1. Market Summary

The bears continued their pressure from the prior Friday’s opening pop and drop to start the week, as the Dow fell triple-digits and the small-caps fell below key support at 1,140.

Last Tuesday’s pullback can be blamed on the U.S. airstrikes against Syria in a starting attempt to defeat ISIS, but the bulls held support despite the somber news.

The rebound on Wednesday was textbook, as the bulls avoided a possible four-session slide for the first time all year. However, Thursday’s damage made for the worst trading day since late July, as the bears pushed fresh lows for the week.

Friday’s rebound kept a possible trading range intact that I have talked about forming, but this week promises to be just as volatile.

The Dow jumped 167 points, or 1%, to finish at 17,113 on Friday. The blue-chips traded to a high of 17,148 late in the session and held 17,100 into the closing bell. This sets up another run to 17,350-17,500 over the near-term as long as shaky support holds at 17,000. There is additional risk to 16,800, with last week’s low reaching 16,945. For the week, the Dow dropped 166 points, or 1%.

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The S&P 500 soared 16 points, or 0.9%, to settle at 1,982. The index made a run to 1,986 on Friday but failed at holding 1,985. The close above 1,980-1,975 was bullish, but there is risk to 1,960-1,950 on a dip back below the latter. Stronger resistance is at 2,000, but, if cleared, could lead to 2,025-2,050 over the near-term. The S&P 500 slipped 28 points, or 1.5%, for the week.

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The Nasdaq zoomed 45 points, or 1%, to end at 4,512. Tech opened above 4,475 and cleared 4,500 shortly after midday to hold this level into the weekend. The bulls kissed 4,515 and held 4,500 into the closing bell, which keeps 4,550-4,600 in the mix. A drop below 4,475 again will likely lead to 4,425-4,400. The index fell 67 points, or 1.5%, last week.

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The Russell 2000 added 9 points, or 0.8%, to close at 1,119. The small-caps opened higher and held positive territory after a shaky start. The bulls made an attempt at clearing 1,120-1,125 late in the day but ultimately fell short. Monday’s break below 1,140 was the one of the main clues I said to watch for last week, as I said it would lead to a test to 1,125-1,100. Last Thursday’s low reached 1,107. If the bears get below 1,100 expect a test to 1,075. For the week, the Russell 2000 tanked 27 points, or 2.3%.

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The S&P Volatility Index ($VIX, 14.85, down 0.79) ended the week below 15 following Friday’s 5% pullback. The close above 13.50 to start the week signaled a test to 15 was coming, and I mentioned there would be risk to 17.50. Tuesday’s trip reached 14.94 before the bulls recovered 13.50 on Wednesday. Thursday’s wild ride reached 16.69, with the VIX ending at 15.67. Friday’s low touched 14.31. I will be watching all of theses levels again this week, but it will be important for the bulls to hold 15 today.

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From the beginning of September:

“Geopolitical concerns remain the main headline risk as tensions from around the world have heated up and are boiling over. Hopefully, things simmer down this week and into next as this would allow the global markets to breathe a sigh of relief.

From there, triple-witching and September option expiration week could cause volatility to creep back up, as well as heightened U.S. airstrikes.

Tan suits, twiddling thumbs and long vacations have encouraged the saber-rattling and violence in the world. In fact, things are at the point of no return for some countries. This is why I’m slightly cautious on the market over the intermediate-term and for the back half of September and into October.” (END)

I like to look back over my postings as reference points, and these were my thoughts heading into the month. I have been warning for much of the year that the market can go up during the threat of war, but it usually pulls back when bullets start to fly.

I also mentioned the perfect storm the bulls were approaching on the day Alibaba (BABA, $90.46, up $1.54) went public along with September option expiration day, and new highs triggered at the open the prior Friday.

The bearish close that day, Alibaba testing $90 on Monday and falling back below this level on Tuesday, the VIX stalling at 11.50 on the bulls and the quick back test to 15 by the bears on Tuesday were all great clues that volatility would return last week.

The “death-cross” I have said to watch for weeks also played out on the Russell 2000, with the 50-day moving average (MA) falling below the 200-day MA. I pointed out midweek that the last time this had happened was over two years ago when the small-caps were at 765 and the bulls held. This time might be different, so I charted the exponential moving averages (EMAs) for the Russell 2000, as they give a better weighting on recent action than the simple moving averages (SMAs). Market charters often use these two averages, as they are similar, but the EMAs can be more reliable if price fluctuations start to rise. The chart below shows the Russell 2000 50-day EMA holding above the 200-day EMA, but on the verge of breaking below the 100-day EMA.

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The decline in the small-caps this month and since July has been discouraging, as the Russell 2000 has underperformed the major indexes since peaking at 1,213. The index is down 73 points, or 6%, since July 1 and double-nickels (55 points), or 5%, for September. There are only two trading days in the month for a recovery, and I doubt the bulls will have the mustard to top 1,193 or 1,174 this quickly to get the quarter and monthly win, respectively. If not, it will be the first time in nine quarters, or more than two years, that the Russell will end the quarter with a loss. The current win streak of eight is the best performance ever including the two bull runs in the 1990s for the index.

The Russell 2000 will be the focal point for a possible fourth-quarter and year-end rally to continued all-time highs. If the bulls hold current support levels, then October could present a buying opportunity. If the bears do further damage and crack 1,100, the selling pressure could intensify.

The financial stocks will also need to hold support, and I covered the action in the Financial Select Spiders (XLF, $23.29, up $0.22) midweek. The break below prior support at $23.40 is now short-term resistance, with $23 and the 50-day moving average serving as backup. A close below $23 would be bearish, as it would likely setup a test to the 100-day moving average on continued weakness.

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The Monday/ Friday closes on the Dow were mixed last week, with the recent action also suggesting a trading range could be setting up into third-quarter earnings season. However, the blue-chips experienced triple-digit price swings throughout last week, so a more volatile range could be in store.

This type of action can cause flip-flopping analysts that don’t do homework or chart work to panic, and that’s why it has been important for me to wait for all of my indicators to trigger before loading up on short positions. That hasn’t happened, yet.

Economic news will be back in focus this week along with geopolitical events, so the headlines will be there to sway the bulls and bears to act. Friday’s Nonfarm Payroll report and unemployment numbers will be the main focus along with the christening of October, which has historically experienced some of the worst bear market declines in history.

Trading ranges can be difficult to navigate, especially volatile ones, and during a trading range, I’ve found it’s best to use “cheap” options during these types of environments. By cheap options, I’m usually referring to options trading for 75 cents or less.

When a clearer trend develops, I like to trade closer in-the-money options on more expensive stocks, but I normally keep all of my options trades at $1.50 or less. Sometimes, I will trade options up to $2, but it represents four 50-cent option trades, and my odds are better playing four trades instead of one.

I mentioned last week if you are a new subscriber, to check out the 10-year charts from February and from a couple of weeks ago as I have updated them. This will give everyone a great overview of what I have expected from the market this year and where the indexes could be trading at by yearend.

It will likely be a busy week, as I could have New Trades, Profit Alerts and Trade Updates, so make sure you sign up for the text alerts as well to know the instant I go to press.

Ahead of this morning’s open, futures look like this: Dow (-98); S&P 500 (-12); Nasdaq 100 (-25).

2. Senomyx (SNMX) Surging as Shares Approach Double Digits Weekly 

Key of Technicals Used In Following Article:

WW1_002

Shares of Senomyx (SNMX, $9.24, up $0.23) are up 10% in the last five days, 17% in the last month, and 154% in the last 52 weeks.  With these kinds of gains and wanted to take a closer look at the company to see what their story is.

The $400 million biotech flavor and smell enhancer company based in San Diego, California develops flavor ingredients for the packaged food, beverage, and ingredient supply industries using proprietary taste receptor-based assays and screening technologies.  The company claims to have basically reverse engineered the receptors in humans that react for taste and aroma.  Using this technology, they are producing chemicals to make food taste better.

Senomyx licenses flavor ingredients to its product discovery and development collaborators: Japanese food and chemical company Ajinomoto, Swiss perfume and flavor company Firmenich SA, Nestlé SA, and PepsiCo (PEP).

Charles Zuker and biochemist Lubert Stryer, both professors of neurobiology at Stanford University, co-founded the company in 1998.  Dr. Zuker’s work led to the identification of sweet, sour, bitter, salty, and umami (which can be translated as having a “pleasant savory taste” in Japanese) taste receptor cells.  Both are now on the company’s Scientific Advisory Board.

Taste perception begins when certain molecules interact with specialized receptors in the membrane of a taste cell.  Compounds with sodium and hydrogen ions are perceived as salty and sour, respectively.  Carbohydrates are generally associated with sweetness.  The alkaloids caffeine and quinine are bitter compounds.  Umami is frequently associated with protein-rich foods such as meat and cheese.  A typical molecule for this taste is monosodium glutamate (MSG).  In general, salty and sour tastes are transduced by ion channels, while bitter, sweet, and umami are transduced by receptors coupled to internal signaling molecules called G proteins.

On June 22, 2004, Senomyx sold 6 million shares to the public for $6 each, raising $36 million.  Shares opened for trading at $6.45, reached an intra-day high of $7.70, and closed the day at $6.75.

The company has four flavor programs currently under development: Sweet, Savory, Bitter, and Cooling.  Further, four ingredients with in the Sweet Program have received regulatory approvals and are available for commercialization.  Each of its Savory Flavors as well as the Bitter Blockers and Cooling Agents have received FEMA GRAS (Generally Recognized As Safe) regulatory approval.  Cooling Agents S2227 just received FEMA GRAS in the second quarter of 2014.

The Savory Program provides a distinct new savory (umami) taste sensation and can be combined with other ingredients to create unique new flavor blends.  They can be used in sauces, frozen foods, cooking aids, soups, and snack foods, and can be used to reduce or replace added monosodium glutamate.  Nestlé is currently marketing products that incorporate a Senomyx Savory Flavor.  PepsiCo and Firmenich SA are partnering with Senomyx in the Sweet Program.  The company had started collaboration with PepsiCo to develop S617 in August of 2012.

WW2_002

In addition, the company partnered with PepsiCo to research salt flavor modifiers.  Pepsi will provide research funding for the Salt Taste Program for 2014 and in return, earn non-exclusive rights to salt flavor modifiers discovered during the research funding period.  Senomyx will also supply these flavor ingredients directly to Pepsi.  Such research is in demand after the U.S. Center for Disease Control and Prevention said that Americans consume too much salt.

On June 30, 2014, Senomyx was added to the Russell 2000 and Russell 3000 indexes.  The Russell 3000 tracks the 3000 largest U.S. companies by market capitalization.  The Russell 2000 is a small-cap index of the bottom 2,000 stocks in the Russell 3000.  Inclusion in any index means that funds that track the index will be forced to buy the stock.

On Thursday, July 31, the company reported results for the second quarter ending June 30.

  • Revenue was $7.34 million, down from $7.67 million the same quarter a year ago, and missed the average analysts’ estimate of $7.46 million.
  • Net loss was $2.6 million, down from a net loss of $2.3 million the same quarter a year ago.
  • The U.S. Patent and Trademark Office granted the company a new patent entitled, “Sweet Flavor Modifier”, which includes composition-of-matter claims for Sweetmyx S617 and will be in force through December 4, 2033.  In addition to Sweetmyx S617, the patent covers a number of similar flavor modifiers for sucrose, fructose, and sucralose.

WW3_001

Revenue has generally stayed the same over the years, but analysts estimate that revenue will rise in the third and fourth quarters.  Revenues hit a trough in the prior second quarters (6/11 and 6/12), so it is possible that revenue will rise in the third and fourth quarters.  Earnings are also expected to rise in the fourth quarter.

WW4_001

The stock seems slightly overvalued, with negatives (red) outnumbering positives (green) 8 to 12.  This is a growth play with a high gross margin and low PEG ratio (negative because trailing PE is negative).  Current ratio is above two, which means that it is fairly liquid.The company competes with the Flavors division of International Flavors & Fragrances (IFF), but it has no publicly traded direct competitors.

On the negative side, almost all margins are negative and the forward PE is very high.  The high short interest could cause a short squeeze if more good news is released.

At $9.24, the stock is just below its low target of $9.50 made by the 5 analysts recorded by Thomson/First Call.  Mean is $14.20, median target is $15.00, and high target is $16.50.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.0, unchanged from a week ago.

  Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 1 1 1 1
Buy 3 3 3 2
Hold 1 1 1 1
Underperform 0 0 0 0
Sell 0 0 0 0

The long-term graph shows that the price is at the first wave of resistance and could head down to the first wave of support around $8.10.  The second wave of resistance is around $12.30.  The target price set by the rounded bottom is around $14, which is represents another layer of resistance.

SNMXSR

The short-term graph looks more bearish than bullish.  On the bearish side, the price is at 1st resistance and could head down to 2nd support.  The rising wedge also creates a target price at 2nd support.  A rising wedge is usually bearish.  Two of the four times when the MFI, RSI, Stochastic %K, and W%R were at similar levels, as indicated by the purple lines, the price fell.  Further, the MACD formed a bearish downward cross.

SNMXRSI

On the bullish side, the rising wedge also gave a target price just above 3rd resistance.  If the price breaks out, it could go to 4th resistance.

I believe there is further room for shares to run but I would use options to play a possible move past double-digits.  The Senomyx November 10 calls (SNMX141122C00010000) are currently at 60 cents but the bid/ask is wide at 45/ 75 cents and the open interest is low.  This is the main reason for the huge spread and something that will likely keep me out of an option trade.  If the spread narrows and open interest starts to rise then maybe these options will be worth a second look.

Weekly Wrap Portfolio Update

All prices given in this update are current as of Sept. 29, 2014

The Weekly Wrap Closed Trade Track Record for 2014 is 26-4, for an 87% win rate (111-11, or 91% win rate, overall since the start of 2011).

To download the most current Weekly Wrap returns of closed positions in Excel format, click here.

 

Vanguard Natural Resources (VNR, $27.49, up $0.03)

Original Entry Price:  $29.43 (9/16/14)

Lowered Price from Selling Options/ Dividends:  $29.43

Exit Target:  $33

Return:  -7%

Stop Target:  $25 (Stop Limit)

Dividend Yield:  7.9%

Action:  Near-term support is at $26 following Friday’s drop to $26.11.  Resistance is at $27.50-$28.  The current monthly dividend yield is 8% and the next 21-cent payout is October 15.  There was no news to explain Friday’s dip to $26 and I have set a Stop Limit of $25 to close the position on further weakness.

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Pizza Inn Holdings (PZZI, $7.96, down $0.09) Stock Trades

Original Entry Price:  $8 (8/13/14)

Lowered Price from Selling Options:  No options available

Exit Target:  $12

Return:  -1%

Stop Target:  $5

 

Original Entry Price:  $8.10 (10/11/13)

Lowered Price from Selling Options:  No options available

Exit Target:  $12+

Return:  -2%

Stop Target:  $5

Action:  Shares traded to a low of $7.66 ahead of earnings but quickly recovered $8 midweek and kissed $8.42 after the company reported stellar growth in its Pie Five Pizza franchises.  Although Pizza Inn reports a loss of 4 cents a share, it was better than the 8-cent loss from the same quarter a year ago.  Revenues came in at $10.9 million versus $10.4 million last year.  The revenue numbers will continue to improve with the number of stores opening this quarter and I’m looking for the company to turn a profit in early 2015.

I was a little disappointed shares couldn’t clear and hold $8.50 on some follow-through after earnings but when they do, a run past $9 and fresh 52-week peaks could be in the cards.  Once double-digits hit, shares could really start to move.

Previous comments:  Click here to read my recent in-depth commentary and write-up on Pizza Inn.

The company recently announced further expansion plans.  Pizza Inn is now on track for 200+ stores.  I believe this will be a $15-$20 stock in 1-2 years with insiders and mutual funds owning nearly 40% of the company.  Institution ownership is over 17%.  I have already recommended 2 profitable trades for the Weekly Wrap when shares were near $3.

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Huttig Building Products (HBP, $3.92, up $0.22) Stock Trade

Original Entry Price:  $4 (8/13/14)

Lowered Price from Selling Options:  No options available

Exit Target:  $6+

Return:  -2%

Stop Target:  $2 (Stop Limit)

Action:  I mentioned there was risk to $3.50 on a close below $3.70.  Thursday’s low reached $3.61 before Friday’s 6% surge on earnings.

A close above $4 and the 50-day moving average would be bullish for a run to $4.20-$4.30.

 

Previous comments:

This is a small company with a big presence in the housing industry and a market-cap just south of $100 million.  Huttig has been around for over 100 years and there is little Wall Street coverage with only 1 analyst following the stock.

This is a “cheap” way to play the housing sector with a quality stock.  Despite the fits and starts the industry has been going through the past few years, this is a solid company with an improving balance sheet.

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Limelight Networks (LLNW, $2.34, flat) stock trade

Original Entry Price:  $3.00 (6/9/14)

Lowered Price from Selling Options:  None

Exit Target:  $5

Return:  -22%

Stop Target:  $1

Action:  Shares held another back test to the 200-day moving average but there is additional risk to $2.20.  Resistance is at. $2.50-$2.60.

 

Previous comments:

Shares traded to a high of $3.25 on 6/20 after Tuition Build offered roughly $645 million, or $6.55 a share, for Limelight.  The company dismissed the Silicon Valley’s private-equity firm’s offer after basically saying they weren’t experienced enough to run the business.

I have been suggesting a buyout offer would come for Limelight Networks with the company’s cheap market cap and said they would make a very luscious takeover target.

Its litigation issues have decreased dramatically following their recent win against AKAM and they are open to a much bigger marriage.

Roth Capital lifted its Price Target for Limelight Networks to $4.50 from $3 following its recent court win against AKAM.  I have already covered the acquisition appeal of the stock and Captain Obvious echoed those comments last week.  I was hoping shares would go unnoticed by the suit-and-ties and perhaps they have been reading my updates but I have a much higher target for Limelight.  I have said shares could make a run to $5, possibly $8 if the takeover talk heats up over the summer.

Apple, Google, Facebook, Microsoft and Verizon, just to name a few, could take a look at this company as it looks to build out its CDN network.  Limelight has a market cap of just $280 million and would be a great acquisition target for Apple.

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Hercules Offshore (HERO, $2.38, up $0.11)

Original Entry Price:  $4.50 (5/30/14)

Lowered Price from Selling Options:  $4.20

Exit Target:  $7

Return:  -43%

Stop Target:  $2 (Stop Limit)

Action:  Shares traded to a low of $2.14 last week with support and the Stop Limit holding at $2.  Resistance is at $2.50.

On 5/30/2014 I recommended buying shares at $4.50 and selling the July 4.50 calls for 30 cents to lower the cost basis to $4.20.

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Alexza Pharmaceuticals (ALXA, $2.43, up $0.03) Covered Call Trade

Original Entry Price:  $5.53 (3/4/14)

Lowered Price from Selling Options:  $4.68

Exit Target:  $6+

Return:  -48%

Stop Target:  $2

Action:  Support at $2.50 failed to start the week with shares tumbling to a low of $2.28 on Thursday.  The rebound off the low to resistance at $2.50 was encouraging as shares reached $2.54 on Friday.

On 3/4/2014 I recommended buying shares at $5.53 and selling the June 6 calls for 50 cents to lower the cost basis to $5.03.

On 6/23/2014 I recommended selling the September 5 calls for 35 cents to lower the cost basis of the trade to $4.68.

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Discovery Laboratories (DSCO, $1.73, up $0.03) Stock Trade

Original Entry Price:  $1.68 (8/13/14)

Lowered Price from Selling Options:  $1.68

Exit Target:  $2

Return:  3%

Stop Target:  None

 

Sold October 2 calls (DSCO140101900002000, $0.15, flat) Covered Call Trade

Original Entry Price:  $2.42 (1/7/14)

Lowered Price from Selling Options:  $1.67

Exit Target:  $4

Return:  4%

Stop Target:  None

 

Action:  Shares traded down to $1.66 midweek and held support at $1.60.  Resistance is at $1.80-$1.90.

On 1/7/2014 I recommended buying shares at $2.42 and selling the April 3 calls for 25 cents to lower the cost basis to $2.17.

On 4/30/14 I recommended selling the June 3 calls for 15 cents to lower the cost basis for the trade to $2.02.

On 6/23/2014 I recommended selling the October 2 calls for 35 cents to lower the cost basis of the trade to $1.67.  If shares are called away at $2 by mid-October the trade will make 20%.

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Trades on Hold:  AKS Steel Holding (AKS), DryShips (DRYS), Rambus (RMBS), Bebe Stores (BEBE), Vivus (VVUS), Dendreon (DNDN), Galena Biopharma (GALE) LEAP Trade/ Stock Trade, Zynga (ZNGA)