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Daily Newsletter, Saturday, 11/1/2014

Table of Contents

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

Market Wrap

No Tricks, Japan Treated

by Jim Brown

Click here to email Jim Brown

Early Friday morning Japan announced another massive QE program and the markets surged to new highs.

Market Statistics

Thank you Japan for having such a bad economy that Haruhiko Kuroda, the head of the Bank of Japan, was forced to take extraordinary measures to keep Japan from falling back into deflation. The recent consumption tax hike to 8% and another hike to 10% planned for October 2015, caused the Japanese economy to decline -1.7% in Q2 with inflation falling back towards +1% again. The bank cut its 2015 expected growth rate from +1.0% to only +0.5%. The bank is going to buy an additional ¥30 trillion in Japanese Government Bonds (JGBs) a year and will also purchase shares in ETFs and REITS. The bank said it would continue the purchases until the inflation rate reached 2%, currently 1.2% and falling. The new BOJ spending on QE will rise to ¥80 trillion annually ($712 billion), up from ¥50 trillion a year.

In addition the $1.26 trillion Government Pension Investment Fund (GPIF), the world's largest, will slash its holdings of government bonds from 60% to 35% and shift that money into equities. GPIF will allocate 25% of its assets to Japanese equities, 25% to foreign equities and 35% to domestic bonds. The remaining 15% will be for international bonds. GPIF Announcement PDF

Basically the BOJ and GPIF are going to be adding about $414 billion in bond and equity purchases with much of that in foreign equities. Since the U.S. market is the largest and most liquid that means we are going to be the beneficiary of the Japanese QE. Analysts believe this could be something in the range of $200 billion flowing into the U.S. equity markets.

The Japanese Nikkei was up +1,000 points intraday and closed with a gain of +755 at a 7-year high. The S&P futures exploded higher overnight when this QE surprise was announced. The futures exploded higher from 1,990 to 2,016 in the first few minutes after the announcement to setup a major short squeeze at the opening of the U.S. markets.



The Japanese Yen collapsed with a massive -2.76% drop in one day to close at a 7-year low. The dollar spiked nearly +1% in reaction to the Yen's decline.


Some analysts believe the new QE program is so big it could be a "Bear Stearns moment" for Japan. They believe this massive QE for a country the size of Japan, with a GDP less than one-third the size of the U.S. this is going to be a disaster. Japan is a bug in search of a windshield as John Mauldin is fond of saying. Their outstanding debt is more than one quadrillion yen or $10.5 trillion and more than twice their GDP as of December 31st. The BOJ typically buys around 70% of the government debt and the rest is bought by Japanese banks and pension funds. This is eventually going to result in a monumental financial crisis and every holder in Japan is going to be wiped out.

There is no mathematical way for Japan to pay off its debt and it is rising by trillions of yen every year as more debt is sold to pay the interest on the old debt. Eventually getting cash advances on your credit card to pay the credit card bill will leave you with enormous debt and no credit. When that happens to Japan the result is going to be earth shaking. The really bad part is that everyone knows it and they are just buying time by kicking the can down the road in hopes of a sudden economic explosion that extends their eventual fate by a few years.

Today that QE announcement is positive for U.S. markets. Eventually it will be very bearish because the more outlandish the Japanese QE becomes the more likely everyone will begin to see that the emperor has no clothes and the house of cards will collapse.

The Japanese news and the Virgin Atlantic SpaceShipTwo crash were filling the headlines and the economic news was largely ignored. The SpaceShipTwo exploded over the Mojave Desert after being launched from the mother ship WhiteKnightTwo. One pilot was killed and the other severely injured. This was the 55th flight for the SpaceShipTwo and the 173rd flight for the WhiteKnightTwo, which landed safely. The smaller SpaceShipTwo is carried up to 50,000 feet where it is dropped from the mother ship just before firing its rockets to take it up to 350,000 feet. Observers said the ship exploded just after the rocket motors were ignited.

SpaceShipTwo is the smaller vehicle suspended under the wing of WhiteNightTwo. The rocket is fired when the vehicle is dropped from the parent aircraft.


SpaceShipTwo was the vehicle that was planning to take paying passengers into space starting sometime in late 2015. More than 700 people have put down the required $250,000 deposit to reserve a launch position in the future. Richard Branson said the accident meant they would probably lose one or two flyers but others would take their place. He said the deposit was refundable and had not been used for design and construction. I suspect quite a few potential riders are having second thoughts today.

In economic news the Employment Cost Index (ECI) rose +0.7% in Q3 with wages rising +0.8%. Employee benefits rose only +0.6%. Headline growth over the trailing 12 months rose to 2.2% and the fastest pace since Q4-2008. This report was ignored by the market.

The separate Personal Income report for September showed wages rose only +0.2% and the slowest rate since last December. Wage income also rose +0.2% and the slowest since April.

More importantly the PCE and the Core PCE rose only +0.1% each. The trailing 12 months inflation represented by the PCE is now +1.4% and the lowest since March. The trailing Core PCE has been flat at 1.5% for the last five months after dipping to 1.2% in February. The PCE is the Fed's preferred inflation indicator and it is not rising. Their target is 2% and with energy prices in the tank it is only going lower in the short term.

Moody's PI Chart

The final revision of Consumer Sentiment for October rose slightly from 86.4 to 86.9 and the highest level since July 2007. The present conditions component declined from 98.9 to 98.3 but the expectations component rose sharply from 75.4 to 79.6. The impending elections, falling gasoline prices and improving job market were credited with the gains in expectations. Job growth has averaged 245,000 per month over the last six months and the best gains since August 2005.


Next week the calendar is headlined by payrolls. The ADP report on Wednesday is expected to show a gain of +7,000 jobs over September while the Nonfarm Payroll report on Friday is expected to show a decline of -15,000 jobs from the September pace.

The ADP report is from actual employer data that ADP collects when it processes the payrolls for tens of thousands of businesses. The Nonfarm data is a calculated guess by the BLS and can be revised continually over the next year. Far too much credibility is given to the Nonfarm report but that is what the market fixates on and so that is what matters. There are multiple investigations currently underway on bogus numbers in the BLS reports but you don't hear that on the evening news.

The ISM Manufacturing on Monday is expected to be flat. The mixed results from the various Fed surveys suggest that manufacturing strength is spotty across the entire U.S. so no gains are expected.


Stock Split Calendar

Stock news was kind of sparse despite the strong market gains. The big announcements from Thursday after the close were the only major market movers. The two big energy stocks in the Dow helped to push it higher despite falling production and lower oil prices.

Exxon (XOM) shares rallied +$2.26 after reporting earnings of $1.89 ($8.07 billion) compared to estimates of $1.71. The gains came from +38% higher profits in their refining division as a result of lower oil prices rather than a surge in production. Revenue declined from $112.37 billion to $107.49 billion. Oil and gas production fell -4.7% but the oil giant said it was still on track to produce 4.0 million barrels of oil equivalent per day for the full year. The drop in oil prices knocked -4.4% off the profits in the exploration and production division.

The key statistic here is that Exxon spent $42.5 billion in 2013 on capex and they have cut that to $37 billion for each of the next 3 years and they still lost -4.7% of their production. New oil is harder to find and produce and new wells deplete faster than legacy wells. All the E&P companies are on a treadmill to keep drilling new wells faster to keep ahead of rising depletion. That treadmill just keeps increasing in speed every year.


Chevron (CVX) reported a 13% rise in profits to $2.95 ($5.59 billion) compared to estimates for $2.55 on revenue of $54.68 billion. Production fell -1% to 2.57 Mboed as new wells failed to offset declines at old wells. Their refining division posted profits of $1.39 billion and nearly four times the profit from the year ago quarter thanks to lower oil prices.

Chevron has some major production boosts coming in the next three years as several mega projects are completed. Capex for the first nine months was $29.0 billion and right in line with the same period in 2013. Upstream E&P projects accounted for 93% of capex spending.


GoPro rallied +13% after reporting a strong earnings beat on a 45% increase in sales. A new lower priced product for 2015 is expected to be a hit and provide an entry level buyer a platform to step up to a premium product once they get the hang of action photography.


Linkedin (LNKD) rallied +13% on earnings of 52 cents compared to estimates of 47 cents. Revenue rose +45% to $568.3 million and also a beat. The company is rapidly building out its content business now that publishing is available to all members. Membership rose +6.1% to 332 million users. More than 75% of new members came from outside the USA. Advertising revenue rose +45% to $109.2 million and premium subscriptions rose +43% to $114.5 million. Mobile accounted for 47% of its traffic.


A lesser known name, MercadoLibre Inc (MELI), rallied +21% after reporting earnings of 76 cents compared to estimates of 65 cents. Revenue was a blowout at $147.9 million compared to estimates for $131 million. Sales were up 20% year over year. Bank of America upgraded MELI from underperform to buy and the stock rocketed higher. Rarely do you see a rating jump from sell to buy in one upgrade. MELI hosts an ecommerce platform in Latin America. Think of it as a Latin America version of Ebay, Amazon and Craig's List combined.


Earnings for next week contain a lot of symbols most people won't recognize. However, there are some high profile companies. Herbalife on Monday, Tesla, Priceline, Alibaba and Michael Kors follow on Tuesday. Qualcomm, Nuskin, SolarCity and Whole Foods on Wednesday. Disney, First Solar, Monster and Nvidia on Thursday. Berkshire and Humana on Friday. Berkshire was listed in many of the earnings calendars as reporting on the 31st but they have now updated it for next Friday.

Probably the two most anticipated events are Alibaba and Tesla on Tuesday. The BABA earnings are either going to be a huge win or a huge disappointment. Option prices are out of sight so betting on the outcome would be expensive.


Guidance from companies actually issuing guidance in October was positive. Not all companies give guidance so this is a fraction of the total. Of the 720 companies that issued guidance in October 141 raised guidance. A total of 388 guided in line with estimates and 191 issued negative guidance. Despite the number of companies giving negative guidance that was still much better than the normal 2:1 negative to positive average. I can't put the graphic with the symbols in the newsletter because it grew to twice its prior size over the last week. If you want to see the list of 720 companies and their guidance just email me and I will send it to you.

Crude prices have been volatile but they are holding over the $80 support level. Production by OPEC rose +53,000 bpd to 30.974 mbpd in October. This was a 14-month high and was led by Iraq, Saudi Arabia and Libya. The prior month production was 30.921 mbpd. Iraq production rose +150,000 bpd to 3.3 mbpd. Saudi production rose +100,000 bpd to 9.75 mbpd. The increase was to feed their two new refineries, Yasref and Satorp. Libyan production rose +70,000 bpd to 850,000 bpd and the sixth monthly increase and the highest since June 2013. It is only about half what it was while Qaddafi was in power. Angolan production declined -170,000 bpd to 1.7 mbpd but they are preparing to produce 2.0 mbpd in 2015. OPEC is scheduled to meet on Nov 27th to discuss production quotas. They last cut quotas in 2008 during the financial crisis. U.S. production rose to a 31 year highs at 8.97 mbpd and the most since the EIA began keeping records in 1983.

U.S. drivers consumed 372,414,000 gallons of gasoline per day last week or 2.61 billion gallons for the week.

Gasoline prices nationwide are now under $3.00 with some cities as low as $2.64 as in Rockhill SD. AAA says the drop in the price of oil is saving Americans $187 million a day or $500 a year for the typical consumer. For every penny drop in gasoline prices U.S. consumers will save $1 billion a year according to AAA. With gasoline prices so low even store managers are topping off their tanks. Being unsure of when it will go back up they are taking advantage of the low prices to fill their underground tanks instead of just enough to make it to the next delivery. The low prices mean more money available for holiday shopping.

Wholesale gasoline prices declined to $2.15 at the close on Friday. If oil dips below $80 I would expect wholesale gasoline to go below $2. That would be the lowest level since 2010. That would put the price of retail gasoline around $2.80 nationwide.



Gold and silver prices fell to four year lows as the dollar exploded higher as a result of the FOMC ending QE and Japan increasing QE. Gold dropped -$60 in three days to close at $1,173 on Friday. This is just below critical support at $1,175. Some analysts are now predicting a 50% retracement from the $1,925 high, which would put gold at $962.50 if they are right. Central governments around the world are ramping up their purchases of gold at this already low number. Russia bought 37.2 metric tons in September to raise their total reserves to 1,149.8 tons. That was a $1.5 billion buy. Russian reserves have tripled since 2005.

India imported $3.75 billion in gold in September, up +450% from September 2013. China imported 1,500 tons in 2013 and reports claim they have already bought 2,200 tons in 2014. China does not disclose their purchases but they just opened a new gold vault in Shanghai that will hold 2,000 tons. It is rumored that China wants to hoard all the gold possible so they can control the pricing of this commodity. If they were to back the RMB with gold it would wipe out the dollar and most other currencies making China the dominant reserve currency. Chinese citizens currently own more than 6,000 tons.

The drop in silver prices has created a surge in silver coin sales. The U.S. Mint said sales of the Silver Eagle coin jumped +40% in October to the highest level in 21 months. Sales surged to 5.79 million ounces and the most since January 2013. That was the month that set an all time high at 7.5 million ounces. In September sales totaled 4.14 million ounces. Coin dealers said sales of silver coins of all types had more than tripled over the last month. Sales of Gold Eagle coins rose +16% to 67,500 ounces and the most since January.

Gold and silver miners have already begun shutting in high cost production and demand will exceed supply in 2015. This price decline is related to the spike in the dollar and weak European economy rather than a lack of demand for the metals.




Markets

Advancing issues on the NYSE totaled 2,363 compared to 717 decliners. That represents a 3.3:1 ratio. The Nasdaq had 1,921 advancers to 816 decliners for a 2.3:1 ratio. Considering the markets hit new highs neither of those numbers were particularly strong. Volume was 8.2 billion shares and the biggest day of the week.

Friday was the fiscal year end for many equity funds plus it was month end for everyone else. Given the recent dip there were probably funds holding more cash than they wanted to show on their year end statements and they were forced to throw it at the market so they could claim they were fully invested at the new market highs. This was a "hold your nose and buy" event brought on by the Japanese triggered short squeeze and the fiscal year end.

There was a $1.5 billion imbalance in buy orders at the close on the NYSE. This is a sure sign it was funds trying to get in before the fiscal year end closed. This was NOT retail investors.

Since the October 15th lows the Dow rebounded +9.6%, Nasdaq +12.4%, Russell 2000 +12.7% and the Dow Transports +13.7%. The Dow, S&P, Russell 1000, and Russell 3000 all closed at new highs. The Nasdaq closed at a 14 year high and the Dow Transports missed a new high close by -4 points.

While there was a significant outside influence by the Japanese news, Friday's rally was only one day out of the last 15 days that pushed us up to this level. We should not apply too much importance to the Friday news but we should not belittle it either.

November begins the best six months of the year for the market and quite a few investors plan on buying October dips for the end of year rally and the normal gains in Q1. For many the October dip was over too fast. Many investors were hoping for a little deeper decline and once the rebound began it was so fast that many investors were still waiting for an opportunity to get in. The S&P declined -9% from September 19th to the October 15th lows but the majority of that decline came in only 6 days starting on October 9th. The sharp drop ended with a capitulation event on the 15th and it has been straight up ever since for a +11% gain. The S&P had only gained +11% from February 11th to September 19th over a span of seven months. It lost those gains and then recovered them in a little more than three weeks. Bull market corrections are short, sharp and scary and investors were just recovering from the scary part when the rebound was already underway.

Rebounds from corrective drops typically stutter step with a couple days of gains and then a retest of the lows. This second dip is the one that is bought the strongest and we never got a second dip. That left many investors on the sidelines holding their cash and waiting. As the S&P moved over the 1965-1970 resistance levels it became a race to get invested before the market broke out to new highs.

Now, here is the hard part. Did the Japanese news trigger a buying climax that will fail or a breakout that suddenly has new life? Obviously nobody knows for sure and it will be a week or so before the answer appears.

The market is extremely overbought because there have not been any consolidation dips on the way up. This suggests there should be at least a temporary dip in our immediate future. However, the historical trends favor the bulls. After a midterm election the markets post average gains of 8% over the next three months and +14% over the next six months. November is the start of the best six months of the year, which covers every year, not just midterm years.

The Fed claims they ended QE but it is not really dead. They have $4.2 trillion in treasuries, bonds and mortgage backed securities in their portfolio that they have acquired over the last five years. A large portion of those mature every week and the Fed reinvests those proceeds every week. If $10 billion in securities mature they use those proceeds to purchase $10 billion in the same type of security. Last week their holdings rose +$4.87 billion as the last of initial QE purchases were made. They will now keep that portfolio steady until at least the end of 2015 or longer according to analysts. QE purchases will no longer rise but they will continue on a daily basis for at least another year. This will keep the stimulus flowing through the market despite new QE purchases being officially over.

The rebound has been so strong that more than 25% of the S&P stocks are at 52-week highs. That is a huge number given the strength of the October decline. A whopping 74.8% of the S&P are already back over their 50-day averages after falling to only 13.4% in mid October. This is an extreme example of volatility.


The cumulative advance/decline line on the S&P is breaking out to new highs after hitting two month lows in October. This is a very bullish sign.


Regardless of the reason the major averages all closed at new highs and new highs tend to produce more new highs. There is something about that new high candle that seems to pull money off the sidelines faster than flies to a picnic.

With the economy running at a 3.5% GDP growth rate, the Fed sitting on its dovish roost on the sidelines, earnings coming in better than expected, the midterms likely to configure the Senate to prevent additional regulation and taxes, the Ebola fears fading, ISIS headlines regulated to the old news category, employment rising, gasoline prices falling and the holidays ahead the markets have no reason to decline. Of course they don't actually need a reason but you get the idea.

I would like to believe the markets will continue higher but next week is going to be a battle ground between those that believe this was a climax top and those that believe we are going higher. I have read the arguments for both sides and I am not closing any bullish plays. I am tightening the stop losses but I believe the trend is our friend until it changes.

Lastly, I would be a buyer on any pullback for the reasons I stated above. We are due for some profit taking and it could happen at any moment. The Nasdaq and Russell have some very bearish candles.

Those funds that window dressed their portfolios going into fiscal year end can just as easily undress next week to put cash back into account to capitalize on future buying opportunities. Equity funds hate to buy tops. They would rather wait until the next dip to put that money to work. I doubt anyone would deny that Friday was a top but the only question is it "THE" top.

I expect profit taking and dip buying in the week ahead.

The sprint was so fast that real support is well back at 1,985 but the round number at 2,000 would probably be a speed bump to the downside. Following that would be the 50-day at 1,968.


The Dow was dragged higher on Thursday when Visa (V) gained +$21 on earnings and added about +147 points to the Dow. That caused a massive short squeeze in the Dow ETFs while the rest of the indexes struggled along with modest gains. When the Japanese news broke on Friday another short squeeze was born. Add in further gains by Visa and decent gains by Exxon and Chevron and we were off to the races again.

The Dow closed at 17,390 and a new record high. Also closing at a record high was the Dow utilities and the Dow Transports missed it by only -4 points after setting a new high on Tuesday. This triplicate of new highs on the Dow indexes is another Dow Theory buy signal. In theory this means we should move higher. New highs on all three indexes at the same time are fairly rare and should be noticed.


Dow resistance is now 17,500 followed by 17,750. Support should be the convergence of the 50/100 day averages at 16,913.



The Nasdaq exploded through prior resistance highs to gap open to 4,639 and the high of the day. The index held its gains to close at 4,630 and gain 64 points BUT the candle for Friday is very bearish. This is a bearish "hanging man" candle. Ideally the tail should be twice the length of the body but this one is close enough. Basically it means the market gapped open and eventually held its gains but there was some intraday volatility. This is a typical candle for a market gain that was driven by a short squeeze. Everybody was forced to buy at the open and there was no follow on buying during the day to push it higher. Coming after several days of strong gains makes it even more bearish.

In theory this suggests the Nasdaq will retrace some of its gains this week. I went all the way back to 2000 on the Nasdaq and these were the closest comparisons to Friday's candle. The first one is from September 1st, 2000 and the second from January 6th, 2009. Neither was as bearish as the one from Friday on the far right.

Consider that these are the only two similar patterns dating back 14 years and this current one is the most extreme. The odds are very good the Nasdaq is going lower before it goes higher.


Initial support is well below at 4,525 with resistance at 4,700. That is a huge range but we moved from 4,400 to 4,600 in just the last week so anything is possible.



The Russell 2000 gained +4.9% for the week to come to rest at 1,173 and just under strong resistance at 1,175. The Russell candle is identical to the Nasdaq and suggests we will see some profit taking next week.


Fundamentally the market could be poised for a strong rally into December. Technically we are very overbought and the candles on the Nasdaq and Russell are begging to be shorted. I expect some profit taking now that we are in a new fiscal year for mutual funds and they may want to remove their yearend window dressing and raise some cash.

Just when the Fed was taking away the punchbowl the Bank of Japan provided another one to keep the party going. However, we all know what happens when there is a never ending supply of free booze. The party eventually gets sloppy and everyone ends up with a really bad hangover.

Random Thoughts

It is daylight savings time again. Fall back an hour on Saturday night.

President Obama has scheduled a photo op with Janet Yellen for Monday and the day before the midterm elections. Reportedly they are going to talk about the long term outlook for the U.S. economy but cynics believe this is just a last ditch effort for an unpopular president to be seen doing something important before the election in hopes of boosting the democratic candidates currently running away from him.

Very good link of important charts from some of the brightest minds in the business. Most Important Charts in the World

Goldman Sachs analyst David Kostin said the S&P will hit 2,050 by the end of the year and 2,150 over the next 12 months. The 2,050 target is a repeat of his revision up from 1,900 a couple months ago. He is expecting $116 in earnings for 2014 and $125 for 2016. The consensus earnings predictions for 2015 have already been cut by -2% but they are still healthy. He does not believe the U.S. economy will be dragged lower by the weakness in Europe, China and Brazil.

Historically November is the third best month of the year for the Dow and S&P since 1950. Since 1971 it is the third best for the Nasdaq and since 1979 the third best for the Russell 2000. The Dow and S&P have gained in 12 of the last 16 midterm Novembers with an average gain of +2.5% for the Dow and a +2.7% gain for the S&P. The Russell 2000 gained in 6 of the last 8 midterm Novembers with an average gain of +3.9%.

Japan has had to scramble fighter aircraft 533 times in the first six months of 2014 to repel Russian aircraft intruding on Japanese airspace. This compares to 308 in the first half of 2013 and this year ranks as the most intrusions since 2003. Japan claims it does not know why Russia continues to provoke Japan and Russia will not admit to the incursions. A Japanese official said the incursions were meant to send a message not only to Japan but to the U.S. as Japan's closest ally. What an exciting world we live in when Russia can cause problems the world over and just deny they exist.

Russia is also flying nuclear bomber drills around Europe and the North Sea and not using their onboard transponders. Since Oct 28th NATO air defenses have detected and monitored four groups of TU-95 Bear bombers and fighters practicing nuclear launch routes around Europe. Russia Sending Nuclear Messages

Russia and the Ukraine signed a deal last week to supply gas to the Ukraine through March of 2015. Russia will get $4.6 billion for the gas in installment payments. This deal is critical because it keeps the Ukraine from running out of gas for heating and prevents them from siphoning off gas that is destined for the rest of Europe. In 2013 Poland received 10 Bcm (billion cubic meters) from Russia, Germany 40 Bcm, Italy 25 Bcm, Turkey 27 Bcm and the United Kingdom 12 Bcm. In the past when Russia cut off gas supplies to the Ukraine the pipelines across the Ukraine to Europe remained open. Ukraine would siphon off needed gas leaving the rest of Europe with shortages.

Russia needs to sell all the gas it can because it is losing a ton of money on cheap oil. Russia needs Brent crude to be over $100 in order to pay the country's bills. Iran needs $135, Saudi Arabia $95, Nigeria $118 and Venezuela $120.

Hedge-fund assets under management, as of the end of the third quarter, total more than $2.82 trillion dollars.

The number of billionaires in the world has doubled to 1,646 since the financial crisis ended in 2009.

The Bank of Japan's quantitative easing program, relative to size of the economy, is three times bigger than the Federal Reserve's QE.

The most common name in the world is Mohammed.

Americans spend more than $2.08 billion on Halloween candy each year and $2.5 billion on costumes. More than $300 million is spent on costumes for pets. Add in just under $2 billion for decorations and roughly $7 billion will be spent on this holiday. 49% of retailers have Halloween programs. 158 million people will participate in Halloween activities. More than 86% said they would spend less on Halloween this year with 32.7% buying less candy and 18.1% making a costume rather than buying one. More than 25% said the weak economy was impacting their Halloween plans. The average consumer will spend $75.03 on decor, costumes, candy and supplies. More than 78% are planning on buying discounted candy after Halloween and 57% are planning on buying discounted decor for use next year.

Did you notice that retailers switched from Halloween candy and costumes to Christmas themes almost overnight. Walmart and others had Christmas ads up and running Saturday morning.

Only 23 shopping days until Thanksgiving and 53 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The fat you eat is the fat you wear."

Dr John McDougall Change your life here!

 


Index Wrap

Strong Rebound Gets Stronger

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

When price swings extend well below the norm relative to 21-day moving averages, the next move is often to swing back up sharply. Most of my analysis this week centers on how high is 'high' or where next 'resistance' might be.

One of the good tools to use for figuring out the extent of a next index price swing (not in stocks, but in indices) after an 'extreme' low, is to look for the SAME percentage peak ABOVE the 21-day average look as was seen BELOW the Average at the bottom.

I hope I haven't made my charts too complicated but in some I wanted to show a 'normal' percent range in prices above and below a 21-day moving average VERSUS the recent wider ranges of the envelope lines.

Moves to new highs are great but if you bought calls at the recent extremes of price, RSI and trader sentiment you have a terrific trading profit. There's that versus riding the trend which seems to have picked up a lot of bulls all of a sudden. Panic over, resume the bull market anyone?

Lastly before the charts, bullish 'sentiment' was relatively modest when it should have reflected a heightened bullish chart then shot up to quite bullish by the end of the week. It takes awhile to wake our trading universe up as this is a BULL MARKET as I keep saying.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The chart shows that the 'extreme' downside move is being followed by an equal extreme powerful move on the upside. This is fairly typical in a bull market when prices get pushed well below the mean in terms of trading envelope lines that track the 'normal' 3 percent range that occurs in the S&P. When the envelope line grows to 5 percent under the (21-day) Average and is oversold and sentiment is bearish, it's time to look for a bottom.

The subsequent rebound will then often carry to the same WIDER envelope value as was seen on the downside. See the chart for where a 5% envelope line would intersect above the current SPX price; i.e., around 2050 currently, which is noted as potential resistance. That is assuming the prior intraday high at 2019 is pierced.

Support is highlighted at 1960, then in the 1935 area of the 21-day moving average.

The RSI is climbing strongly of course with price but the indicator hasn't hit an overbought extreme nor has the 5-day average of daily trader sentiment 'readings' in terms of being at what I measure as 'extreme' bullishness (overbought).

S&P 100 (OEX) INDEX; DAILY CHART

The OEX has resumed its strong uptrend. It seems now in hindsight an 'overdone' extreme on the downside, followed by what now looks almost like a runaway bull move.

This picture is exaggerated by how far the panic selling took OEX before it made a V-bottom and climbed steadily almost seeming to 'mirror' the steep decline. Not an accident this as waterfall declines, once bullish momentum in earnings is seen again, can be, are frequently, followed by EQUALLY strong recovery moves.

Key support is highlighted at 870, then (still) at 60 Near resistance is anticipated at the milestone 900 level, then extending to the 5 percent upper envelope line currently intersecting at 912.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The normal 'range' in price swings is that the Dow trades from about 3 percent above its 21-day moving average and down to about 3 percent below this Average. In the case of a panic sell off and a correction 'long overdo', a downside dip to 5 percent under the 21-day is an extreme in a bull market. And the RSI confirmed the extreme.

Not surprisingly next, the bears then ran for the hills in the face of still pretty upbeat economic and earnings news. What might be the 'range' when the upside is getting extreme in terms to how far prices are above the 21-day? My rule of thumb is to look for the potential for the Dow to get to a level equal to 5 percent ABOVE its 21-day average price; just as the Dow fell to 5 percent below it. As below, so above to poetically name this concept in trading.

Near INDU resistance is highlighted in the 17600 area, representing a value that would be 5% above the current 'centered' (21-day) moving average. Next resistance then is projected in the 17850 area. The Dow has potential to 18000. Chart/technical support looks like 17000, then 16700.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has regained its bullish upside momentum and then some so the chart is again rated bullish in all time frames: short, medium to long-term.

The downside 'extreme' in COMP can be seen as a low that was around 7 percent under its 21-day moving average. Following the strong recovery move as seen by several bullish upside price gaps we no longer can expect a more normal range of rallies such as ones that get to around 3% above the 21-day average.

My rule of thumb honed over some decades is that moves per this current pattern often see a move on the upside to equal the downside. If the index fell to 7 percent UNDER the centered moving average, look for a next peak at 7% ABOVE the 21-day. Stay tuned for that result - it may be overoptimistic but it 'measures' potential resistance in a useful way for planning an all around strategy.

Resistance is broadly highlighted at 4670 up to 4750. 4750 would be a move that would put COMP 7% over its 21-day average, thereby squaring the circle so to speak. Stay tuned on that much of an advance.

NASDAQ 100 (NDX); DAILY CHART:

The NDX chart not only as I wrote last week "regained its bullish momentum and chart pattern" but the Index NO LONGER needs to retest its prior high as of course NDX sailed through that 'trouble' like a knife through warm butter as my grandmother used to say!

Potential 'resistance' looks like 4200 next then to 4270 if NDX were to go as far ABOVE its 'centered' 21-day moving average as it went BELOW. Seems like a stupid way to 'read' the Market? Yes, it is a 'stupid' market in some crazy ways. The Market does things that make up simple cyclical patterns that repeat and repeat and you say that it can't be that simple!

Near support, not surprise either, is 4000, what was long-standing and tough resistance. Support extends to the 3960 area and to 3900 after that.

I've projected potential resistance, or a next upside target, to 4200, then possible on to 4770 and I'm repeating myself. No reason technically to suggest NDX isn't going still higher, maybe after a short-term pause or pullback.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ tracking stock is bullish in its strong move through 100. 103 looks like a next possible upside target, then to the 104 area. Near support is seen at 98, then in the 96.6 to 96 zone.

On Balance Volume (OBV) continues to point strongly up as it was showing (bullishly) last week.

A move to the 104 area seems quite possible as we head into November. However, 100 should hold up as support on any pullback to suggest that kind of continued upside.

RUSSELL 2000 (RUT); DAILY CHART:

Lo and behold, the rising tide does tend to LIFT all boats as the Russell 2000 (RUT) pierced a key down trendline as it lifted itself above 1160. Near support is suggested now at 1160 but I've highlighted 1140, then 1120, as key chart support points. Most bullish would be if RUT can now stay ABOVE its recently penetrated down trendline; what was a 'line' of resistance, once pierced, 'becoming' new support is the principle.

RUT could have potential to the 1200-1210 area in the current move. That's an optimistic target.

Downside potential again looks like the Index could see some further gains, but not so much if RUT can't hold 1120 on a pullback. How well RUT does will be 'captive' to the current rip roaring bull move continuing.


GOOD TRADING SUCCESS!




New Option Plays

Basic Materials & Services

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

The Sherwin-Williams Co. - SHW - close: 229.56 change: +4.40

Stop Loss: 224.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 526 thousand
Entry on November -- at $---.--
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It's not very often you see a company about to celebrate its 150th birthday. For SHW that will be the year 2016. The company has been in business since 1866. The Company's core business is the manufacture, distribution and sale of coatings and related products. SHW is headquartered in Cleveland, Ohio. They sell through over 4,100 company-operated stores. Their global group has sales in more than 115 countries. Sherwin-Williams is also a very well known dividend payer and has annually increased dividends since 1979.

The slow and steady economic improvement in the U.S. has been beneficial. The real estate market has also helped SHW. New homes need new paint. The pace of new home sales in the U.S. hit six-year highs last month. While home sales do tend to slow down a bit in the winter months SHW should benefit from lower input costs. Crude oil and natural gas are big components in the paint and coatings industry. The severe drop in oil the last few months is a blessing for SHW.

The company raised their earnings guidance back in July. They issued bullish guidance again in their latest quarterly report. SHW announced earnings on October 28th. Wall Street was expecting a profit of $3.22 per share on revenues of $3.18 billion. SHW said their earnings rose +31.4% to a record-setting $3.35 per share. Revenues were up +10.6% at $3.15 billion, which missed the estimate.

SHW's remodeling business saw growth. The real driver was paint sales. Their paint stores account for the lion's share of sales, which saw revenues up +20%. SHW also purchased 2.0 million shares of their stock last quarter and still have 6.8 million yet to buy in their stock buy back program.

Management was optimistic. SHW's Chairman and CEO MR. Christopher Connor, said,

"We are pleased to report record sales and earnings per share in the third quarter and first nine months of 2014 on the continued positive sales volume and strong operating results of our Paint Stores Group. The Paint Stores Group architectural volume growth was positive across all end market segments. The Comex acquisition continues to perform better than expected in the year. Our Consumer Group improved its operating results through higher volume sales and operating efficiencies. Our Global Finishes Group continues to improve its operating margins through improved operating efficiencies."

Management raised their 2014 EPS guidance above Wall Street's estimates. They also raised their revenue guidance but this was only in-line with consensus. SHW now expects Q4 sales in the +6% to +8% range. They expect earnings to be in the $1.30-1.40 range versus $1.14 in the fourth quarter of 2013.

The stock's relative strength has driven shares to new all-time highs and a +25% gain in 2014. The point & figure chart is bullish and forecasting at long-term target at $286.

Tonight we are suggesting a trigger to buy calls at $231.00.

Trigger @ $231.00

- Suggested Positions -

Buy the 2015 Jan $240 call (SHW150117c240) current ask $3.20

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

Daily Chart:

Weekly Chart:


United Rentals, Inc. - URI - close: 110.06 change: +3.94

Stop Loss: 104.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on November -- at $---.--
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
URI is a company that is gaining market share. Traditionally the equipment rental business has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. The last couple of quarterly reports have been strong. In the July 16th report URI beat Wall Street estimates with a profit of $1.65 per share on revenues of $1.399 billion. That was a +47% improvement from a year ago and management raised their guidance.

The most recent report was October 15th. Again URI beat estimates. Analysts were looking for a profit of $2.12 per share on revenues of $1.51 billion. URI delivered $2.20 per share with revenues up +17.8% to $1.54 billion. This was a +34% jump in URI's earnings from a year ago. Margins hit a record +49.3% in the third quarter. They reaffirmed their guidance.

URI's CEO Mr. Michael Kneeland commented on his company's report and said,

"The third quarter provided further confirmation that our strategy and the North American construction recovery are both solidly on track. Our end markets are continuing to rally, creating numerous opportunities for well-managed, profitable growth. We reported a robust 16% increase in rental revenue for the quarter— and more importantly, the discipline behind that growth is evident in our record EBITDA margin and gains in volume, utilization and rates."

Technically the stock experienced a painful correction from $120 to $90 during the market's pullback in September-October. The bounce back stalled at resistance near $110 and its 100-dma and 50-dma. However, after a two-week consolidation in the $105-110 zone, shares of URI now look poised to breakout. Shares were showing relative strength on Friday with a +3.7% gain.

The 50-dma is directly overhead at $110.17 and the intraday high on Friday was $110.39. Tonight we are suggesting a trigger to buy calls at $110.55.

Trigger @ $110.55

- Suggested Positions -

Buy the 2015 Jan $115 call (URI150117c115) current ask $4.40

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

Daily Chart:



In Play Updates and Reviews

Stocks Sprint Toward November

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets delivered another strong week and ended the month with a surge higher thanks to Japan.

GILD and NOW hit our entry triggers. We've updated several stop losses tonight.


Current Portfolio:


CALL Play Updates

Acuity Brands, Inc. - AYI - close: 139.43 change: +1.11

Stop Loss: 135.25
Target(s): To Be Determined
Current Option Gain/Loss: +23.6%
Average Daily Volume = 485 thousand
Entry on October 28 at $136.25
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/01/14: AYI popped at the open on Friday but spent the rest of the day consolidating sideways beneath round-number resistance at $140.00. Investors may want to wait for a new rally past $140.50 before considering new positions.

Tonight we are raising the stop loss to $135.25.

Earlier Comments: October 27, 2014:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

- Suggested Positions -

Long DEC $140 call (AYI141220c140) entry $3.80

11/01/14 new stop @ 135.25
10/28/14 triggered @ $136.25
Option Format: symbol-year-month-day-call-strike

chart:


Costco Wholesale - COST - close: 133.37 change: +0.37

Stop Loss: 130.75
Target(s): To Be Determined
Current Option Gain/Loss: +22.7%
Average Daily Volume = 1.9 million
Entry on October 30 at $132.25
Listed on October 29, 2014
Time Frame: Exit prior to earnings in December
New Positions: see below

Comments:
11/01/14: The stock market's gap higher on Friday morning saw COST open at $134.45. Shares eventually filled the gap and traders started buying the dip. The stock underperformed the major indices but still closed at a new record high.

Tonight we are adjusting the stop loss to $130.75.

Earlier Comments: October 29, 2014
COST is part of the services sector. The company runs a discount, membership sales warehouse. The company's latest earnings report said Costco currently operates 664 warehouses, including 469 in the United States and Puerto Rico, 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, six in Australia and one in Spain.

The company has struggled to hit Wall Street's bottom line estimates for over a year but steady improvement in their same-store sales have helped drive the stock higher. A strong back to school shopping season and higher membership fees fueled a better than expected quarterly report.

COST reported their Q4 numbers on October 8th. After missing estimates for five quarters in a row the company finally beat estimates. Analysts were expecting a profit of $1.52 a share on revenues of $35.3 billion. COST delivered $1.58 a share with revenues up +9.3% to $35.52 billion. The net profit number was up +13% and gross margins improved 15 basis points.

COST also reported that their e-commerce sales continue to grow at a brisk pace and their online sales rose +18% in their fourth quarter. Same-store (comparable store) sales remain a key metric to watch. COST's Q4 same-store sales were up +4% yet if you back out falling gasoline prices and currency effects their comparable store sales were up +6% for the quarter versus +4.5% a year ago. Membership renewal rates remain very strong at 91% in the U.S. and 87% globally. COST plans to open up to eight more locations before the end of the 2014 calendar year.

The company also recently announced their first foray into China. COST has entered the Chinese market with an online store through Alibaba Group's (BABA) Tmall Global platform.

The holiday shopping season is almost upon us with less than 60 days before Christmas. COST is poised to do well since the company caters to the higher-end more affluent customer.

Shares are hovering just below the $132.00 level. Tonight we are suggesting at trigger to buy calls at $132.25. We will plan on exiting positions prior to their December earnings report.

- Suggested Positions -

Long DEC $135 call (COST141220c135) entry $1.54

11/01/14 new stop @ 130.75
10/30/14 triggered @ 132.25
Option Format: symbol-year-month-day-call-strike

chart:


FedEx Corp. - FDX - close: 167.40 change: +2.11

Stop Loss: 163.45
Target(s): To Be Determined
Current Option Gain/Loss: +100.1%
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:
11/01/14: Crude oil posted another decline on Friday and that gave the transport stocks a boost. FDX gapped open higher and briefly traded to a new record high before paring its gains.

This stock is still struggling with its trend line of higher highs and thus more conservative traders will want to seriously consider just taking profits right now. We are moving our stop loss up to $163.45.

I am not suggesting new positions at this time.

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*

11/01/14 new stop @ 163.45
10/28/14 new stop @ 162.65, traders may want to take profits now!
10/25/14 new stop @ 157.85
10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
Option Format: symbol-year-month-day-call-strike

chart:


Gilead Sciences Inc. - GILD - close: 112.00 change: -2.22

Stop Loss: 107.65
Target(s): To Be Determined
Current Option Gain/Loss: -18.1%
Average Daily Volume = 13.8 million
Entry on October 31 at $115.90
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/01/14: Biotech stocks can be volatile. GILD displayed some of that volatility on Friday. The market's gap higher on Friday saw GILD open at a new all-time high at $115.90. Not the best entry point for us since we were hoping to buy calls at $114.45. Our suggested call option opened at $5.50.

The profit taking from the Friday morning high does sting a little bit but our outlook in GILD has not changed.

If you are still looking for an entry point you might want to consider either hoping for a dip toward $110 and its 10-dma or waiting for a bounce above $113.50 as alternative entry points.

Earlier Comments: October 30, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. Their Q2 report on July 23rd was a blowout. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

After the Q2 earnings surprise the market's expectations for GILD were a lot higher this time around. GILD reported earnings on October 28th. They missed Wall Street's EPS number by 6 cents with a profit of $1.84 per share. Quarterly revenues soared +117% to $6.04 billion, which did surpass expectations. Sovaldi sales were a disappointment at $2.80 billion against the street's estimates for $3.1 billion. The EPS number was also negatively impacted by the Obamacare's Branded Prescription Drug Fee.

Most of the analyst commentary on GILD following the third quarter results remain positive. The market is looking forward to GILD's next treatment, Harvoni, which is another drug for chronic hepatitis C infection in adults. Harvoni appears to be off to a strong start, which won FDA approval on October 10th.

Technically shares of GILD have seen a huge rebound from the market-induced October sell-off. A few days ago the stock broke out past resistance near $110 and traders bought the dip. The stock was showing relative strength today with a +3.1% gain. The Point & Figure chart is very bullish and forecasting at long-term target of $159.00.

Tonight we are suggesting a trigger to open bullish positions at $114.45. We'll start this trade with a stop loss at $107.65.

- Suggested Positions -

Long 2015 Jan $120 call (GILD150117c120) entry $5.50

10/31/14 triggered on gap higher at $115.90, suggested trigger was $114.45
Option Format: symbol-year-month-day-call-strike

chart:


Keurig Green Mountain, Inc. - GMCR - close: 151.75 change: +1.77

Stop Loss: 143.25
Target(s): To Be Determined
Current Option Gain/Loss: +46.6%
Average Daily Volume = 1.68 million
Entry on October 28 at $145.75
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: see below

Comments:
11/01/14: GMCR continues to show relative strength and added +1.1% on Friday. Shares are up four out of the last five weeks. You could argue that GMCR might be a little bit short-term overbought. I would not be surprised to see a dip into the $148-150 area.

Strategy Update: We are suggesting investors sell the November $160 call* on Monday morning. The current bid on this option is $4.95. That will significantly reduce our cost on the initial trade, which was buying the Nov. $150 call.

You will want to "sell to open" the Nov. $160 call. Once filled you will be short the Nov. $160 call and long the Nov. $150 call. This will cap our potential gains but also reduce our risk by reducing the cost of our initial trade.

Once the spread is active we will want to close both positions if GMCR hits our stop loss.

* The normal monthly November option that expires on Nov. 22nd.

Earlier Comments: October 25, 2014:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

- Suggested Positions -

Long NOV $150 call (GMCR141122C150) entry $6.17

- plus -

(On November 3rd, 2014, Sell the November $160 call)
Short NOV $160 call (GMCR141122C160) current bid $4.95

11/01/14 Strategy Update: Sell the Nov $160 call on Monday morning, November 3rd
10/30/14 new stop @ 143.25
10/28/14 triggered @ $145.75
Option Format: symbol-year-month-day-call-strike

chart:


iShares Transportation ETF - IYT - close: 156.70 change: +2.20

Stop Loss: 151.85
Target(s): To Be Determined
Current Option Gain/Loss: +285.2%
Current Option/Gain loss if you sold the NOV $159 call: +718.7%
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:
11/01/14: The transportation stocks remain some of the strongest performers in the market. The IYT helped lead the rally on Friday with a +1.4% gain. The group is very short-term overbought and it's nearing potential trouble with its trend of higher highs (see chart).

We have three weeks left on our November options.

I'm not suggesting new positions at this time.

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

- plus -

(sell short the Nov $159 call on October 29th)
Short NOV $159 call (IYT141122c159) entry $1.80

10/29/14 IYT gapped open higher at $157.44 (+56 cents)
10/28/14 Strategy Update: new stop @ 151.85, Plus, we want to sell the November $159.00 call (current bid is $1.75).
10/25/14 new stop @ 148.65, traders may want to take some money off the table now
10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
Option Format: symbol-year-month-day-call-strike

chart:


ServiceNow, Inc. - NOW - close: 67.93 change: +1.51

Stop Loss: 63.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.7%
Average Daily Volume = 1.4 million
Entry on October 31 at $67.46
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/01/14: The plan was to buy calls at $67.25 but the market's gap higher pushed NOW to open at $67.46. Shares sprinted toward round-number resistance near $70.00 before paring their gains. NOW managed to outperform the major indices with a +2.2% gain.

Shares could fill the gap with a dip to $67.00 before moving higher again.

Earlier Comments: October 30, 2014:
NOW is in the technology sector. The company provides cloud-based IT solutions across most of the world. According to the company website, "ServiceNow is the enterprise IT cloud company. We transform IT by automating and managing IT service relationships across the global enterprise. Organizations deploy our service to create a single system of record for IT and automate manual tasks, standardize processes, and consolidate legacy systems. Using our extensible platform, our customers create custom applications and evolve the IT service model to service domains inside and outside the enterprise."

NOW is less than three years old as a public company. Their IPO price was $18.00 and they opened at $23.75 back June 2012. It's been a roller coaster ride for investors but the trend is higher. NOW is one of the fastest-growing enterprise software companies. They're stealing market share from older, larger firms like CA Technologies, Hewlett-Packard, and BMC Software.

NOW is developing a very bullish pattern of strong revenues and raising guidance. The last four quarterly reports in a row have seen NOW meet or beat Wall Street's earnings estimate, beat the revenue estimate, and raise guidance every time.

Their most recent quarterly report was October 22nd. Wall Street expected a profit of $0.01 per share on revenues of $174.4 million. NOW delivered $0.03 with revenues rising +60% to $178.7 million. They added 150 new customers in the quarter, which puts their total at 2,514 clients. Their renewal rate is 98%. NOW raised their Q4 guidance above Wall Street's estimates.

NOW's President and CEO Frank Slootman said, "We had a solid third quarter as we continued to help our customers extend service management across the enterprise. The opportunities for us to expand within IT, as well as deliver value throughout the business, significantly broaden our addressable market and growth potential." Michael Scarpelli, their CFO, said, "Our strong third quarter performance included a record 11 deals greater than $1 million in annual contract value. We also achieved our first quarter of billings greater than $200 million."

Technically shares of NOW have broken out past resistance in the $65.00 area. The Point & Figure chart is bullish and forecasting at $74 target. The highs this past week have been near $67.00. Tonight I am suggesting a trigger to buy calls at $67.25.

- Suggested Positions -

Long DEC $70 call (NOW141220c70) entry $2.85

10/31/14 triggered on gap higher at $67.46, suggested entry was $67.25
Option Format: symbol-year-month-day-call-strike

chart:


NetEase, Inc. - NTES - close: 94.72 change: +0.71

Stop Loss: 91.45
Target(s): To Be Determined
Current Option Gain/Loss: +22.4%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/01/14: NTES ended the week at a new record high. Yet shares are still struggling to close above resistance at the $95.00 level.

We only have about seven trading days left before NTES reports earnings on November 12th. I'm not suggesting new positions.

Tonight we'll move the stop loss to $91.45.

Earlier Comments: October 20, 2014:
NTES is in the technology sector. They are part of the Chinese Internet space. The company operates online video games, an Internet portal and email services in China. Technically the stock has been outperforming most of its peers in the Chinese Internet industry (compare to the performance of the KWEB ETF of which NTES is a component).

Their most recent earnings report was healthy. NTES' quarterly profit was in-line but revenues were up +21% to $475.8 million, beating Wall Street's estimates. NTES' Chief Executive Officer Mr. Ding said, "This quarter we have achieved in three business areas MoM and YoY increase revenue total revenue growth of 17.2%, an increase of 22.3 percent compared with the same period last year, gaming revenues grew 13.1%, advertising services revenue grew 42.9%, mailboxes, electricity suppliers and other business income increased 201.5 percent."

After an initial rally on these results NTES share price stalled out at resistance near $90-91. Here we are more than two months later and NTES is testing resistance near $90-91 again. This time the point & figure chart is suggesting at $102 price target.

We are suggesting a trigger to buy calls at $91.15.

- Suggested Positions -

Long NOV $95 call (NTES141122C95) entry $2.45

11/01/14 new stop @ 91.45
10/23/14 new stop @ 89.40
10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike

chart:


Semiconductor ETF - SMH - close: 51.42 change: +1.97

Stop Loss: 48.85
Target(s): To Be Determined
Current Option Gain/Loss: +131.8%
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:
11/01/14: Semiconductor stocks were some of the best performers on Friday. The SMH gapped open higher and ended Friday with a +3.98% gain.

I would not chase it here. We will raise our stop loss to $48.85.

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

11/01/14 new stop @ 48.85
10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

chart:


ULTA Salon - ULTA - close: 120.81 change: +0.25

Stop Loss: 117.85
Target(s): To Be Determined
Current Option Gain/Loss: -16.1%
Average Daily Volume = 925 thousand
Entry on October 29 at $121.75
Listed on October 28, 2014
Time Frame: Exit PRIOR to earnings on December 4th
New Positions: see below

Comments:
11/01/14: ULTA's performance these last couple of days has been disappointing. The broader market is surging higher but ULTA's rally has stalled. Shares are just consolidating sideways in the $120-123 area.

I am not suggesting new positions at this time. We will raise our stop loss to $117.85. You may want to raise your stop even higher.

Earlier Comments: October 28, 2014:
ULTA is in the services sector. They're considered a specialty retailer. Founded in 1990 the company is headquartered in Chicago. According to the company website, "ULTA Beauty is the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the United States. Ulta Beauty provides affordable indulgence to its customers by combining unmatched product breadth, value and convenience with the distinctive environment and experience of a specialty retailer. ULTA Beauty, through its stores and ulta.com, offers a unique combination of over 20,000 prestige and mass beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well as salon haircare products. ULTA Beauty also offers a full-service salon in all of its stores."

The stock had a rough time late last year when ULTA missed earnings estimates and guided lower back in December 2013. Shares collapsed from the $120 area toward the $90-95 zone. They missed and warned again in March. Yet it would appear that ULTA has worked out the kinks as the company's last two earnings reports have been strong. In June and in September ULTA reported quarterly results that were above Wall Street's estimates on both the top and bottom line. More importantly management guided higher for the next quarter both times.

Investors were really impressed with the latest quarterly report in September. You can see the huge gap higher in the stock price. Analysts were expecting a profit of $0.83 a share on revenues of $713.3 million. ULTA delivered $0.94 a share with revenues up +22.2% to $734.2 million. They also reported a very strong +9.6% same-store sales growth versus a tough +8.4% sale growth against the year ago period. Margins also saw improvement in the quarter.

ULTA management also laid out their long-term, five-year estimates. The company is forecasting annual comparable store sales growth in the 5% to 7% range. They expect EPS growth to be in the low 20% area. Their expansion plans include opening 100 stores a year. Jim Cramer lists ULTA as one of his best picks in this industry.

Mary Dillon, ULTA's Chief Executive Office, said, "A significant improvement in traffic, successful new product and brand launches, and rapid e-commerce growth drove better than expected top line performance. As a result, the Ulta team delivered healthy operating margin expansion in the second quarter. We are raising our outlook for the year and now expect to achieve sales and earnings per share growth in the 20% range, reflecting our confidence in continued strong market share gains."

The company is definitely seeing growth in its online sales. Their second quarter saw e-commerce sales soar almost 55%. They plan to grow their e-commerce sales to 10% of total revenues.

Technically shares of ULTA dipped toward support during the market's September-October pullback. Now shares have rebounded back toward resistance in the $120 area. Today saw ULTA showing relative strength and a new 2014 closing high. We want to hop on board if ULTA can breakout past the $120-121 area. We are suggesting a trigger to buy calls at $121.75.

- Suggested Positions -

Long DEC $125 call (ULTA141220C125) entry $6.20

11/01/14 new stop @ 117.85
10/29/14 triggered @ 121.75
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates


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