11:30pm (EST)
1. Market Summary
2. Zafgen (ZFGN) – Biotech Could be a Safe Place in a Volatile Market
3. Weekly Wrap Portfolio Update
4. Week Ahead
1. Market Summary
Bears Push Lower Lows, Bulls Win Week
The bears gave Wall Street a scare last week as more slick-talking pros jumped ship that cumulated with Thursday’s test to the major moving averages (MAs).
Friday was setting up to be a disaster as overnight futures were showing a panic-like open but as the saying goes, “it’s always darkest before the dawn”.
Indeed it was as Wall Street had a sunny session and ended the week in positive territory.
The Dow zoomed 185 points, or 1.1%, to finish at 16,554 on Friday. The blue-chips stayed within a tight range on the open but held support at 16,350 following the 4-point dip to 16,364. I have talked about further risk to 16,200-16,000 on a close below this level and the weekly low reached 16,333. Resistance is at 16,600 but the bigger hurdles are at 16,800-17,000.
The S&P 500 surged 22 points, or 1.2%, to close at 1,931. The index held 1,909 by the slimmest of margins (1,909.01) following a half-point loss during the first hour of trading. I warned there could be further risk to 1,900-1,875 on a close below 1,909. However, the bulls are now focused on resistance at 1,940-1,950 after clearing 1,925-1,930 ahead of the weekend.
The Nasdaq added 36 points, or 0.8%, to end at 4,370. Tech held the 4,325-4,300 level following a test to 4,327 an hour after Friday’s open. I cautioned risk to 4,300-4,200 following the close below 4,400 the previous week and this level will serve as resistance going forward followed by 4,425-4,450. The bears pushed a low of 4,321 on Thursday’s pullback.
The Russell 2000 jumped 11 points, or 1%, to settle at 1,131 ahead of the weekend. The small-caps slipped a point to 1,118 to start the session but held steady to clear 1,125-1,130 by the closing bell. The bears failed to push a lower weekly low after testing 1,107 the previous Friday as Monday’s low of 1,108 was their best effort. The bulls aren’t out of the woods yet, as multiple layers of resistance are at 1,140-1,150 followed by 1,160.
The S&P 500 Volatility Index ($VIX, 15.77, down 0.89) fell 5% on Friday after trading higher to 17.07 on the open. The VIX closed in between 15-17.50 throughout the week with a low of 14.69 on Monday and an intraday high of 17.25 on Thursday. A close above 17.50 will likely send Wall Street running for cover while a close under 15 might entice buyers back into the market.
Before Friday’s rebound, some suit-and-ties were patting themselves on the back following the start of August selling pressure. After 7 months of being wrong and saying they told us a pullback was coming, they were barking they told us so. Those same knuckleheads are now second-guessing themselves following Friday’s rebound by saying the selling pressure is over. Maybe, they should become weather forecasters because there opinions seem to mimic them.
I have been able to stay a step ahead of Wall Street by charting “fluff” targets from December that nearly triggered in March and were finally reached in June and early July following May’s tight trading range.
I warned when analysts stating raising their yearend price targets in late June there could be a short-term top and there was by the July 4 holiday. This was clearly an omen and had been playing out like a fiddle before Friday’s back test to resistance.
Predicting a market “bottom” is just as hard as picking market “tops” and while the charts have made me look better than most, it isn’t easy.
I talked about weakness coming into the month and possibly into this week and geopolitical events had a lot to do with this. There were continued airstrikes by the U.S. on ISIS over the weekend and was (or is) the straw that almost broke the market’s back following Thursday’s close.
I will skip the politics but I said back in late February any threats of war could throw a monkey wrench into my year-end price targets. Although the longer-term charts are still bullish, there was some technical damage done that is unresolved at the moment.
First, I want to discuss the VIX and my comments from March 3rd, 2014:
“The VIX continues to be an excellent indicator for me despite the idiotic quotes some of the slick talking pros have said this year. One well-known talking head says they pay no attention to the VIX until it gets over 20.
I have talked about the VIX on a Daily basis for a few years now because it really does help with market direction. For new subscribers, historically when the VIX is below 15, the market is bullish. A VIX over 20 usually indicates down markets and nervousness. I have talked about the VIX testing 11 and 52-week lows, and even the single-digits, so I still believe the bulls will ring that bell before there is a major pullback.” (END)
The VIX touched a 52-week low of 10.28 on July 3rd.
More comments from March 3rd:
“I have talked about expecting a possible 10%-20% pullback at some point in 2014 – providing major support levels fail. I covered those last week and the 10-year uptrend lines are at: Dow (15,500); S&P 500 (1,750); Nasdaq (4,000); and Russell 2000 (1,100). If these downside levels trigger, then my lower end Price Targets for 2014 would become my focus.” (END)
At the time of my early March comments, the Russell 2000 ended February at 1,183. In mid-April, the index kissed 1,095 intraday and rebounded 5% over the next 5 trading sessions. The following week, or by the end of April, the small-caps were again pushing 1,100 and closed below this level by the first week of May.
While I mentioned the longer-term charts are still bullish, this 3-year chart for the Russell 200 shows the close below its 50-week MA for the first time since late 2012:
The Monday/ Friday closes on the Dow were positive last week with nice gains. The blue-chips added 76 points on Monday and are up two-straight to start the week. They also ended a 2-session Friday slide with the end of week triple-digit plus rebound. These were bullish signs and something to watch again this week.
I have been planning and talked about the possibility of a summer rally following some August weakness. The short-term “bottom”may have come a day earlier than I had anticipated if Monday is a bullish session and resistance is cleared.
I will be watching the VIX, M/F closes and this week’s action in the small-caps again this week as the main clues for market direction and the next possible trend. I have done well limiting and from committing myself to short positions and put options all year long until the levee breaks.
I have done extremely well in navigating the market again this year and I’m once again averaging nearly a 70% success rate with my trades. The few put options I have taken have been good insurance and I have avoided the pitfalls most of the pros go through by chasing performance.
I take pride in outperforming the Wall Street pros every year and have learned not to get caught up in trading ranges or pending breakouts or breakdowns until they happen.
The indexes were on the verge of collapsing Friday and while cooler heads may have prevailed for now, the bulls are certainly walking on eggshells. The wall of worry has gotten a little steeper and a lot more slipperier so extreme caution is still needed.
I expect another extremely busy week for both the Daily and Weekly Wrap portfolios as both are in tremendous shape to play the August action that could be coming, good or bad. The Daily portfolio is showing a 111% return for closed trades while the Weekly Wrap is up 30% for 2014 and I don’t work on Wall Street. The results are from triple-digit hours of homework and chart work every week.
While the devil on one shoulder is begging me to go short, the angel on the other blade is telling me to stick with the bulls.
Ahead of Monday’s open, futures look like this: Dow (+33): S&P 500 (+4): Nasdaq 100 (+9).
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2. Zafgen (ZFGN) – Biotech Could be a Safe Place in a Volatile Market
Key of Technicals Used In Following Article
Small biotech companies with a promising pipeline are always fun to research. They are great for possible takeover plays as large pharmaceutical companies search for the next big money maker and many blockbuster drugs are coming off patent. One company that may hold promise is Zafgen (ZFGN, $17.38, down $0.14).
Obesity is a huge problem going forward. In June 2013, the American Medical Association labeled obesity a disease for the first time. Unlike appetite-suppressing drugs like the ones sold by Arena Pharmaceuticals (ARNA) and Vivus (VVUS), Zafgen targets the metabolism of fat. Scientific evidence shows that those who are obese metabolize fat very differently from lean people. Once the person becomes obese, the body undergoes certain metabolic changes and becomes “programmed” to create and store more fat, making it much more difficult to reduce body weight. The metabolic adaptations that take place in obese people impair the normal release and breakdown of fatty acids from adipose tissue. Simultaneously, the body becomes much more efficient in diverting calories from food and storing them as fat.
The company was founded in 2005 to explore novel approaches to obesity therapeutics. Academic research from the Boston Children’s Hospital found that drugs which stopped blood vessels from forming might also help shrink fat tissue. Two studies were carried out to test this hypothesis. That hypothesis turned out to be wrong, but the other study identified agents known to inhibit the enzyme methionine aminopeptidase 2 (MetAP2) were found to drive weight loss and metabolic improvements in mice. Current Zafgen Chairman Peter Barrett and Bruce Booth of Atlas Ventures completed original licenses on this research. Atlas Ventures, a venture capital firm that invests in the life sciences, provided initial seed money for Zafgen. In August 2006, Atlas wrote an $800,000 check as the company’s first significant round of venture funding, known as a Series A round. The company focused on targeting MetAP2 and on restoring control of key metabolic processes, releasing stored fat which then is used by the body as fuel. MetAP2 inhibitors work by re-establishing balance to the ways the body metabolizes fat, leading to substantial loss of body weight. The seed funding and Series A totaled about $2 million.
The next step of forming a successful biopharmaceutical startup was to form a great management team, which Zafgen has done. In 2006, Atlas entrepreneur James Vath joined as the founding chief science officer. Vath had served as senior vice president of product development at Phylogix and senior vice president of research at Praecis Pharmaceuticals. In 2008, the company recruited Thomas Hughes, a 21-year Novartis (NVS) veteran, as CEO. In 2011, Dennis Kim joined as chief medical officer. Dr. Kim had held multiple senior-level clinical and corporate positions at Orexigen Therapeutics (OREX), a biopharmaceutical company also focused on the obesity treatment. In 2013, Patricia Allen joined as chief financial officer. Allen served as the vice president of finance, treasurer, and principle financial officer at Alnylam Pharmaceuticals (ALNY), a biotech focusing on RNA interference. Alicia Secor joined the company in January 2014 as chief commercial officer. She spent 15 years at Genzyme, acquired by Sanofi (SNY), in various leadership roles. And on July 1, 2014, Patrick Loustau joined as president. Loustau was the senior vice president for global commercialization at Bristol-Myers Squibb (BMY), where he grew diabetes sales from $158 million to $1.6 billion in three years through both organic and external growth.
While the management team is important for managing the actual operations, the board of directors are responsible for setting the company’s vision. And we think Zafgen has done a good job at that too. Chairman Dr. Peter Barrett joined Atlas Venture in 2002. Before that, he was a co-founder, executive vice president, and chief business officer of Celera Genomics. Dr. Bruce Booth joined Atlas Venture in 2005. He was a principal at Caxton Health Holdings LLC, a healthcare-focused investment firm, where he oversaw activities ranging from early stage venture capital through late stage buyouts. Co-founder Avi Goldberg has over 15 years of experience building and operating technology companies. Dr. Thomas Hughes, also on the management team, has more than 25 years of experience in biomedical and pharmaceutical research and development. Dr. John LaMattina spent 30 years at Pfizer (PFE), where he held senior positions and as senior vice president, as well as president of Pfizer Global Research & Development. Kevin Starr has more than 20 years of experience in management of finance, technology, and operations in biotech, including leadership positions at Biogen (BIIB). On June 26, 2014, Frank E. Thomas joined the board to serve as the Chair of the Audit Committee. He has more than 22 years of experience in high growth industries, including executive vice president and chief operating officer of AMAG Pharmaceuticals (AMAG).
As for education, many hold bachelors degrees in chemistry or biology, and most hold advanced degrees. Thomas E. Hughes, James E. Vath, Peter Barrett, Bruce Booth, and John LaMattina have Ph.D.s in nutrition, chemistry, analytical chemistry, molecular immunology, and organic chemistry respectively. Dennis Kim holds both an M.D. and an M.B.A., while Alicia Secor holds just an M.B.A. and as bachelor of science in healthcare administration. Thus, both the management team and the board of directors seem well educated.
Below is the expected pipeline at the end of 2014. Investigational New Drug (IND) application is needed to ship an experimental drug across state lines and start Phase 1 trials.
Beloranib (also known as ZGN-433 and ZGN-440) reduces hunger while stimulating the use of stored fat as an energy source. The MetAP2 enzyme modulates the activity of key cellular processes that control metabolism, and by inhibiting it, Beloranib increases metabolism of fat, releasing energy. The company holds exclusive worldwide rights (except South Korea) for development and commercialization of beloranib. It exclusively licensed beloranib from Chong Kun Dang (CKD) Pharmaceutical of South Korea.
In January 2013, the U.S. Food and Drug Administration granted beloranib orphan designation to treat Prader-Willi syndrome (PWS). To qualify as an orphan drug by the U.S., the drug must treat rare diseases affecting no more than 200,000 people in the U.S. The designation provides seven years of marketing exclusivity in the U.S. after product approval. In addition, the sponsor qualifies for certain benefits, such as reduced taxes, from the federal government.
Then on August 9th, the company announced beloranib received orphan drug status in the European Union (EU) for the treatment of PWS. To qualify as an orphan drug by the European Commission (EC), the drug must treat rare life-threatening or chronically debilitating diseases affecting no more than five in 10,000 people in the EU and has no satisfactory treatment available. The designation provides 10 years of marketing exclusivity in the EU after product approval.
PWS, the most common known genetic cause of life-threatening obesity, results in constant and unrelenting hunger that drives patients to engage in problematic food-related behaviors and excessive weight gain. As a result, many of those affected become morbidly obese and suffer significant mortality. There is currently no cure for this disease. Although the cause is complex, it results from a deletion or loss of function of a cluster of genes on the 15th chromosome. PWS typically causes low muscle mass and function, short stature, incomplete sexual development, and a chronic feeling of hunger that, coupled with a metabolism that utilizes drastically fewer calories than normal, can lead to excessive eating and life-threatening obesity. It is estimated that PWS is present in both males and females around the world with a range of 1 in 8,000 to 1 in 50,000.
Beloranib also is being studied to treat craniopharyngioma-associated obesity. Patients with craniopharyngioma frequently suffer from severe obesity. Craniopharyngioma is a type of brain tumor that occurs most commonly in children but also in men and women in their 50s and 60s. When patients have the tumor removed from their brains, their hypothalamus is often damaged, leading to abnormally high hunger and obesity. Approximately two in two million have craniopharyngioma. Zafgen plans to seek orphan drug designation for beloranib in craniopharyngioma-related obesity, but no ruling has been made yet.
- On June 22, 2013, the company announced Phase 1b studies with beloranib demonstrated rapid weight loss averaging approximately one kilogram (2.2 pounds) per week and 3.1% over 26 days in severely obese patients, with encouraging reductions in body fat, improvements in cardiovascular risk factors, and tolerability.
- On January 15, 2014, the company announced results from its Phase 2a study of beloranib in patients with PWS demonstrated improvements in hunger-related behaviors and body composition, including reductions in body fat content and preserved lean body mass.
On April 19th, the company sold 6 million shares, 1 million more than initially planned, to the public for $16 each, at the high end of the expected range of $14 to $16, raising $96 million. Underwriters exercised an option to purchase an additional 900,000 shares of common stock at the IPO price, thus bringing the offering total to 6.9 million. Shares opened for trading at $20, and closed the day at $19.75. Only 31% of its outstanding shares were sold in the IPO, valuing the company at $303 million. Just before the IPO, Atlas Partners owned 35.6% of the company, Third Rock Ventures owned 35.4%, Alta Partners owned 7.4%, and Fidelity Investments owned 6.0%. Since its founding, Zafgen had raised $104 million in venture capital.
With the IPO cash, the company aims to start a Phase 3 in Prader-Willi, a Phase 2a trial in craniopharyngioma, and a Phase 2b trial in patients with severe obesity, by the end of this year. It also has a preclinical drug candidate ZFG-839 for nonalcoholic steatohepatitis, nonalcoholic fatty liver disease, abdominal obesity, and Type 2 diabetes.
Steatohepatitis (also known as fatty liver disease) is a type of liver disease, characterized by inflammation of the liver with fat accumulation. More deposition of fat in the liver is termed steatosis. Usually seen in alcoholics as part of alcoholic liver disease, steatohepatitis is also frequently found in people with diabetes and obesity. When not associated with excessive alcohol intake, it is referred to as nonalcoholic steatohepatitis, or NASH. NASH affects approximately 2% to 5% of Americans.
The company has no direct competitors, but Arena Pharmaceuticals (ARNA) and Vivus (VVUS) have obesity drugs on the market, despite working differently. Orexigen Therapeutics (OREX) is also developing an obesity drug, but more similar to that of Vivus and not Zafgen.
The company will host a conference call on Wednesday, August 13, 2014 at 4:30 p.m. ET to discuss its financial results for the second quarter ended June 30th. It also intends to provide an update on operations. Investors can listen to a webcast here http://ir.zafgen.com/events.cfm – registration is required.
At $17.38, the stock is way below its low target of $33.14 made by the 2 analysts recorded by Thomson/First Call. Mean and median target is $40.63, and high target is $48.11. 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 a week ago.
| Current Month | Last Month | Two Months Ago | Three Months Ago | |
| Strong Buy | 0 | 0 | 0 | 0 |
| Buy | 1 | 0 | 0 | 0 |
| Hold | 0 | 0 | 0 | 0 |
| Underperform | 0 | 0 | 0 | 0 |
| Sell | 0 | 0 | 0 | 0 |
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3. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 8/8/14)
The Weekly Wrap Closed Trade Track Record for 2014 is 22-4, or 85% win rate (107-11, or 91% win rate, overall since the start of 2011)
Special Notice: There are limit orders to start new positions on PZZI and DSCO if certain levels are cleared. Please read the trade instructions carefully and I will send out a Trade Alert if triggered.
Current Trades
Apple (AAPL, $94.74, up $0.26)
Original Entry Price: $98.40 (7/28/14)
Lowered Price from Selling Options/ Dividends: $97.93
Exit Target: $120
Return: -3%
Stop Target: $85
Dividend Yield: 2.1%
Action: Shares traded to a low of $93.28 on Friday after testing support at $93.50 and the 50-da MA before rebounding to push $95. Resistance is at $96 followed by $98 and where I would like to sell a triple-digit strike call option.
The company paid a dividend of 47 cents on 8/7/2014 to lower the cost of the trade to $97.93.
Pizza Inn Holdings (PZZI, $7.56, up $0.11) Stock Trades
Original Entry Price: $6 (7/9/14)
Lowered Price from Selling Options: No options available
Exit Target: $8, raise to $10
Return: 26%
Stop Target: $7, raise to $7.25 (Stop Limit)
Original Entry Price: $8.10 (10/11/13)
Lowered Price from Selling Options: No options available
Exit Target: $12+
Return: -7%
Stop Target: $5
Action: Shares held near-term support at $7.40 throughout the week. Backup support is at $7.25-$7. A close above $7.75-$8 would be bullish for a run at the 52-week high north of $9.
The stop limit is at $7 to protect profits on the second position (7/9/14). Raise it to $7.25.
The other position is a long-term core holding (10/11/13). Investors have gone crazy for El Pollo Loco (LOCO, $36.95, down $1.92) but Pizza Inn is the better valuation play by far and I have mentioned there is no analyst coverage on Pizza Inn. Hopefully, Wall Street doesn’t find out about this little gem until after the fact because PZZI is my favorite stock to hold over the next 3-5 years.
***Special Note: If shares clear $8, I will add another 200 shares to the portfolio, automatically, as new highs would likely be in play.
Previous comments:
The company 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. I have already recommended 2 profitable trades for the Weekly Wrap when shares were near $3.
CubeSmart (CUBE, $18.80, up $0.14) stock trade
Original Entry Price: $18.62 (6/23/13)
Lowered Price from Selling Options/ Dividends: $18.49
Exit Target: $22
Return: 2%
Stop Target: $18.50 (Stop Limit)
Dividend Yield: 2.8%
Action: Shares tested $18 and fell below the 100-day MA to start the week before finishing at $18.29. Thursday’s close at $18.42 and the 50-day MA was bullish and led to Friday’s run at $19. The 52-week high is at $19.69 and where I would like to possibly sell a call option. I have placed a Stop Limit of $18.50 on the trade if volatility continues for a breakeven bailout.
The company paid a dividend of 13 cents on 6/27/2014 to lower the cost of the trade to $18.49.
Limelight Networks (LLNW, $2.57, up $0.06) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: None
Exit Target: $5
Return: -14%
Stop Target: None
Action: The company reported a better-than-expected quarter following Monday’s close. However, shares traded down to $2.36 on Tuesday’s open before ending the session a nickel higher to $2.57. The 100-day MA held throughout the week but a close below $2.50 could lead to $2.30.
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. The market cap was just $214 million when I started recommending shares at the end of May at $2.16.
Hercules Offshore (HERO, $3.18, down $0.09)
Original Entry Price: $4.50 (5/30/14)
Lowered Price from Selling Options: $4.20
Exit Target: $7
Return: -24%
Stop Target: $2
Action: I warned there could be further risk to $3.25-$3 and Friday’s low hit $3.12. Resistance is at $3.30-$3.40 going forward.
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.
Alexza Pharmaceuticals (ALXA, $4.04, down $0.82) Covered Call Trade
Sold September 5 calls (ALXA140920C00005000, $0.15, down $0.15)
Original Entry Price: $5.53 (3/4/14)
Lowered Price from Selling Options: $4.68
Exit Target: $6+
Return: -14%
Stop Target: $3
Action: Shares tested longer-term support at $4 with Friday’s 17% spanking following an analyst downgrade. While I disagree with the call, a close below this level could lead to $3.75. Resistance is at $4.20.
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. If shares are called away at $5 by mid-September the trade will make 7%.
Discovery Laboratories (DSCO, $1.67, up $0.01) Covered Call Trade
Sold October 2 calls (DSCO140101900002000, $0.20, flat)
Original Entry Price: $2.42 (1/7/14)
Lowered Price from Selling Options: $1.67
Exit Target: $4.50-$5
Return: 0%
Stop Target: None
Action: Shares tested and held the May and 52-week low of $1.51 last week. This may have completed the back test to form a “double bottom” as shares closed at $1.60 the following session. A break below $1.50 could lead to $1.40-$1.25. Resistance is at $1.75 and the 50-day MA.
The company recently announced Phase 2 trials for Aerosurf have begun and beat earnings estimates last week on higher revenue.
***Special Note: If shares clear $1.75 I will add another 500 shares to the portfolio, automatically, as a run back to $2 would likely be in play.
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%.
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)
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4. Week Ahead
Here is a chart of the events for the week ahead:
