock has been oscillating sideways in the $58-63 zone the last few weeks. It's starting to look like the consolidation may be over. TPX displayed relative strength last week and it held up today as well while the rest of the market was sinking. If TPX can trade over $63.00 it will generate a new quadruple top breakout buy signal on the P&F chart. We are suggesting a trigger to launch bullish positions at $63.15.

- Suggested Positions -

Long TPX stock @ $63.15

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

Long SEP $65 CALL (TPX150918C65) entry $3.50

06/27/15 new stop @ 64.40
06/22/15 new stop @ 61.90
06/10/15 triggered @ $63.15
Option Format: symbol-year-month-day-call-strike

Wayfair Inc. - W - close: 37.64 change: +0.85

Stop Loss: 35.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on June -- at $---.--
Listed on June 27, 2015
Time Frame: exit PRIOR to earnings in August
Average Daily Volume = 884 thousand
New Positions: Yes, see below

06/30/15: W delivered a strong bounce with shares gaining +2.3%. The stock looks poised to break the very short-term (one week) trend of lower highs. We could see W hit our entry trigger at $38.35 soon.

Trade Description:
Tonight's new candidate has been outperforming the market and could see a short squeeze. Year to date W is up +92% and shows no signs of slowing down.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:
Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October last year and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading.

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

Naturally, with this much growth, the management is very optimistic. Niraj Shah, co-founder, CEO and co-chairman of Wayfair, commented on his company's results, saying,

"We are off to a strong start this year and are particularly pleased with the revenue strength and accelerated growth in our Direct Retail business. We believe the growth rate this quarter underscores the size of the market opportunity, the rapidly changing, and favorable dynamics of how customers purchase home goods and Wayfair's unique position in this large and rapidly growing market segment. Additionally, the increase in our advertising spend last year helped attract new, and higher value customers, driving both revenue growth and advertising spend leverage this quarter. We remain excited about the opportunity ahead as we continue to gain market share and grow."
On the company's conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.24 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 28.8 million shares, which is relatively small. The most recent data listed short interest at 47% of the float.

I noted earlier that on the first day of trading W peaked at $39.43. A few days ago the rally peaked at $39.43 (June 22nd). Afterwards traders jumped in to buy the dip when W tagged its 10-dma. Once W crosses above $39.43 the short squeeze could blast off. That's why tonight we are suggesting a trigger to launch bullish positions at $38.35.

Traders should consider this an aggressive, higher-risk trade. W has been a volatile stock in the past. There's no reason to expect that to change in the near future. Consider small positions to limit risk. We are listing a call option with this trade but I want to caution you that the option spreads are pretty wide.

Trigger @ $38.35 *small positions to limit risk*

- Suggested Positions -

Buy W stock @ $38.35

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

Buy the AUG $40 CALL (W150821C40)

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

Continental Resources, Inc. - CLR - close: 42.39 change: +0.31

Stop Loss: 44.85
Target(s): To Be Determined
Current Gain/Loss: +3.1%
Entry on June 22 at $43.75
Listed on June 20, 2015
Time Frame: 6 to 8 weeks, exit prior to earnings in August
Average Daily Volume = 8.8 thousand
New Positions: see below

06/30/15: CLR slipped to a new low this morning but shares managed a bounce and closed up +0.7%, outperforming the major indices. If this bounce continues CLR should find resistance in the $44.00 area.

Trade Description: June 20, 2015:
There are a lot of currents moving the oil industry these days. Currency moves, OPEC production, access to capital, falling rig counts, and potential bankruptcies. The stock performance for U.S. shale oil drillers have been suffering. CLR is one such stock.

CLR is in the basic materials sector. According to the company, "Continental Resources (CLR) is a Top 10 independent oil producer in the United States and a leader in America's energy renaissance. Based in Oklahoma City, Continental is the largest leaseholder and one of the largest producers in the nation's premier oil field, the Bakken play of North Dakota and Montana. The Company also has significant positions in Oklahoma, including its SCOOP Woodford and SCOOP Springer discoveries and the Northwest Cana play."

Earnings have taken a hit. CLR reported their Q1 results on May 6th. They reported a net loss of $186 million or 36 cents a share. That's a big drop from a 61-cent profit a year ago. After adjusting for writedowns and one-time items CLR said their quarterly earnings were a loss of ($0.09) per share. That was actually four cents better than analysts' estimates for a ($0.13) loss. Revenues plunged -41% to $592.89 million even though CLR's production surged +36% from a year ago.

Bullish investors could argue that crude oil put in a bottom earlier this year and the commodity should rally toward year end. Bulls can also point to falling production costs as a tailwind for the industry. CLR said their completion costs for wells dropped -15% from the end of 2014. Obviously this makes the company more profitable (or at least cuts their losses). Optimistically CLR expects their cost reductions to hit 20% by mid-year. There are some on Wall Street who think the industry has seen a bottom. Shares of CLR were upgraded by Goldman Sachs to a "buy" in May.

Bulls also note that the plunge in active rigs should be bullish for oil and thus oil companies. Weekly rig count, compiled by Baker Hughes, showed that the number of active oil and gas rigs fell again last week. This is the 28th week in a row that the number of rigs has declined. We're now down to 857 active oil and gas rigs, which hasn't been this low since early 2003.

Naturally you might think that a plunge to 12-year lows for active rigs means that U.S. oil production would shrink as well. That hasn't happened yet. While costs are going down oil producers are actually more efficient at pumping per well so production is going up. The low rig count is a leading indictor that production will eventually decline but it could be months from now. The U.S. EIA doesn't expect U.S. production to fall until early next year.

A bigger problem for the oil industry is competition. The recent OPEC meeting showed that the Saudis are willing to pump as much oil as they can to maintain their market share regardless of the price of oil. These are state-run oil companies and don't have to report to shareholders like American drillers. Plus the average cost per barrel of oil is a lot lower in Saudi than the U.S.

Another challenge for many drillers is capital. Drilling shale oil wells and fracking costs a lot of money. The drop in crude oil prices has made lenders less likely to loan money to drillers. To compensate for the lack of capital the oil drillers might be forced to sell more stock to raise capital and this would dilute current shareholders and drive stock prices lower. This past week the Cowen research company said, ""We expect ... E&Ps to issue additional equity in 2H2015 to fund 2016 capex as borrowing bases will be declining and debt metrics deteriorating."

The issue of debt and access to capital could be a fatal one. There are growing predictions that we will see up to a dozen publicly traded oil and gas companies file for bankruptcy between July 2015 and June 2016. Now CLR is not on the list but if we see smaller rivals start to go bankrupt it is going to put pressure on all the oil-industry stocks.

Oil stocks are also going to react to currency moves. The Federal Reserve wants to raise rates and that will lift the dollar. Even if the Fed doesn't raise rates the QE programs in Japan and Europe could drive the yen and euro lower, which boosts the dollar. A rising dollar pressures commodity prices lower.

A lot of investors are already betting on CLR to decline. The most recent data listed short interest at 17.9% of the 84.8 million share float. We think the bears are right. CLR has been underperforming the broader market. The point & figure chart is bearish and forecasting at $35.00 target. I suspect the 2015 lows near $42.00 could be support. Tonight we are suggesting a trigger to open bearish positions at $43.75.

- Suggested Positions -

Short CLR stock @ $43.75

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

Long SEP $40 PUT (CLR150918P40) entry $2.00

06/27/15 new stop @ 44.85
06/25/15 new stop @ 48.35
06/22/15 triggered @ $43.75
Option Format: symbol-year-month-day-call-strike

Murphy Oil - MUR - close: 41.57 change: +0.15

Stop Loss: 43.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on June -- at $---.--
Listed on June 29, 2015
Time Frame: Exit PRIOR to MUR earnings in very late July
Average Daily Volume = 1.9 million
New Positions: Yes, see below

06/30/15: The last couple of days have seen MUR trade in the $41.20-42.00 zone. The stock bounced today but failed under the $42.00 level. The intraday low this morning was $41.21. Our suggested entry point for bearish positions is $41.15.

Trade Description:
The crash in crude oil prices in the second half of 2014 was pivotal turning point for the U.S. energy industry. Suddenly the booming oil and gas sector had its future being question with the price of oil now unprofitable for many drillers. Oil has managed a bounce from its 2015 lows while many of the oil and gas producers are still seeing their stocks decline.

MUR is in the basic materials sector. According to the company, "Murphy Oil Corporation is an independent exploration and production company with a strong, oil-weighted portfolio of global offshore and onshore assets. Exploration activities are focused in four main regions: Deepwater Gulf of Mexico, the Atlantic Margin, Southeast Asia and Australia."

The company reduced its 2015 capex outlook by -33% when they reported their 2014 Q4 results back in January. MUR's Q1 results came out in May. Profits evaporated with MUR delivering a loss of ($1.11) per shares versus a profit of $0.96 a year ago.

Management is trying to prop up their floundering stock price. On May 20th the company announced an accelerated stock buy back program of $250 million. This is part of a previously announced $500 million repurchase program from August 2014. The buy back doesn't seem to be working.

Goldman Sachs downgraded MUR to a "sell" in late May. Nearly a month later UBS has also downgraded MUR to a "sell". The UBS analyst expressed concern that MUR's production would likely decline in 2015 and 2016 since the company has cut back on investment.

The stock's attempt at an oversold bounce failed near $44 a couple of weeks ago and now shares are breaking down to new multi-year lows. The point & figure chart is bearish and forecasting at $34.00 target. Tonight we are suggesting a trigger to open bearish positions at $41.15.

Trigger @ $41.15

- Suggested Positions -

Short MUR stock @ $41.15

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

Buy the AUG $40 PUT (MUR150821P40)

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

On Deck Capital - ONDK - close: 11.58 change: +0.14

Stop Loss: 12.45
Target(s): To Be Determined
Current Gain/Loss: +19.3%
Entry on June 02 at $14.35
Listed on June 01, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 431 thousand
New Positions: see below

06/30/15: ONDK produced a +1.2% oversold bounce. I don't see any changes from my recent comments. Broken support near $12.00-12.10 should be new resistance. Plus the 10-dma, currently at $12.40, is also overhead resistance.

No new positions at this time.

Trade Description: June 1, 2015:
You know something is wrong when a stock is down -50% from its post-IPO peak in less than six months.

ONDK is part of the financial sector. Here's how the company describes itself:

"OnDeck (ONDK), a leading platform for small business loans, is committed to increasing Main Street's access to capital. OnDeck uses advanced lending technology and analytics to assess creditworthiness based on actual operating performance and not solely on personal credit. The OnDeck Score, the company's proprietary small business credit scoring system, evaluates thousands of data points to deliver a credit decision rapidly and accurately. Small businesses can apply for a line of credit or term loan online in minutes, get a decision immediately and receive funds in as fast as the same day. OnDeck also partners with small business service providers, enabling them to connect their customers to OnDeck financing. OnDeck's diversified loan funding strategy enables the company to fund small business loans from various credit facilities, securitization and the OnDeck Marketplace, a platform that enables institutional investors to purchase small business loans originated by OnDeck.

Since 2007, OnDeck has deployed more than $2 billion to more than 700 different industries in all 50 U.S. states, and also makes small business loans in Canada. The company has an A+ rating with the Better Business Bureau and operates the website BusinessLoans.com which provides credit education and information about small business financing. On December 17, 2014, OnDeck started trading on the New York Stock Exchange under the ticker ONDK."

The company charges outrageous interest rates on its short-term loans. According to the SEC filings these can range from 20% to 99% APRs. They get away with this by only loaning to businesses and not individual consumers. Rising defaults are an issue. The company expects about 7% of their loans to go into default but some of the latest numbers suggest reality is closer to 20%. There is a concern that companies like ONDK will face future regulations that will limit how much interest they can charge. Another bear argument is valuations.

The company was valued around $1.4 billion at its IPO. Even with the decline it's still valued near $1 billion today. That's for a company without any profits. They lost ($0.01) per share in the fourth quarter and that jumped to a loss of ($0.05) per share in the first quarter.

Another potential landmine for shareholders is ONDK's six-month lockup expiration. Currently there are about 13.2 million shares outstanding. On June 15th, 2015 another 56 million shares are unlocked.

The stock broke down on its earnings report in early May. Now it's breaking down below its 2015 lows in the $14.50-15.00 zone. The point & figure chart is bearish and forecasting at $7.00 target.

The stock has seen some volatile moves. I would consider this a more aggressive, higher-risk trade. Tonight I am suggesting a trigger to launch bearish positions at $14.35. Traders may want to use put options to limit their risk.

- Suggested Positions -

Short ONDK stock @ $14.35

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

Long AUG $14 PUT (ONDK150821P14) entry $1.80

06/29/15 new stop @ $12.45
06/20/15 Caution! ONDK may have formed a bullish double bottom
06/16/15 new stop @ 13.25
06/15/15 new stop @ 14.25
06/10/15 new stop @ 15.15
06/02/15 triggered @ $14.35
Option Format: symbol-year-month-day-call-strike


Starbucks Corp. - SBUX - close: 53.62 change: +0.07

Stop Loss: 53.45
Target(s): To Be Determined
Current Gain/Loss: +4.7%
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

06/30/15: SBUX hit our stop loss at $53.45 before bouncing near support and rebounding back into positive territory. After a seven-week rally we're happy to lock in gains on this trade. However, more aggressive traders should be poised to see more gains. I mentioned last night that SBUX would likely bounce near $53.00. The low today was $53.14.

- Suggested Positions -

Long SBUX stock @ $51.05 exit $53.45 (+4.7%)

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

JUL $50 CALL (SBUX150717C50) entry $2.07 exit $3.53 (+70.5%)

06/30/15 stopped out
06/27/15 new stop @ 53.45
06/16/15 SBUX expands it mobile service app coverage to more than 4,000 locations
06/04/15 new stop @ 49.95
05/18/15 triggered @ $51.05
Option Format: symbol-year-month-day-call-strike