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Daily Newsletter, Saturday, 10/18/2014

Table of Contents

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

Market Wrap

Happy Anniversary

by Jim Brown

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Twenty seven years ago this Sunday the Dow crashed -22% in one day. It makes last week look calm by comparison.

Market Statistics

Twenty seven years ago on Monday October 19th the Dow sank -508 points. The crash began in Hong Kong and spread to Europe then to the USA. The Dow dropped -22.61% to close at 1,738 on record volume of 604 million shares, nearly twice the prior trading day. Volume would have been much higher but the primitive electronic trading systems were overwhelmed and some orders took days to process. Art Cashin said as he headed to the floor of the NYSE on Black Monday with a disastrous open ahead he uttered to himself "Nos morituri te salutamus", which roughly translated means "We, who are about to die salute you." This phrase was used in 52 AD by combatants about to enter the Coliseum to fight and die in front of Emperor Claudius. I think it was very appropriate as he headed into the maelstrom the NYSE was going to be that day.

It could have been worse since New Zealand dropped -60%. The Dow drop came after a remarkable first half of 1987 where the Dow gained +44%. This is the biggest one-day percentage decline in the Dow on record. The Dow did not return to the August 25th closing high of 2,722 for almost two years.

A couple days before the crash Iranian missiles hit a U.S. flagged tanker off the coast of Kuwait. Five months before an Iranian missile hit the U.S.S. Stark, a frigate, killing 37 sailors. In the early morning hours on the 19th two U.S. warships shelled an Iranian oil platform in the Persian Gulf. Geopolitical tensions were high and they added to the pace of the selloff. Here we are 27 years later and Iran is still a major problem.

The Dow gained almost 200 points at the open on Tuesday the 20th and then rolled over to return to negative territory. It seems the big drop scared the major banks and they called in the credit lines for the big broker dealers. At a time when the market needed liquidity the banks were cancelling it. The Fed got on the phone to the big banks and demanded they reinstate the credit lines immediately and promised to guarantee any losses. The banks reopened the credit lines and the market rebounded.

In 1987 the 30 year yield was 10.12%. Oil was $17.50, gasoline $1.00 and the average price of a home was $127,000.

The situation last week was not so dramatic but the volatility was huge. The VIX soared to 31 as put volume exploded. These levels rarely last but back in 2011 when the government shutdown the VIX held over 30 for more than a month. The volatility eased on Friday to the 2013 highs at 22. Apparently we are not out of the woods yet and investors are still buying puts to protect their portfolio or for speculation.



For the week the Dow declined -689 points from the prior Friday's close and then rebounded +525 points into Friday's close. Anyone holding positions with stop losses were probably stopped out. That was a -8.6% decline from the Dow's 17,350 high on September 19th to the low for the week at 15,855 on Wednesday.

The Nasdaq declined to 4,116 from the September high of 4,610 for a -10.7% decline on an intraday basis from the highs. The S&P declined from a high of 2,019 in September to 1,820 on Wednesday for an intraday drop of -9.9%. While corrections are normally measured from closing highs to closing lows the intraday numbers are typically used by traders trying to jump the gun on a correction rebound. We may still get an opportunity for a correction on closing numbers in the days ahead.

Helping to provide fuel for the rebound was news from Europe that the ECB would begin "within the next days" to purchase assets in new programs to support the economy. Mario Draghi has been promising to begin a QE program for months but the recent string of bad economic reports out of Europe has apparently energized him to actually do something. Time will tell since we have no idea what he is planning or will it be enough to keep Europe from falling back into a triple dip recession or even worse falling into a depression.

The market also got support from Fed President James Bullard saying the Fed should delay the end of QE as a result of slowing growth overseas. The Fed is currently on pace and on message to end QE at the October 29th FOMC meeting.

Oil rebounded to $83 after Goldman Sachs said the decline was "too much, too early" and the market is not oversupplied and a glut has yet to materialize. This energized the energy sector and Morgan Stanley's strong earnings helped power financials higher. With financials and energy the two largest sectors in the S&P the rebound had legs.

The U.S. economic reports were positive and that boosted market sentiment. New Residential starts for September rose from 957,000 to 1,017,000 on an annualized basis for a +6.3% gain. Single family starts rose from 639,000 to 646,000 and multi-family starts rose from 318,000 to 371,000. Housing completions rose +8.6% to 999,000. Housing permits, a gauge of future activity, rose +1.5% to 1,018,000.

Consumer Sentiment for October rose from 84.6 to 86.4 and contrary to expectations for a decline to 84.3. This is the highest reading in sentiment in the last 7 years. Lower gasoline prices and rising job gains were credited with pushing the number higher. The present conditions component was flat at 98.9 but the expectations component rose from 75.4 to 78.4. Consumer inflation expectations ticked down again for the third month since the high of 3.3% in July. The October reading was 2.8%.

As proof the job market is improving the weekly jobless claims on Thursday came in at 264,000 and a 14 year low. Not since April 2000 have we seen claims at this level. Apparently employers are comfortable with their existing employment levels heading into the holiday season.

The economic calendar for next week is fairly light. Existing Home Sales and New Home Sales are not likely to stimulate the market. We are moving into that period of the year where sales are lackluster. However, it is possible the lowest mortgage rates in 16 months will energize some buyers.

The two Fed surveys on Thursday are probably going to show more of the same with mediocre growth or a minimal slowing of activity. The Philly Fed last Thursday declined from 22.5 to 20.7 but that was less than expected at 19.9. This was the second consecutive monthly decline from the high of 28 in August. The Philly Fed Survey sets the tone for the month and the surveys to follow normally report similar trends. The disappointment for last week was the NY Empire Manufacturing Survey, which fell from 27.5 to 6.2 and the lowest level since April. New orders fell from 16.9 to -1.7 and into contraction territory. Inventories spiked from -7.6 to +2.3 suggesting sales had suddenly slowed. While the reports this coming Thursday are not expected to show that dramatic a decline they are not expected to show any material gains. The economy is continuing to post modest to moderate gains as explained in the Fed Beige Book last Wednesday.

Our muddle through economy is why the deterioration in Europe and China is so important. It the rest of the world continues to weaken we don't have a strong enough economy to be self supporting. We are likely to catch the same cold.


No new splits announced last week.


There were four important earnings reports on Friday. General Electric (GE) posted earnings of 35 cents (+11%) or $3.54 billion on revenue of $36.17 billion. That beat estimates by a penny. While GE does not give specific guidance the company said it expects a strong Q4 thanks to shipments of equipment and better profit margins. CEO Jeff Immelt said "the U.S. is probably the best we have seen it since the financial crisis." In the conference call with analysts discussing the global economy he said, "It is a slow growth pattern with volatility, but not a lot different than what we have seen in the past." He said there were pockets of high activity in the developing world but slow growth in Europe and Japan. GE earnings are not watched for their actual earnings but for their economic guidance since they operate in multiple sectors on a worldwide basis. This is an economic report more than an earnings report. GE shares rallied +2.3% on the news.


Honeywell (HON) reported adjusted earnings of $1.43 ($1.19 billion) to beat estimates of $1.41. Revenues rose +5% to $10.108 billion, which also beat estimates slightly. Aerospace revenues were flat at $3.895 billion to do a divestiture during the quarter. Segment profits rose +8% to $790 million and profit margins rose 150 basis points to 20.3%. Automation solutions revenue rose +9% to $3.671 billion with profits rising +11%. Revenue in materials and technologies rose +7% to $2.542 billion with an 8% increase in profits. Cash and equivalents at the end of the quarter were $6.4 billion and long term debt was $6.8 billion. They raised the low end of full year revenue guidance and raised the forecast on earnings per share by 5 cents to $5.50-$5.55. Free cash flow is expected to be $3.9 billion. They warned that 2015 would probably continue to be a slow growth environment but they would continue to deliver strong earnings growth.

Honeywell is one of those sleeper companies that you never hear about until the earnings report every quarter. However, all of us have multiple Honeywell products in our homes and we use Honeywell products every day in some form. I thought the earnings were very good. There were solid gains in every area, they are making a nice profit and have very little net debt compared to cash. I wish every company was as stable as Honeywell and they pay $1.80 a year in dividends. They are actively considering several acquisitions in their plan to spend $10 billion over five-years that they laid out in March. Shares rallied +4% on the news.


Textron (TXT) reported a surge of +61% in earnings to 60 cents compared to estimates of 53 cents. Revenue of $3.43 billion rose +18% but missed estimates of $3.63 billion. Textron makes Cessna and Beechcraft planes, Bell helicopters and military vehicles. The company said demand was strong and is poised to exceed the number of planes they can produce this quarter. CEO Scott Donnelly said, "We have seen a pretty significant uptick in terms of demand and the level of activity out there and it is pretty much across the board."

That comment suggests the U.S. economy is stronger than most people expect. When coupled with Immelt's comments in the GE earnings I see this as bullish confirmation the economy is strengthening.


Morgan Stanley (MS) reported adjusted earnings that rose +87% to 65 cents that easily beat estimates of 54 cents. You can thank the Alibaba IPO for a lot of that. Morgan Stanley has underwritten the most IPOs of any bank in the first nine months of 2014. Equity underwriting almost doubled to $464 million. Trading and investment banking revenue surged 22% to $4.52 billion. Bond trading revenue spiked +19.4% to $997 million. Net revenue overall rose +7% to $8.69 billion compared to estimates of $8.17 billion.


The earnings cycle so far has come in better than expected. Entering the Q3 earnings the growth estimates had declined to about 4.1% as of Sept 30th.

Earnings so far this quarter have produced decent results. Of the 82 companies that have reported 68% have beaten earnings estimates (below the average of 73% for this point in the cycle) and 63% have beaten revenue estimates (above average). The blended earnings growth rate so far is +5.1% but we are just getting started. Forward estimates as of Friday had risen to +7.5%. Of the 68 companies that reported and hosted conference calls 44 of them cited Europe as a Q4 concern with 20 citing some negative impact on the call. On those same calls 38 companies cited dollar strength as a problem and 29 said it would have a negative impact on Q4. Only 25 companies cited China during their calls and only 7 warned of a negative impact. Only 6 companies mentioned Ebola on their conference calls.

Future earnings growth expectations for Q1 are currently 8.9% and Q2 10.1%. Revenue growth is significantly less at 3.7% and 3.1% respectively.

As of Friday's close the forward PE for the S&P-500 is 14.4 using the Factset 2015 earnings forecast of $129.31.

Earnings guidance has not been outstanding with 46 negative updates compared to only 30 positive updates. Despite the apparent imbalance this is actually better than expected. Normally negative guidance is 2:1 over positive guidance. In Q4-2013 it surged to 11.4 to 1 and the most negative since Q1-2001. If it holds in the current 1.5:1 range that would be bullish. Those giving in line guidance totaled 53.

This is even more bullish since Q4 guidance is normally the most negative. Companies that kept quarterly guidance throughout the year in expectations for sales to pickup now have to correct that guidance going into Q4.


Next week there are 130 S&P companies reporting with 12 Dow stocks. The energy sector is going to be a real drag on the overall earnings gains. Revenue growth is expected to decline -5.1% and earnings -4.4% because of the decline in oil prices in September.

Apple will start the week off with a bang on Monday with IBM and Texas Instruments also playing a supporting role. Amazon, Microsoft and GM will lead the lineup on Thursday. UPS will close the week on Friday.


Markets

For an avid market watcher the last couple of weeks have been interesting to say the least. We have not had the normal bouts of selling that one associates with corrections. We did have some very negative days with some big triple digit swings but we really did not get the volume imbalances you would expect.

Strangely the biggest imbalances were on the 9/10th at 7:1 and 5:1 in favor of decliners. However, the biggest negativity was in the four days highlighted where 52-week lows rocketed higher.

I am sure if I had taken a snapshot at noon on Wednesday it would have been close to 10:1 negative when the Dow was down nearly -400 points. Because that was a V bottom day the morning was negative and the afternoon positive that leveled out the A/D volume and the A/D ratio. Note the volume soared to nearly 12 billion shares on Wednesday.


It has been about 40 months since we had a real 10% correction on the S&P. This one does not count since we have not closed below 1,809 and an official -10% correction on a closing basis. If the market continues higher next week this will go down as just one more headline dip that was bought.

Note that the cumulative Advance-Decline line on the S&P bounced exactly where it should have. The percentage of S&P stocks trading over their 50-day average dropped to only 13.4% on Wednesday.



The percentage of stocks still showing a point & figure buy signal fell to 41.6% and the lowest level since August 2011 and the S&P debt downgrade on the USA. The decline in October was very dramatic.


All of these charts only show one thing. The S&P went from a new high on September 19th to very oversold on October 15th. They do not tell us if the rebound is going to continue or will the S&P roll over into a full 10% correction. I wish I had an answer but I don't.

What I do have is a caution. While I hope next week will bring more gains there was a critical signal on Friday. All the major indexes with the exception of the Russell 2000 failed at the same relative level. The Russell failed but at an even stronger level at 1,100.

The S&P stalled at a key Fibonacci retracement level and right where a bear market bounce should have run out of steam. Carter Worth called it the "kill zone" for bear market rallies.


Another key point is that the S&P has traded under its 200-day average at 1,906 for the last four days and that should be turning into stronger resistance every day that the S&P lingers below it. This was the first time the S&P has traded below the 200-day in 475 trading days or just over 2 years. That is the longest streak ever with the second place streak of 385 days in 1963-1965 and then again in 1995-1996.

On the plus side the S&P did test some pretty decent support at 1,815 from April and rebounded strongly. The dip only took it to 1,820 but that is close enough for me.

In order for this rebound to continue the S&P has to conquer the round number resistance at 1,900 and the 200-day at 1,906 with positive hang time counted in days not minutes. Traders probably bought the dip because it was the right thing to do given the intraday signals at the time. Investors are probably still on the sidelines waiting to see if the rebound will stick. Until both groups are committed to a single direction the rebound is at risk.

Fortunately if the S&P does move over 1,906 the next major resistance is 1,950 and that puts us back within striking distance of a new high before yearend.


The Dow rebounded to close +12 points over what should have been decent resistance at 16,368. Like the other indexes the Dow closed just below prior resistance at 16,462 and a likely place to fail if traders don't charge out of the gate on Monday morning.


All 30 Dow components were positive but quite a few were only fractional gainers. On a +263 point gain you would have expected more of the laggards to participate.


The Dow broke support at 16,025 twice but never closed below that level. However, the drop to 15,855 is a significant break and I have no illusion of hope that the 16,025 level will hold on a retest. If we don't go up from here I firmly expect to see the Dow decline to the 10% correction level at 15,555.


The Nasdaq did not make it back to resistance at 4,300 but came close with the high at 4,296. At this point I don't have a lot of confidence the Nasdaq will continue higher. The Netflix disaster and the chip sector uncertainty should keep it volatile until after Apple reports earnings after the bell on Monday. That earnings report, along with IBM and TXN, will give us direction for Tuesday.

The Nasdaq closed in no-man's land at 4,258 with no material support or resistance nearby other than the 200-day at 4,301. It could go either way next week but the path of least resistance is down.




The Russell 2000 was the hero for the week with a +2.75% gain. Of course it had been the leader to the downside for the last month and it is still down -7% for the year. If the Russell 2000 continues to rebound it should drag the big cap indexes along. However, the Russell rebounded to strong resistance at 1,096-1,100 and the selling began again almost immediately.

Given the Russell's +60 point rebound from the 1,040 low we should have expected sellers to return at that 1,100 level. The challenge is continuing the rebound through that level without losing traction and that may be a tough task. Support is now well below at 1,045 and despite the rebound the chart is still negative.


The Russell 3000 broad market index ($RUA) declined -121 points from the recent high of 1,201 to enter correction territory intraday. The rebound was immediate and it is now back above the prior support at 1,110. In theory this should be positive for the broader market as long as there are no further dips back below 1,110. The chart is still negative but the close was positive.


The Dow Transports were the big winners for the week with a +254 point gain. Obviously the sharp decline in oil prices to below $80 on Wednesday was a big factor. The transports are well above prior support at 8,000 but the chart is broken. That big drop below support damaged sentiment and I would not be too surprised to see a retest.


Remember the markets declined around 17% when QE1 ended. When QE2 ended they declined about 13%. The Fed balance sheet is now $1.5 trillion higher than it was at the end of QE2 and stocks are significantly higher. I have said repeatedly the odds for a decline as QE3 ends this month are very high.

I would be very careful about initiating new longs next week. The charts are still bearish despite the rebound. You don't have to be in the market every day. Sit back and wait for the fat pitch and pick your entry points.

Corrections are normal. Going more than two years without one is not. Since 1927 there have been 210 corrections of 5% or greater. The median correction lasted 22 sessions and declined an average of -8.24%. The average correction, which included some outlying events, averaged 40 sessions and a decline of -12.19%. The current correction from peak to low on the S&P was -9.1% and has taken 19 sessions. In theory we could be done with the decline but in practice this may be an outlier. All the prior dips in the current trend rebounded when they hit the bottom of the uptrend channel. This decline broke the trend and it could be telling us there is more pain ahead.


Random Thoughts

Citigroup said the recent decline in oil prices to a four-year low will provide up to $1.1 trillion in stimulus to global economies by lowering the cost of fuel and other oil related commodities. Citi said the average consumer would save $600 a year if prices were able to remain at this level. Brent fell to $83.37 and more than 20% below its three-year average. That represents a savings of about $1.8 billion a day for consumers. The next OPEC meeting is November 27th and recent comments from Saudi Arabia and others suggests they will not cut production. Global supplies have risen to the highest since 1965 thanks to surging production from oil shale.

The global economy is expected to rebound +2.98% in 2015 according to a Bloomberg survey of analysts. If oil prices remain low it will boost the global economy even higher with one analyst suggesting it could add +2% if prices stay in the low $80s. I am not holding my breath on that. The global population rises 200,000 per day. If you continue that thought it means there are 200,000 people reaching working age every day and becoming independent consumers of oil. Oil demand is still growing at an average of 1.2 million barrels per day every year. For 2014 demand will grow by 650,000 bpd to 92.7 mbpd according to the IEA. That is the slowest growth rate since 2009. Right this minute oil supplies are growing faster than the 1.2 mbpd average growth rate but this will end in 2016-2017 when the main fairways in the U.S. shale fields have all been drilled. Future wells on the edges of the basins will cost more and produce less and the rapid first year depletion rates of 65% will catch up with production and overall output will begin to decline.

U.S crude production rose to 8.95 million bpd last week and the highest level since 1986. We still had to import 7.74 million bpd so it is stupid to be making claims that the U.S. should export its excess oil. We don't have any excess oil. What we have to light sweet crude and we are importing heavy sour crude. We should be converting some refineries to process more U.S. crude in order to make ourselves self sufficient.

About 2.6 mbpd of global production requires a price of $80 or more per barrel to be profitable according to the IEA. About 4% of U.S. shale output requires that level and about 25% of output from the Canadian oil sands requires at least $80. Goldman Sachs predicts that drilling in the Bakken will decline with WTI under $90 and Jefferies pegs that number at $80. However, Morgan Stanley said oil would have to trade down to $50 for 12 months before output would decline -500,000 bpd. I have a hard time believing that.


Ebola, Ebola, Ebola. That is almost all you hear on the news and it is time for that news to fade. Yes, there are 4 patients with Ebola in the U.S. right now. With a 50-70% fatality rate there is a good chance at least one of them will die. That would bring the 2014 Ebola death rate in the U.S. to two. Yes, it is a terrible disease but it can only be contracted by physical touch with an infected person's bodily fluids.

In the U.S each year between 3,000 and 50,000 people die from the common flu depending on which strain attacks and the hardiness of the strain. There is almost no scenario where Ebola is going to kill 3,000 in the U.S. over the next year and it would be nearly impossible to reach the 50,000 mark that we accept every few years from the common flu. So why is this virus so newsworthy? It is because Ebola is unknown in the U.S. and it is a gruesome illness. It is a hemorrhagic virus. That means it breaks down your cell walls and you bleed everywhere. It is accompanied by explosive vomiting and diarrhea. It is a very uncomfortable and embarrassing way to die. This is really scary and people are deathly afraid of a potential epidemic.

There is a concrete reason to fear Ebola. Every person that gets infected by Ebola there is the risk it will mutate into something else even more deadly and possibly transmitted by air. Every infected person is like a walking Petri dish with millions of virus cells interacting with the existing antibodies in that person's body. There are billions of combinations since every person's health history is unique as is their bodies reactions to those prior events.

CDC officials have already documented more than 300 changes in the virus since this current epidemic began several months ago. There were five major strains of Ebola prior to this outbreak. The virus was first discovered in 1976. Viruses such as Ebola, whose genomes are made from ribonucleic acid, are constantly mutating. Some mutations are good and some are bad. Sometimes they mutate into something that becomes less virulent and the virus dies out on its own. Sometimes they mutate into extremely virulent forms that transmit easily and multiply faster. The current 21 day incubation period could shrink considerably if the virus mutated into a more virulent form. It could become airborne like measles from a patient's breathing or become hardier and last longer on surfaces outside the body.

U.S. citizens Ebola fears were heightened last week after the Texas nurse flew Frontier airlines from Dallas to Cleveland and back while feeling "not right" and running a low grade fever. Frontier is trying to contact 1,300 passengers that flew on the plane carrying the nurse both while she was on it and the six flights after her trip. The plane was finally taken out of service and has been cleaned 9 times and fumigated with an aerosol mist that kills any bacteria or virus that it touches. The passengers on the initial plane from Dallas to Cleveland are also being contacted even though she did not have any outward symptoms on that trip. Two schools have been closed, one in Dallas and one in Ohio, plus a bridal shop in Cleveland until the 21 day period has passed.

Elsewhere a lab worker that processed some of Thomas Duncan's lab samples is quarantined to his room on the Carnival Magic cruise ship. When it was found that the worker was on the cruise the ship was denied entry to Belize and Cozumel. It is returning to its home port of Galveston with 4,500 angry passengers. The worker has no symptoms.

This shows how quickly the virus could spread if it arrives in the U.S. undetected. People will originally think they just have a cold or flu and continue with their activities until they become so sick they have to stay in bed. The people surrounding Duncan in Dallas knew they were exposed and were being monitored. If Ebola gets into the U.S. undetected the contagion rate could be huge because we are a very mobile society unlike villagers in Liberia that never leave their home village. This is what is really scaring U.S. citizens. The president will not halt visas for people from the African nations where the disease is raging so about 150 people per day enter the U.S. with nothing more than a questionnaire and a spot temperature check. If you wanted to get into the U.S. for medical treatment just in case you had been exposed I would expect you to load up on Aspirin or Tylenol to force your fever down before the spot check. I think these checks are designed to make us feel that something is being done rather than actually take some serious action.

China said it was opening up its two-child policy two years from now. China has had a one-child per couple policy for a long time and it is impacting their birth rate and the labor force population between the ages of 16-59 fell in the last two years because of a shrinking worker pool. Chinese President Xi Jinping relaxed the one-child policy last year to allow some couples to have two children. At least one parent had to have been an only child. The change in the laws failed to create a baby boom. Only 3% of the 11 million Chinese couples eligible applied for permission to have a second child. Only 690,000 couples applied and 620,000 were approved. On Friday the director of the Chinese Academy of Social Sciences said "We will fully relax the policy" in two years. "People wish to choose the number of children they want to have, and they should be given the choice, at least for two children." Couples can "apply" to have a second child. The UN projects the population of China will begin to shrink by 2030 if the birth rate is not increased.

Things are not going well for President Obama. Democratic candidates don't want him to campaign for them. Just send the money. The Ebola outbreak was never supposed to make it to America and that did not go as expected. He had to cancel some fund raising trips and a golf game last week to deal with the Ebola headlines. Lastly he went out to dinner at the fancy Estela restaurant on East Houston Street in New York a couple weeks ago. When he presented his credit card to pay for the meal it was declined. He tried to laugh it off with the waitress but that had to be really humiliating. Fortunately, Michelle had her card and paid for the meal. This year is just not turning out well for the president.

Mario Draghi has been talking a strong game for the last couple years but his lack of action has finally run its course. Yields on the German Bund fell to an all-time low of 0.72% and the lowest level of any major European country in recorded history. The flight to quality is not going to stop until Draghi and the ECB actually take action to stave off a potential depression. The credit chief at UBS, Andrew Roberts said, "If the ECB does not act in the next few days this could snowball." At this point it could be too late. There is no common treasury security in the EU unlike the USA. If the ECB is going to do a QE program it is unclear how they would do it. There is also the question of how much they can actually do. They are not like the Fed in the USA. The ECB has limits and some EU countries oppose the concept of QE, Germany being one of them. The various yields across the EU are starting to price in not only a protracted economic slump but the potential for a default or even a breakup. There was another big article last week claiming the EU would dissolve within two years. Greece is again a problem with the PM promising to break free of the EU and IMF and return to the markets for debt financing. That pushed Greek yields up to 9% within a week. Trouble is brewing in Europe and it will continue to weigh on our markets.

Russia's credit rating was cut by Moody's Investor Service on Friday because of sluggish growth prospects that have been worsened by the Ukraine sanctions, weak ruble and falling oil prices. Moody's cut Russia's credit from Baa1 to Baa2 and kept a negative outlook on the country. This is the same rating as Fitch and one step above S&P, which cut Russia to BBB- in April. Russia has spent $13 billion so far this month to support the ruble and it is not working. Moody's said the gradual and ongoing erosion of the country's international reserve buffer contributed to a weakening of their creditworthiness. Foreign reserves have declined -11% to a four year low of $452 billion.

Russian bonds are trading at a 3.23 percentage point premium over U.S. treasuries. That has almost doubled since the end of 2013. Moody's expects Russia to fall into a recession in 2015 with a -1% contraction in GDP. Personally I think it will be a lot worse. Russia pumps over 9 million barrels of oil per day. The income off that oil is based on Brent prices, which have declined -25% over the last two months. That means they are selling their oil for 25% less today than just a few months ago. This means they are getting $774 million a day for their oil at current Brent prices compared to the June rate of $1,008 million, a drop of -$234 million a day. This is really, really painful for Putin when it comes on top of the sanctions. Russia's state owned Sberbank, Russia's largest, said the country needs oil to be over $104 in 2015 to balance its budget.

The country has said it is going to boost military spending +21% in 2015 but with falling oil prices I would expect that spending program to be cut back significantly. Putin has a habit of nationalizing assets when it is suffering financial problems. Watch for Putin to seize something in the near future to bolster Russian spirits and government bank accounts.

So far in October the Dow is down -5.3% and the S&P -5.6%. This ranks as the seventh worst October for the Dow since 1950 and the fifth worst for the S&P. In the last 64 years the Dow and S&P declined in October 26 times. After those declines the market rallied in November 23 times with an average 4% gain according to the Stock Trader's Almanac. We are entering the strongest six month period of the year starting November 1st. October dips are normally bought with a surge into year end.

The market may be down -9% at its lows but investors are not pulling money out of equity funds. According to TrimTabs.com the outflows have been "remarkably light" with only -$1.6 billion withdrawn so far in October. The company said this is negative for stocks because there is no panic. Bottoms are not formed until investors panic. Even worse leveraged short funds saw huge outflows of -5.6% last week and -10.2% for the last two weeks. Investors are cashing out on short bets. Reading between the lines the average investor is still bullish.

China is poised to report its slowest growth since the financial crisis at 7.2% GDP for Q3. For 2015 estimates are now for 7.0% growth and some feel it will be worse than that. However, the government's target is 7.5% for 2014 so there could be some padding when it comes to the reporting. Over the last 30 years China has averaged growth of about 10% so this is a material weakening of their economy. Starting in 2010 through 2014 growth was 10.5%, 9.3%, 7.7%, 7.7% and 7.3% is the likely result in 2014.

The only thing that is thriving in China is the state sponsored hackers. The FBI sent a warning to businesses on Wednesday that state sponsored hackers are "exceedingly stealthy and agile" and have used customized malicious code that was undetected by security researchers and law enforcement. The warning hinted at an increasingly public confrontation in which the U.S. claims the Chinese government is conducting a long term, widespread campaign of economic espionage. Despite U.S. charges and the indictment of five Chinese military officials accused of stealing trade secrets the hackers continue to operate. The FBI said in addition to banks they are targeting defense contractors in multiple countries and many multinational corporations. The FBI said Chinese hackers "routinely steal high value information from U.S. commercial and government networks through cyber espionage."

The Census Bureau said on Thursday that 48 million Americans live in poverty and 16% of American children are living in poverty. Some 46.2 million people are on food stamps. The official poverty line is $23,283 for a family of four. In some cities it is over $30,000 because the cost of living is higher. California's poverty rate last year rose to 23.4%. Some 11 million people fell under the poverty line because of increasing medical expenses.

The Flash Crash in the bond market last week sent the yield on the ten-year down to 1.868% for a short time on Wednesday. The drop in yields were almost immediately reflected in the mortgage market with the 30-year rate falling to 3.97%. That means the monthly payment on a $200,000 mortgage would be $951 per month. The catch is that nobody can qualify for the loans.


The battle against ISIS for Kobani is continuing but the U.S. and its partners have stepped up the attack. More than 70 airstrikes were carried out on Friday and ISIS is getting pounded from every direction. However, some analysts claim that the ISIS attack on Kobani is really just a distraction to divert attention away from their real target of Baghdad. Some say it is only a matter of time until the U.S. embassy is attacked with vehicle borne IEDs followed up by a flood of ISIS infiltrators that have been moving into Baghdad in small units to evade detection. Daily car bombs are becoming more common in Baghdad as they chip away at the morale and infrastructure of the city.

The war finally got a name. The Pentagon said it rejected the name "Inherent Resolve" a few weeks ago because it was too neutral. However, no new name was forthcoming and Inherent Resolve has been surfacing more often in discussions. The politics of the issue is the problem. If you name it, you own it and many reporters claimed the White House did not want the war to have a name. According to a Defense Dept official, "They don't want to own it."

The Iraqi government has asked to buy another 800 Hellfire missiles from the USA. Congress approved an order for 5,000 in August and more than 1,100 have already been delivered. Lockheed Martin (LMT) assembles them in Alabama and with three shifts their current capacity is about 500 a month. Looks like they need a bigger plant because this war is going to last a long time.

Only 67 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"To argue with a person who has renounced the use of reason is like administering medicine to the dead."

Thomas Paine

 


Index Wrap

Potential Market Bottom Seen

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Panic selling ends eventually and it did this past week as a likely bottom was made and probably more than an interim one. The nature of corrections stemming from overbought over-valued stocks is often scary steep speed to a climax bottom.

This situation happens again and again with most Markets as buying on the way up occurs multiple times, in multiple increments, but selling tends to be more emotional and panicky in nature and stocks tend to get dumped in a condensed time period.

I stand by an earlier 'headline' statement from a prior Index Wrap that: "The 'correction' camp has won out for awhile but that's a good thing too as bottoms are easier to 'time' than tops."

How so, bottoms are 'easier' to time (predict) than tops? Well, I should also say that I speak for myself. But in bull markets we do see the kind of pattern shown on the weekly S&P 500 (SPX) chart with REPEATED rallies (4) up toward the upper resistance trendline, the upper end of SPX's broad uptrend price channel with it hard to predict that the 3rd, 4th, or 6th time will lead to a correction that will take the Index back down toward the middle to low end of its channel.

True that there was a 'failure' of relative strength as highlighted above, in that the RSI didn't also go to a higher high and 'confirm' the price trend. But this pattern doesn't mean that the rally can't or won't go on for more weeks, even in a seasonal period that tends to be bearish.

I wrote a Trader's Corner opinion pieces on Wednesday (10/15/14) laying out why I thought that the major indices had bottomed in terms of falling to deep retracement levels relative to the February to mid-September advance such as the 62% to 66% retracement levels seen in SPX, OEX and NDX. In the Nasdaq Composite (COMP) and the Dow 30 (INDU) the 3/4ths-75% retracement levels were reached.

Moreover, I decided it was time to look at the model offered by using 21-day moving averages with moving average envelope lines that showed the type of EXTREMES associated with major Index bottoms; namely, at levels equal to 5 percent UNDER the 21-day average in the S&P and Dow and 7 percent under in the more volatile Nasdaq Indices. My aforementioned Trader's Corner article (clickable above) is a companion piece to this one and is a quick read. However, the same retracements and moving average envelope studies are also shown again in my charts below.

In terms of Index strategies, I don't necessarily envision an immediate sharp rebound ahead as some basing price action may occur first, but I believe a tradable bottom is in place. November to May should be a mostly bullish trend. I welcome some two-sided trading swings as I anticipate opting for bullish strategies on good-sized price dips.

As the weekly SPX chart above demonstrates with the RSI low of the week just ending, ALL the major indices are now 'fully' oversold on both a 2-month/8-week basis as well as will be seen with the 13-day Relative Strength Index (RSI) indicators shown on the charts below.

MARKET 'SENTIMENT':

In terms of the related bottoming pattern of at least 1-2 days of 'extremes' in bearishness among options participants occurring typically AHEAD of Market bottoms, two such daily extreme-bearishness CPRATIO readings (Friday-Monday) occurred ahead of the Wednesday low of this past week; i.e., as measured by daily call to put equities-options volume ratios per my CPRATIO model seen on the SPX and COMP charts.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

As described above in my initial 'bottom line' commentary, I believe that the major indexes like SPX have reached at least an interim bottom. However, I also don't think it's up, up and away ahead; just that we likely won't see lower lows ahead. The drop to the area of lower envelope line in SPX, at 5 percent under the 21-day moving average, is often an EXTREME low for a sell off and can represent an upside reversal area as suggested with SPX this past week.

The S&P 500 would have an intermediate trend reversal if it closed and stayed below its February lows. If SPX fell instead to its February lows in the 1740 area, but not lower, that would be a 100% retracement of the Feb-Sept advance and a possible double bottom. Given the extent of the correction to date of about 2/3rds of its prior advance, I assess the Index as probably not making a lower low than last week. This remains a bull market based on the long-term trend.

SPX is oversold on both a 2-week and 2-month basis. Bearish sentiment got extreme for a couple of days running prior to the recent bottom. Price action, extent of the correction, the oversold condition AND the dip, although brief, into extreme bearishness by options traders suggests good potential for an upside reversal. Moreover, the VIX volatility Index rose all the way to 26 before falling back. There's a tendency for VIX levels above 22 to end up marking a bottom.

Support is highlighted at 1814 to 1830, extending to 1800. Resistance is seen at 1900-1906, with next resistance in the 1940 area. A Close above 1906, the 200-day moving average with SPX holding above this key average would be a bullish plus.

S&P 100 (OEX) INDEX; DAILY CHART

As with the S&P 500, I think the S&P 100 (OEX) has put in a bottom; with OEX, this is suggested in the 820-815 area. If instead, OEX saw a new down leg develop, coupled with a dip below 800 this might signal the Index going on to retest its February lows in the 770 area. The drop to the area of lower envelope line in the OEX, at 5 percent under the 21-day moving average, is often an EXTREME low for a sell off and can result in an upside reversal setting up in this area.

Given the retracement of 66% of the prior multimonth advance, an oversold condition and the rise in bearish sentiment we've seen, this portends the prospects of a substantial bottom being already in place.

Key support is highlighted at 820, extending to 814 with next support in the low-800 area. Near resistance is seen at 847-850, extending to 860. A Close above the 200-day moving average at 845 that then mostly held above this average would suggest prospects for further gains.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow finally got 'fully' oversold on both a 13-day and now 2-month basis and that was missing prior to this past week. The retracement of 75% of the February-September advance to 15840 holds out the prospect that INDU will not have a full round-turn decline of 100% by retracing to its February low at 15340.

I've highlighted potential support ahead at 16000, then in the 15840 area; the levels of 16600 and 15840 represent the 62 and 66% retracement levels respectively. The 15840 area is also at the lower (5%) envelope line and represents an oversold EXTREME where upside reversals are common.

Near resistance is at 16600, at the 200-day moving average. It would a key bullish development for INDU to get back above this key average watched widely on the Street. Next resistance then comes in at 16800 and also at another key average, the 21-day. Rallies from the low envelope line, at 5 percent UNDER this average that gets back up TO but not above the 21-day average, usually leads to another dip.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

With the Nasdaq and greater than 'normal' downside volatility reaching the LOWER 'oversold' 21-day moving average envelope value at 7 percent under the average which often represents an EXTREME low. Sometimes the lower envelope value will go more than this but not usually for long. The fact that COMP stabilized, so far at least, in this area suggests potential for a bottom to be in place. Further dips to near or TO the prior COMP low are not ruled out however.

I assess the bearish correction as mostly having run its course. There may well be some backing and filling but there's some likelihood that the 4100 area will hold up as support. As representing a 75% retracement of the Feb-Sept advance, this is much of a give back as is generally seen without a move back to the PRIOR low. So if 4100 is pierced we can assume there's then potential for COMP to retrace its prior gains from its Feb low and retest the 3983-3946 area.

4300 is key near resistance at the 200-day moving average. Next resistance then looks like 4400 at the 21-day moving average. A move from the lower 7 percent envelope line back to the 'centered' moving average (relative to the envelope values) would then be a key test of further upside potential. It's common for rallies to fail in the area of the 21-day and pull back once again.

Near support is at 4200; next support is highlighted at 4112-4100. If COMP retraces MORE than 75% of its prior upswing, there's potential for a round-turn 100% retracement back to the starting low (February).

Bearishness still abounds which is a bullish plus in a contrarian sense. The call to put ratio went up with more call activity but I don't think this is going strongly higher anytime soon. More trading shocks would not be surprising. The Composite got quite oversold and that bodes well for some further upside.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq big cap 100 (NDX) halted it's slide this past week at a level just shy of a Fibonacci 62% retracement for two days running and touched the lower 7 percent envelope line that often represents an EXTREME low on the downside. Potential upside reversal price action coupled with an oversold RSI extreme (finally) and the VXN S&P 100 volatility Index so high (over 26 briefly) all lend support to the potential for a bottom to have formed.

Support is seen in the 3765 area; with next support at 3700, extending to 3884-3880. Major support begins in the low-3400 area.

Initial resistance could come in at 3850-3854, then is highlighted at 3900 on the chart (red down arrow), with resistance extending to 3950 at the 21-day moving average. A move all the way from the lower extreme envelope line back up to the 'centered' 21-day average is a key test of renewed upside momentum; rallies frequently fail in this area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ tracking stock for NDX (an ETF) has the same potential bottom pattern as NDX, given the extent of the retracement of the February-September advance which was not quite to a 62% retracement which would have been reached at 90.

The 200-day moving average, at 92 should be considered initial support now that the Q's have rebounded back above this key average that's well followed on the Street.

While 92 may hold as support a more conservative estimate is 90.2-90 as technical/chart support; next lower support is then suggested at 89. Resistance is highlighted at 94, then at 96.

On Balance Volume (OBV) is still pointed lower and adds a bearish note to the chart as a 'secondary' indicator versus price action. And, price action is potentially bullish; more so if 92 finds support/buying interest.

RUSSELL 2000 (RUT); DAILY CHART:

As I've been noting in some of the other of my index commentaries, the first key test of RUT resistance after its rebound from the lower (5 percent) envelope line that has marked many prior lows is what happens on a move TO the 'centered' (within the upper and lower envelope lines) 21-day moving average. RUT turned down on that test on Friday as the Index touched the average but this the approximate high of the day.

I don't see the Russell rallying further, especially in a sustained move above the 21-day average, without some backing and filling and a possible retest of prior lows.

I've highlighted chart support at 1060, then at 1040. Near resistance is at 1100 as noted, then at 1120 and next in the 1140 area.

RUT is at an oversold extreme and this has in the PAST meant it would reliably rebound but this may be a definite thing that buried in the past! RUT is the only index that is now represented as being in a DOWNTREND channel.

On the longer-term weekly chart (not shown here), major support at RUT's longer term uptrend line comes in currently in the 1000 area.


GOOD TRADING SUCCESS!




New Option Plays

Big Cap Earnings, ETFs, and Chinese Internet

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Apple Inc. - AAPL - close: 97.67 change: +1.41

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 54 million
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Apple is probably the highest profile big cap stock for investors around the world. The company has a market cap of $585 billion. Google's value is around $345 billion. Microsoft is near $359 billion. Exxon Mobil is about $389 billion. As a consumers goods electronic equipment maker AAPL is subject to the whims of the consumer. There are plenty of AAPL fanboys and girls out there but there is a risk that expectations for AAPL are too high.

The companies recent launch of the iPhone 6 has been a huge success. Yet this success has failed to really power the stock higher. AAPL's stock struggled to get past its prior all-time high near $100-101 from late 2012 (pre-split that was about $700 a share). The new all-time high is $103.74 set on September 2nd this year. Since that peak AAPL has been consolidating sideways with a bearish trend of lower highs. The action this past week looks like a bearish breakdown.

Everything will depend on earnings results and AAPL's guidance. The company is scheduled to report earnings on Monday, October 20th, after the closing bell. Analysts are expecting a profit of $1.30 a share.

The company could beat estimates and still see their stock sell-off if their guidance is too soft. Everyone expects super strong iPhone 6 sales but AAPL's iPad sales have been struggling.

A recent Forbes article noted that over 80% of analysts they polled expected AAPL's iPad sales to fall again. That would be the third quarter in a row they have fallen. AAPL is hoping to reverse this trend and just announced a new iPad Air 2 and an iPad mini 3. We'll have to see if these can sell against a much bigger screen on the iPhone 6. AAPL could be cannibalizing their own sales.

Technically the daily chart on AAPL does look fragile. The Point & Figure chart is already bearish and suggesting an $88 target. I'll say it again - everything depends on Monday night's earnings report and management's guidance.

We suspect that AAPL will disappoint and likely see some profit taking. That is why we are suggesting some short-term puts. I would consider this a higher-risk trade. You could treat it like a binary trade. If we're right, then we could win big. If we're wrong then this option could evaporate in a heartbeat. You win or you lose.

Tonight we are suggesting traders buy the AAPL $96 put that expires after October 31st. These are the weekly puts that expire in two weeks. If you choose this trade you need to buy the puts before AAPL's earnings report on Monday. We're expecting a gap down on Tuesday morning.

Buy the WEEKLY AAPL puts (that expire after Oct. 31st)

- Suggested Positions -

Buy the AAPL Oct 31st $96 PUT (AAPL141031P96) current ask $1.78

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

Daily Chart:


PowerShares QQQ (NASDQ-100 ETF) - QQQ - close: 93.00 chg: +1.21

Stop Loss: n/a
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 36.6 million
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The QQQ is the ETF that mimics the performance of the NASDAQ-100 index. Some of its biggest components report earnings this week.

AAPL is the biggest component in the QQQ at 13.8% of the ETF. MSFT is the second biggest at 8.5%. AMZN is 3.38%. CELG is 1.67%. All four of this big cap names report earnings this week. All of them could see some serious profit taking. We want to speculate on further weakness with the weekly puts on the QQQ.

The options we are choosing expire in two weeks, after October 31st. AAPL reports earnings on Monday night (October 20th) therefore we are suggesting an immediate entry. Microsoft, Celgene, and Amazon.com all report on October 23rd.

Buy puts on Monday, Oct. 20th

- Suggested Positions -

Buy the QQQ Oct.31st $92 PUT (QQQ141031P92) current ask $1.34

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

Daily Chart:


Sohu.com Inc. - SOHU - close: 43.51 change: -1.46

Stop Loss: 45.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 393 thousand
Entry on October -- at $---.--
Listed on October 18, 2014
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
This is a simple momentum trade on a struggling Chinese Internet name.

Sohu.com is an online media, Internet search, and video gaming company. Unfortunately gaming revenues are becoming a smaller chunk of the overall pie for SOHU. At the same time, while they have seen significant growth in ad revenues from streaming TV shows and movies, the company is facing pressures on this front. The cost of content is rising while the Chinese government is becoming more strict about what shows, especially which American shows, they will allow to be aired (or streamed over the Internet). This is pressuring SOHU's margins.

Bulls can argue that SOHU has already corrected and is now oversold. That's possible. SOHU is down eight weeks in a row. It seems to be slicing through support. The 2014 low didn't hold it. Support near $50.00 didn't hold it. The $45 level has failed. The next stop could be $40.00. SOHU's recent bounce just failed at short-term resistance at the 10-dma.

I do consider this a more aggressive, higher-risk trade because SOHU is so oversold. We'll try and limit our risk with a stop above Friday's high.

Trigger @ $43.25 *Smaller positions to limit risk*

- Suggested Positions -

Buy the NOV $40 PUT (SOHU141122P40) current ask $1.20

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

Daily Chart:



In Play Updates and Reviews

Short Covering Continues

by James Brown

Click here to email James Brown

Editor's Note:

The short covering in stocks continued on Friday. A lot of beaten down equities produced big bounces into the weekend. It looks like traders wanted to reduce their bearish positions ahead of the weekend.

We have been expecting a bounce and lowering stops on our bearish plays to protect gains and limit losses. Friday saw all of our bearish plays get stopped out.

Friday's session also saw FDX, HAIN and SMH hit our entry triggers.


Current Portfolio:


CALL Play Updates

Ambarella, Inc. - AMBA - close: 38.44 change: -0.32

Stop Loss: $34.90
Target(s): To Be Determined
Current Option Gain/Loss: +16.6%
Average Daily Volume = 2.4 million
Entry on October 13 at $35.25
Listed on October 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: AMBA underperformed the market on Friday. The major averages all posted gains. AMBA rallied Friday morning but failed near round-number resistance in the $40.00 area.

Tonight we are moving the stop loss up to $34.90. More conservative traders may want to use a stop closer to $36.00. I am not suggesting new positions at this time.

Earlier Comments: October 8, 2014:
AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in October 2012 at $6.00 a share. That price was significantly below where AMBA was expected to price in the $9-11 range.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up +633% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. GPRO came to market in June this year and the stock has been in rally mode since mid August with a rally in GPRO from less than $40 to $90 a share. AMBA happens to make the HD camera sensors in many of GPRO's products. As GPRO rallies it could be giving AMBA a boost and GPRO expects record sales this holiday season.

It's also worth noting that AMBA's rally has been helped by consistent earnings growth. The company has beat Wall Street's estimates on both the top and bottom line for the last four quarters in a row. Their most recent earnings report in September saw AMBA's management raise their revenue guidance.

Shorts are getting killed. As the rally continues AMBA could see more short covering. The most recent data listed short interest at 21.7% of the small 28.0 million share float.

We think the bullish momentum continues. Tonight we're suggesting a trigger to buy calls at $44.65.

- Suggested Positions -

Long NOV $40 call (AMBA141122C40) entry $1.80*

10/18/14 new stop @ 34.90
10/15/14 new stop @ 34.25
10/13/14 triggered at $35.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/11/14 new entry strategy: move the entry trigger from $44.65 to $35.25 and move the stop loss from $40.45 to $31.90.
We will adjust the option strike from the NOV $46 call to the NOV $40 call
Option Format: symbol-year-month-day-call-strike

chart:


FedEx Corp. - FDX - close: 156.12 change: +4.19

Stop Loss: 148.75
Target(s): To Be Determined
Current Option Gain/Loss: +2.8%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: Crude oil bounced for the second day in a row but that did not stop the relative strength in the transportation stocks. Shares of FDX delivered a strong session with a +2.75% gain and a breakout past resistance near $155.00. Our trigger to buy calls was hit at $155.50.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30*

10/17/14 triggered @ 155.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


The Hain Celestial Group, Inc. - HAIN - close: 100.23 change: +1.54

Stop Loss: 96.75
Target(s): To Be Determined
Current Option Gain/Loss: -2.5%
Average Daily Volume = 632 thousand
Entry on October 17 at $100.25
Listed on October 14, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: HAIN was also in rally mode on Friday. After spending most of last week consolidating near its 50-dma shares finally moved and rallied back above the $100 mark. Our entry trigger was hit at $100.25.

Earlier Comments: October 14, 2014:
Looking at the world economies the U.S. is the cleanest shirt in the dirty clothes hamper. Every economy needs to see improvement but the U.S. is looking the healthiest. If U.S. growth continues to improve it should bode well for consumer spending. That should lead to strength in organic food sales.

There has been a strong trend of consumers moving more and more toward natural and organic foods. That's where HAIN is a major player. The company website describes HAIN as, "The Hain Celestial Group, headquartered in Lake Success, NY, is a leading natural and organic food and personal care products company in North America and Europe. Hain Celestial participates in almost all natural food categories with well-known brands that include Celestial Seasonings, Terra, Garden of Eatin', Health Valley, WestSoy, Earth's Best, Arrowhead Mills, DeBoles, Hain Pure Foods, FreeBird, Hollywood, Spectrum Naturals, Spectrum Essentials, Walnut Acres Organic, Imagine Foods, Rice Dream, Soy Dream, Rosetto, Ethnic Gourmet, Yves Veggie Cuisine, Linda McCartney, Realeat, Lima, Grains Noirs, Natumi, JASON, Zia Natural Skincare, Avalon Organics, Alba Botanica and Queen Helene."

HAIN's results have definitely confirmed the trend in consumer spending. They have beaten Wall Street's estimates and guided higher in three out of the last four earnings reports. Their most recent report was August 20th. You can see the big move in the stock after HAIN reported a profit of 90 cents a share on revenues that rose +26% to $583.8 million. Analysts were only expecting $0.89 cents a share on revenues of $577 million.

HAIN's management then raised their guidance again. They expect 2015 earnings to be in the $3.72-3.90 range compared to analysts' estimates around $3.73. HAIN is anticipating sales growth of +27% to +30% in 2015.

The bullish outlook for 2015 did not completely HAIN from the market's recent sell-off. Shares broke support near $100 and dipped to their 50-dma before bouncing. Altogether the stock has weathered the market's correction pretty well. The point & figure chart is still bullish and forecasting a long-term target at $131.00.

We want to be ready to buy calls if HAIN can rally back above the $100 level. Tonight we're suggesting a trigger to buy calls at $100.25. Earnings are expected in November so this might only be a 2-to-4 week trade.

- Suggested Positions -

Long NOV $105 call (HAIN141122c105) entry $2.05*

10/17/14 triggered @ 100.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


iShares Transportation ETF - IYT - close: 145.88 change: +2.11

Stop Loss: 141.75
Target(s): To Be Determined
Current Option Gain/Loss: +61.7%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/18/14: The rebound in the transportation stocks was picking up speed on Friday. The IYT added +1.4% and closed above potential resistance at its 10-dma, its 150-dma, and the $145.00 level.

Tonight we are moving the stop loss to $141.75.

Earlier Comments: October 11, 2014:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40*

10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


Semiconductor ETF - SMH - close: 46.91 change: +0.49

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: -36.3%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: The rebound in the SMH continued on Friday. Chart readers will notice the rally stalled near its gap down and its simple 10-dma. While that might be considered short-term bearish the close above its 200-dma is encouraging.

The SMH gapped open at $47.09 and quickly hit our suggested entry point at $47.15. More conservative investors might want to wait for a rally past Friday's high ($47.48) before initiating new positions.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates


Currently we do not have any active put trades.

Please see tonight's new play section.



CLOSED BEARISH PLAYS

Starbucks Corp. - SBUX - close: 73.54 change: +0.90

Stop Loss: 73.25
Target(s): To Be Determined
Current Option Gain/Loss: +30.0%
Average Daily Volume = 3.6 million
Entry on September 23 at $74.25
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: We were concerned the market might bounce on Friday and lowered our stop loss on SBUX to $73.25 in Thursday's newsletter. The stock gapped open higher at $73.35, immediately closing our play.

The bottom of SBUX's recent trading range near $74.00 could be overhead resistance.

- Suggested Positions -

NOV $72.50 PUT (SBUX141122P72.5) entry $1.60* exit $2.08 (+30.0%)

10/17/14 stopped out on gap open at $73.35
10/16/14 new stop @ 73.25
10/15/14 new stop @ 73.75
10/13/14 new stop @ 74.55
09/23/14 triggered @ 74.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


Tupperware Brands Corp. - TUP - close: 68.61 change: +0.34

Stop Loss: 69.15
Target(s): To Be Determined
Current Option Gain/Loss: +54.4%
Average Daily Volume = 399 thousand
Entry on September 22 at $71.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: We had recently lowered our stop loss on TUP to $69.15 in order to try and protect our gains. The market's bounce on Friday morning pushed TUP above the $69.00 level. Our stop was hit at $69.15.

- Suggested Positions -

2015 Jan $70 PUT (TUP150117P70) entry $2.59 exit $4.00* (+54.4%)

10/17/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
10/15/14 new stop @ 69.15
10/13/14 new stop @ 70.15
10/11/14 new stop @ 71.05
09/23/14 new stop @ 72.25
09/22/14 new stop @ 72.80
09/22/14 triggered @ 71.75
Option Format: symbol-year-month-day-call-strike

chart:


Vulcan Materials Co. - VMC - close: 59.09 change: +2.32

Stop Loss: 57.55
Target(s): To Be Determined
Current Option Gain/Loss: - 1.1%
Average Daily Volume = 976 thousand
Entry on October 08 at $56.90
Listed on October 07, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: The market's bounce on Friday fueled a big rebound in shares of VMC. Shares gapped open higher at $57.50 and soared to a +4.0% gain. Our stop was hit early at $57.55.

- Suggested Positions -

NOV $55 PUT (VMC141122P55) entry $1.67* exit $1.65** (-1.1%)

10/17/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/15/14 new stop @ 57.55
10/13/14 new stop @ 58.10
10/08/14 triggered @ 56.90
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart:


WESCO Intl. - WCC - close: 73.72 change: +1.73

Stop Loss: 72.55
Target(s): To Be Determined
Current Option Gain/Loss: + 79.4%
Average Daily Volume = 306 thousand
Entry on October 01 at $77.75
Listed on September 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/18/14: WCC, like so many stocks on Friday morning, gapped open higher. Shorts were in a rush to cover positions and WCC opened at $72.97. That was well above our suggested stop loss at $72.55.

- Suggested Positions -

NOV $75 PUT (WCC141122P75) entry $1.95* exit $3.50** (+79.4%)

10/17/14 stopped out on gap open at $72.97, stop was $72.55
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/15/14 new stop @ 72.55
10/13/14 new stop @ 73.75
10/11/14 new stop @ 76.25, traders may want to take some money off the table here.
10/01/14 triggered @ 77.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart: