Option Investor
Newsletter

Daily Newsletter, Saturday, 1/26/2013

Table of Contents

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

Market Wrap

Dow Transports Have Reached Orbit

by Jim Brown

Click here to email Jim Brown

The markets continue to set new highs and are setting up for the best January in a decade with the Dow Transports obscenely overextended.

Market Statistics

After some high profile earnings beats and misses the market is still moving higher. A major hiccup in Apple shares that knocked -$75 off the stock price could not prevent the Nasdaq from closing within 3 points from the high of the week. Many stocks that sold off on earnings found eager buyers and erased their losses by the close on Friday.

Bullishness is breaking out all over and the markets are not showing any signs of weakness. The AAII Investor Sentiment Survey for last week is now showing 52.3% of investors are bullish, an 8.4% increase over the prior week. Only 24.3% bearish and that is a decline of -3.1% from the prior week.

The rise in bullishness came from the potential extension of the debt ceiling debate until May and a string of positive earnings reports. Economics were not so bullish but nobody appeared to be paying attention.

The New Home Sales on Friday came in at 369,000 for December. Consensus estimates were for sales of 392,000 compared to 398,000 in November so the headline number was a disappointment. That was a -7.3% decline in December. I think investors were still happy because of the +20% increase in sales for all of 2012. That is the first annual gain since 2005 and the largest since 1992. However, the overall total sales were the lowest in the last 50 years.

The dip in sales in December was likely influenced by Hurricane Sandy and a couple weeks of very cold weather. Sales in the Northeast showed the biggest decline with a -29.4% drop in December compared to the -7.3% for the entire country.

The number of new homes in inventory is near historic lows so prices should continue to climb. Median prices are up +13.7% since December 2011. Analysts expect new home sales to rise to something in the 500,000 range in 2013.

New Home Sales Chart

Mass layoffs for December fell sharply from the November level as the impact of Sandy dissipated. Layoffs had jumped from 1,400 events in October to 1,749 in November with an additional 36,000 workers impacted. In December the number of layoffs declined to 1,509 events and 137,839 workers. That is a decline of -35,000 workers from November's 172,879 high. The November number was the highest since the fall of 2009. The market ignored this data because of the storm impact.

The economic calendar for last week was limited but the coming week has some very high profile events. This is the week for the January FOMC meeting plus Nonfarm Payrolls, GDP, ISM Chicago and national ISM Manufacturing. On top of that more than 20% of the S&P will report earnings.

This will be the first release of the Q4-GDP and the consensus estimate is for growth to have declined to +1.2% compared to the final reading of +3.11% in Q3. This could be a volatile number since Sandy depressed GDP early in the quarter then enhanced it with the recovery efforts late in the quarter.

The Nonfarm Payrolls are expected to be flat with a gain of +155,000. However, the weekly Jobless Claims have been dropping steadily. Last week they fell to 330,000 and the lowest level since January 2008. Continuing claims declined to 3.16 million and the lowest since July 2008.

Weekly Jobless Claims Chart

This could be telegraphing an improvement in the Nonfarm Payrolls. However, there is a trend underway by small businesses to reduce payrolls as a result of the Obamacare rules. Businesses are cutting hours to reclassify employees from full time to part time. They are also reducing employees to get under the 50 employee limit. It may be a couple months before those trends are translated into the payroll report and we may not even see it if the economy continues to recover and new jobs take the place of the disappearing jobs.

Lastly the FOMC meeting is not expected to reveal any change in the current QE programs. There has been some comments from Fed governors about ending the treasury purchases as early as Q3 but in Bernanke's latest speech he did not deviate from the stated Fed position. It will be interesting to see if the post meeting statement tries to overcome that dissension and firmly restate the Fed position. Bernanke can't have the various members of the committee spouting off about the Fed ending the program because that is counterproductive for the Fed position. The Fed is trying to hold interest rates down and those comments and the improving economy are pushing rates higher. For this reason the announcement could be more volatile than normal.

Economic Calendar

Pension and insurance funds are starting to rotate back from an extreme bond position to a preference towards equities. This is being called the "Great Rotation." These funds have benefitted from a nearly 20 year bull market in bonds and the portfolios are ripe for rebalancing. Nobody wants to be the fund that underperforms because they are only earning 2% in bonds when the equity markets are breaking out to new highs.

According to Lipper the fund flows into U.S. equity funds over the first two weeks of 2013 was $11.3 billion and the biggest since April 2000. If you include flows into equity ETFs that number jumps to more than $18 billion and more than twice the flows into bond funds. In the latest week Lipper said $3.66 billion flowed into U.S. equity funds. For all of January the Convergex Group said $15.6 billion has flowed into ETFs. Fund-tracker EPFR said there was $7 billion of inflows into emerging market equities in the first week of the year and that was the most on record. These numbers compare to the $215 billion in equity fund outflows in 2012.

Bank America analyst Michael Harnett said "their conviction in the Great Rotation remains very high." The preference for bonds has been historic. European pension funds had a 43% bond weighting and 24% equity weighting in 2012 compared to more than 40% equities in 2010.

The main point that should be stressed here is that these funds to not move in a hurry. They plan and move, plan and move and test their market outlook all along the way. As long as the market trend remains steady the rotation out of bonds could take a long time. Once the rotation builds momentum it is like the proverbial train that is hard to stop.

With the dividend yield of many U.S. equities well above the yield on bonds there is little downside for these funds to move into stocks as long as the economic forecast is for a gradual improvement.

The rotation picked up speed on Friday with treasuries getting crushed. The yield on the ten-year spiked +5.6% to close at 1.947% and an eight-month closing high. The 30 year yield spiked +3.1% to 3.133% and also an eight month high.

Ten Year Treasury Yield Chart

The S&P completed its longest winning streak since November 2004 with eight consecutive days of gains. The Dow has been up for 11 of the last 12 days and that is the best streak since 2004 as well. The Dow has gained +6% in January making it the best January since 1994. The Dow is only 268 points below its 2007 peak. Eight Dow stocks hit new highs. DIS, HD, JNJ, JPM, MMM, PFE, PG and UTX. On JNJ that high dates back to 1944 and MMM dates back to 1945.

These gains were driven by better than expected earnings from companies like Starbucks, Procter & Gamble, NetFlix and Halliburton.

So far this earnings cycle 76% of S&P companies have beaten on earnings per share according to Bloomberg. Only 67% have beaten on revenues but that is significantly better than the 47% beating last quarter. Estimates for earnings growth have done a U-turn over the last week. Estimates were over 3% on Jan 1st then dropped to less than 2.5% about a week ago. They have rebounded to +4% growth as of the close on Friday.

Guidance remains muted. Companies are not very optimistic about this quarter but the majority are positive. Saying things like "we are well positioned" or "estimates we made last quarter have not changed" may not stimulate traders but at least the majority are not warning of any business decline.

By far the biggest earnings winner for the week was Netflix (NFLX). The company reported better than expected earnings on Wednesday night and surged +$43 points on Thursday and then gained another $23 on Friday. That $66 gain started from the $103 close on Wednesday. The Netflix faithful were definitely rewarded.

NetFlix Chart

Starbucks said profits rose +13% to 57 cents per share and in line with estimates. That failed to generate excitement but news the same store sales rose +7% in the Americas was positive. Analysts were only expecting a sales increase of 5.9%. European sales declined -1% and analysts were expecting a decline of -0.3%. Sales in China and Asia Pacific rose +11%. Starbucks posted its highest revenue ever at $3.8 billion. The company operates 18,200 stores globally with plans to open +1,300 more in 2013.

I think Starbucks is a buy as long as it holds over resistance at $56.

SBUX Chart

Procter & Gamble (PG) posted profits that more than doubled as the cost cutting measures announced last year finally kicked in along with higher sales and new products. Last February P&G announced a plan to focus on its top 40 businesses, 20 biggest new products and 10 most profitable emerging markets. Apparently those efforts paid off. The company earned $4.06 billion or $1.39 per share. That was up from $1.69 billion and 57 cents in the year ago quarter. The company raised full year guidance from $3.80-$4.00 to $3.97-$4.07.

The rising sales in both the Americas and in Europe/Asia were positive for economic sentiment. Kimberly Clark (KMB) also posted higher sales and the pair of reports suggests the global consumer is improving.

P&G Chart

Halliburton (HAL) posted earnings of 67 cents that beat the street by 6 cents. That was down from the 98 cents earned in the year ago quarter. The decline came from a sharp drop in pressure pumping used to fracture wells. The number of active gas rigs has fallen to one third of their recent highs as gas prices remain low and gas production remains high. Halliburton's North American income fell -58%. Baker Hughes (BHI) reported a similar story last week but Schlumberger (SLB) reported stronger results because they have a large presence in offshore drilling.

Halliburton Chart

Oshkosh Corp (OSK) shares spiked +19% to $41.08 after reporting earnings of 60 cents compared to analyst estimates of 31 cents. That massive beat was due to an uptick in sales of construction equipment and orders for fire trucks and emergency vehicles. Car Icahn dropped his bid to buy the company in December and has since reduced his share to 4.7% from 9.5%. I bet he is a happy camper this weekend with a +19% jump in the stock price. The company was upbeat on its guidance saying "there is increasing evidence housing is poised for a nice recovery."

Oshkosh Chart

Apple (AAPL) was the biggest loser of the week with a decline of -$75 from its close at $514 prior to earnings. Revenues were strong as products jumped off the shelves. Sales were just not good enough. They also guided below analyst estimates for Q1. That is not unusual but it was significantly lower. They guided for revenue of $42 billion compared to estimates of $45.4 billion. If you take their guidance on expenses, margins and tax rates that equates to about $9.18 per share in Q1 compared to the $12.30 they made in the year ago quarter and the $11.67 analysts were expecting. It all boils down to sales. Apple sold 47.8 million iPhones in Q4. That was 29% higher than Q4-2011 but significantly below the 50 million analysts were expecting and the 56 million suggested by Verizon. Samsung sold 63 million smartphones in the quarter.

Price targets are being slashed all over Wall Street and the stock has broken through three levels of support in just two days. The $500 level is history and now everyone is hoping $400 will hold. I read two analyst updates this weekend saying the new price target for a bottom is in the $340-$360 range. Personally, I believe buyers will appear in the $400-$420 range and that will be the bottom. Even at the reduced earnings Apple is still undervalued.

Since the September high at $702 Apple has lost $246 billion in market cap. That is the equivalent of 1,230 Boeing 787 Dreamliners at $200 million each. That is more than the $235 billion market cap of GE. That is 27 times the market cap of NFLX, four times the size of Altria, six times the size of Starbucks and 49 times the size of Sears. That means thousands of funds and millions of individual investors lost a sizeable portion of their account on this decline.

Apple Chart

Next week 20% of the S&P reports earnings. However, as you can tell by the list below the size of the average company is declining and the quality of earnings normally declines in this week as well.

By the time we get to next weekend we will now how the earnings cycle will end and how many jobs were created, the GDP in Q4 and the odds of the Fed continuing QE through the end of the year.

We will also be in February and a month not normally known as a bull month. If we are going to face a bout of profit taking I would bet on the first week in February.

The key earnings for next week are CAT, AMZN, BA, QCOM, WHR, MA and the energy giants XOM, COP and CVX. I picked those first six because their earnings will tell us how the consumer and the economy are doing. Boeing will likely give guidance on the fate of the 787 grounding and it could be months. Whirlpool is a consumer appliance company rather than consumer electronics. Those earnings will relate to the strength of housing. MasterCard gives us consumer spending patterns as will Amazon. Caterpillar gives us global economic demand for heavy equipment.

Earnings Calendar

Next week Research in Motion (RIMM) will deliver a knockout punch with BlackBerry 10 according to CEO Thorsten Heins. He said it will be a Muhammad Ali thing where Ali knocked out the competitor in round 8. He said the company learned from its mistakes and they were now prepared for BlackBerry to lead the next revolution in smartphones.

Next week will be the key when they start delivering the new phones but regardless of the phone we could see a sell the news event. RIMM shares are up more than 100% since November and it would take a knockout punch to push them higher. RIMM has not delivered a knockout punch in years. Even Apple has a history of selling off on new product deliveries.

RIMM Chart

I believe the market has shown considerable strength to continue moving higher in the face of Apple's decline. Apple is a major component in the S&P and produced significant negative drag. The weighting in the Nasdaq 100 was simply too much to overcome but the Nasdaq Composite managed to close positive on Friday.

If/When Apple shares do find a bottom it will be rocket fuel for the indexes because Apple never rebounds slow from major setbacks.

The volume in the market has been steady but not strong. The average volume since January 3rd has only been 6.1 billion shares. The advance-decline numbers have not been that bullish. There has been a steady bias to the advancers but nothing material. The morning sell offs have been skewing the internals while the afternoon bias to the upside has failed to produce enough volume to overcome the morning details.

However, the new 52-week highs are growing. On Tuesday and Thursday there were more than 1,000 new highs and Friday saw 958 new highs. This meltup may not qualify as a stealth rally since the string of consecutive daily gains is starting to set records. However, the strength has been well hidden thanks to those morning sell offs.

We have reached the point where this bull market can no longer be ignored. With the Dow only 268 points from a historic high and the Dow and S&P making new five-year highs every day the money managers have to be taking action.

They can't afford to continue ignoring the new highs or waiting for a pullback. They have to be putting money to work or they are going to be left behind. When the fund rankings come out you want to be on the top of the list, not the bottom.

This is why markets making new highs tend to continue making new highs. Managers are forced to chase stocks higher today or lose customers later.

Eventually this meltup is going to lose traction. I am targeting the first week of February based on historical trends. We know the market can remain irrational far longer than we can remain solvent if we are betting against it so until proven wrong the trend is our friend.

The S&P closed over 1,500 and right at uptrend resistance. Any further gain from here targets the 1,550 level and then the historic high close at 1,565. These targets are close enough that traders are fixated on them and that could make them a reality in the days ahead. It is not safe to be a bear today as every dip is bought. That will eventually change.

S&P Chart - Daily

S&P Chart - Monthly

The Dow has extended its gains and is beginning to accelerate. With only 268 points to go before reaching its historic high the checkered flag is in sight. Initial support is close at 13,800 and real support is well back at 13,500.

This streak of 11 positive days out of the last 12 can't last forever so be prepared for a meaningful dip soon.

Dow Chart - Daily

Dow Chart - Monthly

The Nasdaq is the only major index that has not made a new high and it is entirely due to Apple's decline. The index has only gained +50 points since the gap to 3100 on January 2nd. The multiyear high close was 3,183 back on September 14th. You have to go back to November 2000 for a higher close.

Eventually Apple is going to find a bottom and the resulting rebound should power the Nasdaq higher. Let's hope the bottom in Apple comes before the markets decide to roll over for that long overdue bout of profit taking.

Current support is 3125 and then 3100.

Nasdaq Chart

The Russell 2000 blew past round number resistance at 900 but remains close enough that a retest is still possible. The Russell gained 1.3% past week and was rather subdued with the Dow gaining +1.9%. Could it be the small cap bulls are growing tired?

The Russell is over extended so a pause could come at any time.

Russell 2000 Chart

The Dow Transports are a perfect example of hyper extension. This chart is begging for a serious bout of profit taking and it is hard to understand why any investor would be buying a transport today. The transports have gained +600 points in January and they are up nearly 11% for the year. Caution is strongly advised!

Dow Transports Chart

Without any seriously negative news from Europe or China the indexes should continue the recent trend of steady but muted gains. If we were to experience a blowout on some specific news that turned into triple digit gains I would be worried about a climax top. We don't have to actually hit the prior highs on the Dow and S&P before profit taking can begin.

The transports worry me a lot. That extreme extension is begging for a bout of selling and it could contaminate the rest of the market. However, with nearly 250 companies reporting earnings this week there will be plenty to keep traders distracted. The challenges could come from within with the GDP, FOMC, ISM and Jobs.

I remain in buy the dip mode until proven wrong but beware of a sharper than normal dip.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"If the lessons of history teach us anything it is that nobody learns the lessons that history teaches us."
Unknown


Index Wrap

S&P Nears 2007 Highs, up 125% From its '09 Lows

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

While the tech-heavy Nasdaq seriously lags, it has already exceeded prior 10-year highs, whereas the S&P is nearing this milestone. Good-timing award: with the S&P 500 up 125% from '09 lows, individual investors are buying again. My first chart below of the monthly SPX chart tells the story. I don't think individual investors are stupid, just ignorant of the Market and the truth of buying when stocks are out of favor and taking caution when it's a party topic.

By the way, if the Dow 30 (INDU) closes at 13900 on Thursday, Jan. 31st (Friday Close: 13895), this would constitute a Dow Theory 'confirmation' of a primary up trend in the market. Not that this is a point to go into stocks for the first time but it suggests that investors who bought back when were buying at an appropriate time.

Certain Market bellwethers here tell the story as to why Nasdaq is lagging and the Dow (and S&P) are surging. The relative influence of Apple Computer (AAPL) and Dow stock IBM demonstrates the relative bearishness of AAPL as it pierced its long-standing up trendline and IBM rallied strongly from the low end of its (long-standing) up trendline.

All other comments are contained within my individual stock commentaries. Of GENERAL interest is that this market is at an overbought extreme in general, especially with the S&P stock indices and the Dow. This doesn't mean that these stocks can't and won't go higher but it does suggest that there is a greater risk of a downside correction. Even if there's no sharp pullbacks ahead, for options traders, a sideways ('time') correction will work against some strategies (while helping others).

The fact of Nasdaq lagging here doesn't mean as much as the pattern of such a well-defined line of resistance that looks like a lid on this important Market segment and suggest a possible interim top. At some point such a pattern suggests that the S&P and Dow will also experience a pause and/or an interim top.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P chart continues in a maximum bullish fashion as SPX climbs higher, albeit along the top end of the Index's uptrend channel. This pattern of hugging the top end of its channel is a visual demonstration of slowing or just-moderate upside momentum. I'm cautious about a reaction ahead of the really tough resistance suggested in the 1550-1560 area.

On the other hand, I don't think SPX is going to form a massive triple top. Double tops are far more common and we've already seen that given the 2000-2007 double top. Ahead, especially with individual investors coming back into equities mutual funds, I anticipate a move above the prior highs.

In terms of a pullback, it would be quite common to see SPX pull back to the low end of the aforementioned uptrend channel and/or back to the 21-day moving average.

Note the 'overbought' extreme seen above with the Relative Strength Index, which suggests that the odds of a correction ahead is when rather than if.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish in the same pattern as seen with the S&P 500. A pullback to the lower end of its channel wouldn't be surprising and the odds of another sharp upswing is less than the potential for a sideways to lower correction by the end of the coming week. OEX has support at 660, extending to the 650 area.

Resistance is suggested at 677, extending to 685 at week's end, assuming that the upper channel line will continue to limit more than a gradual further advance. Major resistance is expected in the 727 area.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) is bullish and INDU, powered especially by IBM, CSCO, DIS, HD, JNJ, JPM, MMM, PFE, PG, TRV, and UTX has the potential to go substantially higher. Odds favor INDU at least challenging the 14000-14020 area and above such as to the prior weekly closing high at 14093. Whether the Dow will make it to near 15000 without at least a minor correction first is hard to say.

Near resistance is suggested at 13945, extending to 14020. Near support is highlighted at 13800, then in the 13600-13575 area.

A pullback to the 21-day moving average wouldn't be surprising either but this average is rapidly rising also. INDU is at an overbought extreme and as high as we'll typically see before there's at least a pause in such a powerful advance. The Market as we know tends to go from extreme to extreme and INDU is at the high extreme as measured by the Relative Strength Index.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite is bullish as it continued to advance but is of course lagging the S&P recently. The tech heavy Nasdaq hasn't lagged on a long-term basis since it already exceeded its prior highs that SPX is only approaching now.

The risk of a near-term correction is growing and it's a question as to whether the other major segment of the Market, the NYSE listed stocks, will continue to soar without Nasdaq in gear. Stay tuned on this outcome. The relative position of COMP is keeping I think a lid on bullish trader sentiment.

Very near resistance is in the 3150 area, then at the upper channel line around 3200, extending to 3215.

Near support is at 3100, then at the current intersection of the low end of COMP's uptrend channel at 3060.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) is mixed in its pattern as it drifts sideways tracing out a well-defined line of resistance at 2750, the day range above this level notwithstanding.

The sideways move does have a benefit to the bulls in that this pattern 'throws off' an 'overbought' extreme such as seen with the S&P and Dow.

I've noted near resistance at 2750-2770, then well above this area, at the upper channel line currently intersecting in the 2815 area and extending over time to 2850. The correction at the prior highs above 2850 is a good example of how RSI extremes tend to precede substantial (downside) corrections.

My worst case scenario for NDX is currently for a pullback to support in the low-2700 area, extending to around 2680 currently. Fairly major support beings at 2650, then 2600 even.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is mixed in the same way as the underlying NDX of course. The sideways movement suggests that's there's at least a temporary cap on the market.

A decisive upside penetration of 67.30-67.7 is needed to suggest that QQQ could be seeing another up leg such as a move to the upper end o of its uptrend channel, currently intersecting at 68.8, extending to 69. Major resistance begins at 70-70.5.

Near support is in the 66.2-66 area extending to implied support at QQQ's up trendline, currently intersecting at 65.3.

Volume as been mostly lackluster as the Q's trade sideways, something quite unexciting to the bulls who jump more heavily (on the buy side) after other buyers propel the Index higher. Daily volume figures and On Balance Volume (OBV) are neutral. A break below recent lows should send volume up sharply. Otherwise QQQ is a yawn, although owning the stock versus its calls loses nothing; unlike call option premiums.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index continues to lead or at least do as well as the S&P and Dow. There is a definite seasonal tendency for the small to mid-cap stocks of the Russell to move higher in January.

RUT is at an all-time high. 'Resistance' can only be estimated or guessed at from the upper line of RUT's uptrend channel, currently intersecting in the 915 area, extending to 925.

Near support is at 883 to 875. Major support begins in the 850 area, extending to 830-820. 800 is 'must-hold' support for the bulls.

As with the other strong moving indexes, RUT is at an overbought 'extreme' by the lights of the 13-day Relative Strength Index or RSI and is at as high a reading as the last time that RUT had a substantial pullback. Just saying!



GOOD TRADING SUCCESS!


New Option Plays

Energy & Beverages

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cimarex Energy Co. - XEC - close: 64.00 change: +0.77

Stop Loss: 61.90
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Feb. 19th
New Positions: Yes, see below

Company Description

Why We Like It:
The energy sector has been outperforming the S&P 500. Shares of XEC have participated in that rally. You could argue shares of XEC are overbought given the big bounce off its late December lows. Yet shares are now poised to breakout from a six-month trading range between $56 and $64.

I am suggesting a trigger to buy March calls at $64.55. More conservative traders may want to wait for a rally past $65.00 instead. If triggered our target is $69.50. However, we will plan to exit prior to the Feb. 19th earnings report.

Trigger @ 64.55

- Suggested Positions -

buy the Mar $65 call (XEC1316c65) current ask $2.35

Annotated Chart:

Weekly Chart:

Entry on January -- at $---.--
Average Daily Volume = 708 thousand
Listed on January 26, 2012


NEW DIRECTIONAL PUT PLAYS

Monster Beverage Corp. - MNST - close: 46.71 change: -0.56

Stop Loss: 50.15
Target(s): 41.00
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to the late February earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
The last half of 2012 was a rough one for shares of MNST and 2013 is not seeing any change in trend. The stock exploded the few years prior to its peak in mid 2012. Since then the company seems to be suffering a number of maladies. First and foremost it seems that sales are slowing in certain markets. More recently there has been rising litigation risk. Just last week MNST plunged to a new relative low following the release of a report from the Substance Abuse and Mental Health Services Administration. This report is suggesting that emergency room visits related to energy drink consumption has more than doubled from 10,068 in 2007 to 20,783 in 2011. Elsewhere there are allegations that (excessive) energy drink consumption can be attributed to death in young adults. One politician in the Chicago area has proposed a ban on the sale of energy drinks.

Naturally MNST denies any health risk associated with its energy drink products, claiming they only contain enough caffeine similar to a cup of coffee. Legally, any deaths related to energy drink consumption have not yet been proven. It is the risk of increased litigation that has created a black cloud over shares of MNST. We think the current down trend continues.

Before we continue, please note that MNST has been a very volatile stock in the past. This should be considered an aggressive, higher-risk trade. I am suggesting we buy put positions now, at the open on Monday. Our target is the $41.00 level since the $40.00 level was support in October and November 2012.

- Suggested Positions - *Small Positions*

buy the Mar $45 PUT (MNST1316o45) current ask $2.85

Annotated Chart:

Weekly Chart:

Entry on January -- at $---.--
Average Daily Volume = 2.0 million
Listed on January 26, 2012



In Play Updates and Reviews

Another Week, Another Round of Highs

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index has extended its gains to four weeks in a row and closed at new multi-year highs. Most of our bullish candidates are following the market higher.

We did close GILD on Friday. Both CTRX and SODA were triggered.


Current Portfolio:


CALL Play Updates

Anheuser-Busch InBev - BUD - close: 91.71 change: +1.45

Stop Loss: 88.45
Target(s): 99.00
Current Option Gain/Loss: +18.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/26/13: Friday saw shares of BUD gap open higher and close at new all-time highs with a +1.6% gain on the session. We are adjusting our stop loss higher to $88.45.

- Suggested Positions -

Long MAR $90 call (BUD1316c90) entry $3.05

01/25/13 new stop loss @ 88.45

chart:

Entry on January 22 at $90.25
Average Daily Volume = 894 thousand
Listed on January 19, 2012


Catamaran Corp. - CTRX - close: 53.23 change: +0.11

Stop Loss: 50.90
Target(s): 58.50
Current Option Gain/Loss: - 8.3%
Time Frame: exit PRIOR to earnings in late February
New Positions: see below

Comments:
01/26/13: CTRX was little changed on Friday but shares did climb high enough to hit our entry point to buy calls at $53.25. I would still consider new positions now. I don't see any changes from my Thursday night comments.

More conservative traders could wait for a new high above $53.60 instead. Our target is $58.50 but we do not want to hold over the late February earnings report (no date set yet). FYI: The Point & Figure chart for CTRX is bullish with a $68 target.

- Suggested Positions -

Long Feb $55 call (CTRX1316B55) entry $0.60

chart:

Entry on January 25 at $53.25
Average Daily Volume = 1.3 million
Listed on January 24, 2012


Deere & Co - DE - close: 93.47 change: +0.23

Stop Loss: 89.25
Target(s): 99.00
Current Option Gain/Loss: +63.8%
Time Frame: Exit prior to the Feb. 13th earnings report
New Positions: see below

Comments:
01/26/13: DE was up every day this week. Shares closed at new 18-month highs. The stock is arguably short-term overbought and due for a dip. Look for support near its 10-dma or in the $91-90 zone.

We do not want to hold over DE's February 13th earnings report. FYI: The Point & Figure chart for DE is bullish with a $104 target.

- Suggested Positions -

Long Feb $90 call (DE1316B90) entry $2.35

01/22/13 new stop loss @ 89.25

chart:

Entry on January 11 at $90.25
Average Daily Volume = 2.3 million
Listed on January 09, 2012


Starwood Hotels - HOT - close: 60.89 change: +0.91

Stop Loss: 58.85
Target(s): 64.50
Current Option Gain/Loss: + 2.2%
Time Frame: exit prior to earnings on Feb. 7th
New Positions: see below

Comments:
01/26/13: HOT is once again challenging resistance at the $61.00 level. The stock looks poised to breakout this time. More conservative traders may want to raise their stop. I would use a breakout past $61.00 as a new bullish entry point. Keep in mind our plan to exit prior to earnings on Feb. 7th.

- Suggested Positions -

Long Feb $60 call (HOT1316B60) entry $1.81

chart:

Entry on January 22 at $60.60
Average Daily Volume = 1.9 million
Listed on January 15, 2012


Ingersoll-Rand - IR - close: 51.47 change: +0.38

Stop Loss: 49.75
Target(s): 54.00
Current Option Gain/Loss: +14.2%
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: see below

Comments:
01/26/13: IR was up every day this week. Shares closed near its 52-week high. I am raising our stop loss to $49.75. I'm not suggesting new positions. We only have a few days left. The plan is to exit prior to earnings on Feb. 1st.

- Suggested Positions -

Long Feb $50 call (IR1316B50) entry $1.75

01/26/13 new stop loss @ 49.75
01/24/13 new stop loss @ 49.25

chart:

Entry on January 17 at $50.25
Average Daily Volume = 1.8 million
Listed on January 12, 2012


Noble Energy - NBL - close: 108.30 change: +0.70

Stop Loss: 104.65
Target(s): 114.00
Current Option Gain/Loss: + 4.3%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

Comments:
01/26/13: Since the big surge higher on Tuesday, shares of NBL have been consolidating sideways. I am raising our stop loss up to $104.65. More conservative traders may want to raise theirs closer to $106.00 instead. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $110 call (NBL1316B110) entry $1.15

01/26/13 new stop loss @ 104.65
01/22/13 new stop loss @ 103.75
01/17/13 new stop loss @ 102.75

chart:

Entry on January 14 at $105.31
Average Daily Volume = 820 thousand
Listed on January 12, 2012


OpenTable, Inc. - OPEN - close: 53.75 change: -0.25

Stop Loss: 51.40
Target(s): 58.00
Current Option Gain/Loss: -11.4%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

Comments:
01/26/13: The upward momentum in OPEN could be in trouble. Thursday saw shares produce a bearish reversal at the $56.00 level. The weakness continued on Friday although the pullback has been pretty mild. I am not suggesting new positions. More conservative traders may want to raise their stop loss.

Earlier Comments:
OPEN could see a short squeeze. The most recent data listed short interest at 42% of the very small 19.4 million share float. FYI: The Point & Figure chart for OPEN is bullish with a $73 target.

- Suggested Positions -

Long Feb $55 call (OPEN1316B55) entry $2.54

01/19/13 new stop loss @ 51.40
01/16/13 new stop loss @ 50.90
01/12/13 new stop loss @ 49.90

chart:

Entry on January 04 at $52.23
Average Daily Volume = 361 thousand
Listed on January 03, 2012


Sherwin-Williams Company - SHW - close: 165.51 change: -0.28

Stop Loss: 161.75
Target(s): 169.00
Current Option Gain/Loss: +25.8%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

Comments:
01/26/13: Readers may want to exit early now and book a profit on SHW. The stock hit new record highs this last week but momentum has been slow. We only have a few days left. SHW is scheduled to report earnings on January 31st. If SHW does not hit our exit target at $169.00 then we will plan on closing positions on January 30th at the closing bell. Please note our new stop loss at $161.75.

Earlier Comments:
We keep our position size small to limit our risk.

- Suggested Positions - *Small Positions*

Long Feb $165 call (SHW1316B165) entry $3.10

01/26/13 new stop loss @ 161.75
Prepare to exit on Jan. 30th at the closing bell if SHW does not hit our target by then.
01/19/13 new stop loss @ 159.65

chart:

Entry on January 09 at $161.28
Average Daily Volume = 928 thousand
Listed on January 08, 2012


iShares Silver ETF - SLV - close: 30.21 change: -0.44

Stop Loss: 29.85
Target(s): 33.50
Current Option Gain/Loss: +13.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/26/13: I have been warning readers to expect a likely pullback in the SLV towards the $30.00 level. The ETF complied with a drop to $30.10 on Friday afternoon. I'm expecting the $30.00 level to be support so we're raising the stop loss to $29.85. That may be too tight for some traders who will want to keep their stop loss wider and give the SLV more room to maneuver.

Earlier Comments:
More cautious traders might want to raise their stop loss.

- Suggested Positions -

Long March $30 call (SLV1316c30) entry $0.95

01/26/13 new stop loss @ 29.85
01/22/13 new stop loss @ 28.49

chart:

Entry on December 31 at $29.07
Average Daily Volume = 11.6 million
Listed on December 29, 2012


SodaStream Intl. Ltd. - SODA - close: 53.23 change: +1.48

Stop Loss: 49.45
Target(s): 58.50
Current Option Gain/Loss: +29.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/26/13: Our new trade on SODA is off to a strong start. Shares opened at $52.00 and surged to a +2.8% gain. Our trigger to buy calls was hit at $52.15. If you missed the entry point I would wait for a little pullback. Please note I am raising our stop loss to $49.45. FYI: The Point & Figure chart for SODA is bullish with a $62 target.

- Suggested Positions -

Long Feb $52.50 call (SODA1316b52.5) entry $1.85

01/26/13 new stop loss @ 49.45

chart:

Entry on January 25 at $52.15
Average Daily Volume = 1.2 million
Listed on January 24, 2012


SPX Corp. - SPW - close: 73.79 change: +0.60

Stop Loss: 69.75
Target(s): 79.00
Current Option Gain/Loss: +11.5%
Time Frame: Exit prior to earnings on Feb. 14th
New Positions: see below

Comments:
01/26/13: SPW is up five out of the last six trading days. More conservative traders may want to raise their stop loss here. SPW is nearing what could be round-number resistance at $75.00 so I would not be surprised to see a little pullback. Watch for short-term support near $72.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $75 call (SPW1316B75) entry $1.30

chart:

Entry on January 23 at $72.42
Average Daily Volume = 832 thousand
Listed on January 22, 2012


Whole Foods Market - WFM - close: 95.65 change: +2.10

Stop Loss: 91.40
Target(s): 99.50
Current Option Gain/Loss: +52.1%
Time Frame: Exit PRIOR to earnings on Feb. 13th
New Positions: see below

Comments:
01/26/13: Whew! Friday's rally in WFM comes as a relief after the Thursday afternoon reversal lower. WFM gapped open higher on Friday and surged past potential resistance near $94.00 and its 100-dma and 150-dma. The stock even closed above potential round-number resistance at $95.00.

We do not want to hold over the Feb. 13th earnings report.
NOTE: because of a previous dividend the option strike for February is an odd one (95.50)

- Suggested Positions -

Long Feb $95.50 call (WFM1316B95.5) entry $1.90

chart:

Entry on January 24 at $94.25
Average Daily Volume = 1.5 million
Listed on January 23, 2012


PUT Play Updates


Currently we do not have any active put trades.



CLOSED BULLISH PLAYS

Gilead Sciences - GILD - close: 79.36 change: +0.96

Stop Loss: 76.45
Target(s): 84.50
Current Option Gain/Loss: + 7.2%
Time Frame: EXIT on Friday Jan. 25th at the close
New Positions: see below

Comments:
01/26/13: GILD broke out from its recent trading range and closed at new all-time highs on Friday. Yet we had decided to close positions on Friday at the closing bell to avoid holding over the stock's 2-for-1 split. GILD will begin trading post-split on Monday.

The trend is up and we will keep GILD on our radar screen for a future entry point.

- Suggested Positions -

Feb $80 call (GILD1316b80) entry $1.51 exit $1.62 (+7.2%)

01/25/13 scheduled close
01/24/13 prepare to exit at the close tomorrow, unless GILD hits our target
01/23/13 GILD not working, do not be surprised to get stopped tomorrow
01/22/13 Strategy adjustment, prepare to exit on Friday, Jan. 25th to avoid holding over the 2-for-1 stock split.
01/22/13 trade opened at trigger (78.65)

chart:

Entry on January 22 at $78.65
Average Daily Volume = 4.0 million
Listed on January 19, 2012


CLOSED BEARISH PLAYS

Lululemon Athletica - LULU - close: 69.83 change: +2.23

Stop Loss: 66.65
Target(s): 60.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
01/26/13: The stock market's strength is fueling a rebound in shares of LULU. Shares are bouncing from support. Friday saw it rally past several moving averages. It is unlikely that LULU will hit our suggested entry point to buy puts at $64.75 any time soon. We are removing the stock as a bearish candidate.

Trade did not open.

01/26/13 removed from the newsletter.

chart:

Entry on January -- at $---.--
Average Daily Volume = 3.1 million
Listed on January 22, 2012