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Daily Newsletter, Saturday, 12/13/2014

Table of Contents

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

Market Wrap

Whoosh!

by Jim Brown

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That giant sucking sound was the market dropping with the sell on close orders on Friday. The Dow dropped nearly -140 points in the closing minutes to lose -315 for the day.

Market Statistics

The market had its worst week since May 2012 as oil prices collapsed to $57.42 and -44% off their $107.73 high in June. This carnage in the energy sector has infected the rest of equities and completely erased the normal December bullishness.

However, we are at or near a bottom in crude prices. This flush in crude prices has run its course and external events are starting to mount that will create an offset for the selling in crude.

Can we go lower? Absolutely! However, oil is significantly oversold and it is only a matter of time before a rebound appears.

For instance, there are a record number of oil tankers headed toward China. There are 83 Very Large Crude Carriers (VLCC) bound for Chinese ports with a capacity of 166 million barrels. This is the largest number since records were started in October 2011. China averaged 67 VLCCs in past Decembers. The cost to hire a crude tanker is at a 5 year high at $83,605 a day and the highest since January 2010. The International Energy Agency said China was taking advantage of the drop in crude prices to add to strategic reserves.

West Africa has booked 33 VLCC cargoes for the month of December. That is 43% over December 2013. Angola and Nigeria are shipping 4.0 mbpd and the most since August 2012. The cheap oil is forcing producing countries to produce as much as possible to make up for the lower price. This is feeding the current over supply but the cheap prices are causing those countries and refiners with additional storage capacity to stock up. This could consume an additional 200 million barrels over the next 90 days. Obviously that will lower demand in months to follow but by then we should see high dollar oil production begin to decline.

The IEA said stockpile building could consume 297 million barrels in the first half of 2015 to lift inventory totals to 2.87 billion barrels and right at the total global storage capacity.

Reuters reported that new well permits declined almost 40% in November. Drilling Info, an industry tracking firm, said new well permits declined from 7,227 to 4,520. That is a monster decline and that is an indication of what will happen to production 6 months from now. A drilling permit is also a snapshot into what will happen to rig activity over the next 60-90 days. This is the first significant drop in shale drilling since the boom started in 2007.

Permits for the Permian declined -38%, Eagle Ford -28% and the Bakken -29%.

The next data point is the weekly rig report from Baker Hughes. The active rig count plunged by -29 rigs to 1,893 over the last week. The Permian saw the biggest drop of -20 rigs to 548. The Granite Wash shale declined -6 rigs to 57. I expect this drop to continue in the weeks ahead.

Enterprise Products Partners (EPD) announced on Friday they were cancelling the proposed pipeline from the Bakken in North Dakota to Cushing Oklahoma. This is the first major project to fall victim to low oil prices. Many more will follow.

Conoco (COP) said it was cutting 2015 spending by 20%. BP Plc (BP) said it was cutting $2 billion off its capex. Chevron (CVX) said 2015 spending plans were on hold. Apache (APA) said it was slashing its North America budget by -25%. Halliburton is going to lay off 1,000 workers to reduce exposure to a slowdown in drilling.

Oil prices may have declined to $57.50 on Friday but remember shale drillers are getting far less than that because of transportation costs. Bakken crude was quoted at $51 on Friday and Canadian Select was down to $42 per barrel and tar sands crude in the $30s. The WTI price is a benchmark and all land based fields and grades trade at a discount or premium to WTI. The Gulf Coast benchmark is Brent, which closed at $61.43. Louisiana Light Sweet is normally traded at Brent prices. Venezuelan heavy crude was $20-$22 under Brent or $40 a barrel. They need $135 to balance their budget. Expect a country collapse soon.

The impact to the market from the imploding energy sector should not be understated. Dow component Exxon (XOM) lost -2.60 for -21 Dow points and Chevron (CVX) lost -2.53 for -20 Dow points. The 46 energy stocks in the S&P were a major reason for the S&P decline. The Russell 2000 has 195 energy stocks or roughly 10% of the index and accounted for the majority of the -30 points lost for the week.

Energy is in a bear market. That should be no surprise to anyone. Stephen Schwartzman of the Blackstone Group is raising up to $4 billion for a new fund to invest in energy. He is positively giddy about the buying opportunity he is seeing now. He said in an interview, "I think this is going to be a wonderful, wonderful opportunity for us. It is going to be one of the best opportunities we have had in many, many years."

We are seeing a capitulation style sell off. Thomas Lee of FundStrat Global Advisors pointed out that the Relative Strength Index (RSI) on Brent crude has fallen below 23 for only the fourth time in 26 years. On each of the prior three occurrences oil was higher 100% of the time 3, 6 and 12 months later with an average gain of +74%. Three times over 26 years is not a very big dataset but we should pay attention. My chart program does not go back 26 years on Brent but you have to admit the damage is obvious. We are also at the 2007 and 2009 support lows.


Analyst William Maloney pointed to the 200-month moving average on WTI and a level that is rarely penetrated for more than a short term dip. That level is currently $60.26 and just about where WTI closed on Thursday. The break below that level should attract long term buyers.


The International Energy Agency (IEA) cut its demand forecast for 2015 for the fourth time in five months. The agency now expects demand to rise +900,000 bpd in 2015 to 93.3 mbpd and -230,000 bpd below their prior forecast. The agency had a novel reason. They said the fall in prices would reduce government spending in places like Russia, Venezuela, Brazil and Nigeria. Those countries derive much of their revenue from oil prices and that revenue has fallen -44% in the last six months. This is really going to crimp their operations, which depend on export revenue. The IEA said demand in Russia alone would decline -195,000 bpd to 3.4 mbpd.

The IEA said new supplies outside OPEC should rise +1.3 mbpd in 2015 after a +1.9 mbpd rise in 2014. They only expect U.S. production to rise +685,000 bpd but that may be wildly optimistic. This production is from projects already underway that can't be cancelled. For instance there are several deepwater Gulf of Mexico projects that will begin production to add about 300,000 bpd. These multibillion dollar projects have been in the development stages for years.

The IEA expects the demand for OPEC crude to decline -300,000 bpd to 28.9 mbpd. The current OPEC production quota is 30.0 mbpd and they produced about 3.42 mbpd in November. That was down about 400,000 bpd from October.

OPEC is paying the price for 4 years of $100 oil. When prices were high producers spent their extra cash on new wells to increase production even more. They basically overdosed on the large profits and overspent on new equipment, new wells and new government spending on social programs. With that revenue cut in half they can't afford to cut production now because that will further reduce income. To put it bluntly they are in trouble.

Russia is in serious pain. They are commonly referred to as a first rate military with a third world economy. With 9 mbpd in production the revenue funds the military and allows Putin to project force around the world. With that revenue cut in half and the Ruble, or should we say rubble, crashing into oblivion and Russia in recession and sinking fast we could see another debt default on the horizon. So much for the New Russia that Putin was trying to build. A funny thing happens to dictators that run out of money. They tend to be removed from power. We are about to see that in Venezuela. President Maduro is circling the drain. Inflation is rampant. Revenue is nonexistent. He and Chavez before him have nationalized any business that made money and there is nothing left. The 44% drop in oil revenue is the final straw and the country could implode any day now.

The IEA upgrades their demand forecast every month. It is a moving target. Long term I don't give it much credibility. For instance U.S. citizens each consume an average of 23 barrels of oil per year. The average Indian consumes 3 barrels per year and the average Chinese citizen consumes only 1 barrel. China's economy is now bigger than that of the U.S. and still on track to grow by 7% in 2015. They are the largest car manufacturer with more than 20 million cars a year and growing. They have 1.3 billion people and 1.0 billion are trying to move from an agrarian economy into the 21st century. Their oil demand is going to explode over the next several years. They currently import about 8.0 mbpd and they produce about 4.5 mbpd. If Chinese consumption rose only 1 barrel per person in 2015 they would need twice the 12.5 mbpd they consume now. That is not going to happen in 2015 but it is going to happen over the next several years. China is an emerging economy turning into a developed economy and their oil consumption could double by 2020. India is just like China only growing at a slightly slower pace.

Unfortunately the world's excess production is not going to double in the same period. We are going to be looking back at this oil crash several years from now in amazement and wishing we had mortgaged the home, farm and kids to buy energy stocks.

A trader made a $2 million bet on oil on Thursday that could return $10.9 million. The trader bought 14,500 of the March 53/62 call spreads on the XOP for $1.50 each. That cost $2.2 million. The SPDR Oil & Gas Exploration ETF (XOP) has to close over $54.50 by March expiration to be profitable and over $62 to earn the maximum $10.9 million profit. The XOP closed at $44 on Friday so it has to rise +23% just to break even. The high on November 21st was $63. This trader is betting a lot of money the hysteria will fade and crude prices will rally over the next three months.

Deutsche Bank warned that oil prices below $60 could force restructuring in more than one-third of producers. The banking sector is also declining on worries over exposure to energy loans. Five years ago U.S. E&P companies had $300 billion in debt. Today that number is well over $1 trillion. Analysts claim there is $200-$500 billion in high yield debt that is likely to be distressed with oil prices under $65. Some were recommending shorting the XLF with a March timeframe because we should have a clearer picture of the debt problems by March. I think it would be a lot longer than that. Companies selling debt typically go out 5-10 years so the debt increase over the last 5 years probably won't come due until later in the decade.

PNC Financial (PNC) is the second largest regional bank. The CEO said they had about $7.5 billion in exposure to energy including $2.5 billion in outstanding loans. He said they had stress tested the loan portfolio down to $50 without any significant challenges. US Bank said it faced "no material impact" from the oil price decline. They have $2.8 billion in loans to energy companies.

In economic news the Producer Price Index (PPI) declined -0.2% in November. That should be no surprise with the drop in energy prices. The price of goods fell -0.7% with core goods down -0.1%. Energy products declined -3.1% and gasoline declined -6.3%. Finished goods prices declined -0.7% and the biggest drop since July 2009. There is no inflation pressure at the producer level with the trailing 12 month number at +1.4% compared to +2.1% back in May. Next Wednesday we will get the Consumer Price Index (CPI) and I expect it to decline as well.

Consumer sentiment for December exploded higher by a whopping +5 points from 88.8 to 93.8. That is the highest level in more than 8 years since July 2005. The expectations component rose from 79.9 to 86.1 for the majority of the headline gain. The present conditions component was still strong with a rise from 103.7 to 105.7 and the highest level since February 2007.

The combination of job growth and falling gasoline prices is lifting consumer spirits during the holiday season. Gasoline prices fell to $2.60 nationwide on Friday with analysts now expected prices to be between $2.40-$2.50 by the end of December. That will spread a lot of holiday joy. Gasoline prices have now declined for 78 consecutive days. November marked the sixth straight month that sales at gas stations declined. That is the most since 1998.


For next week the highlight is of course the FOMC meeting on Tue/Wed. With oil crashing to 5 year lows, China, Japan and Europe adding stimulus there is no way the Fed is going to be able to raise rates in the near future. The only focal point for the Wednesday announcement is the "considerable period" statement. Nearly everyone believes it will be changed but what they replace it with is the key question. It will probably be some form of "data dependent" language.

Bill Gross said there is a slim chance the Fed will change the language after the crash in oil prices. "Why would they start to eliminate language that talked about an extensive period of time when the U.S. itself is, not deflating but disinflating, and certainly not moving in the direction of its 2 percent target? The sharp decline in the price of oil has disoriented markets and changed the perception of the creditworthiness of companies and countries."

The CPI also on Wednesday is likely to show declining inflation and that will weigh on the FOMC decision.

The Philly Fed manufacturing survey on Thursday will be the proxy for the rest of the regional reports until the ISM in early January. Note that the forecast is for a significant decline from 40.8 to 22.0 and that could be negative for the market.


Stock Split Calendar - No new splits announced.


The market implosion and the crash in oil prices have sent a lot of money into treasuries. The yield on the 10-year closed at 2.1% and analysts are projecting sub 2% levels next week. The drop in all commodities not just oil is creating deflationary pressures that are starting to scare some investors. Copper declined to $2.80 an ounce the prior week and copper is widely considered to be the best indicator of future economic activity. Iron ore is sinking, cotton has gone from $2 to 60 cents. Coal has fallen from $67 a ton to $54 since May. Falling commodity demand is a sign of deflationary pressures and bonds are benefitting.




Gasoline futures closed at $1.59 on Friday and the lowest level since mid 2009. While low gasoline prices are good for consumers it is bad for some corporations. As individuals we can dance a jig around our cars while filling up with cheap gas but some corporations are seeing their stocks decline on the news.


For instance Dow component Boeing has seen its share price fall from $135 to $120 over the last three weeks. Investors are worried that oil producing countries no longer have the cash to pay billions for new fleets of airliners. Boeing has sold more than $25 billion in aircraft to countries that depend on oil for a substantial portion of their revenue. Will those countries cancel those orders? Will other countries place new orders?

Boeing has been selling billions in new planes that are more fuel efficient. If jet fuel is so cheap how will that impact the need for airlines to spend extra for those new planes?


On the flip side the extra $50 to $100 per month in gas savings for consumers will mean an immediate boost in traffic for fast food and casual food restaurants as well as retailers like Target, Macy's and Walmart. It will be interesting to see if Walmart's monthly sales continue to decline or will the gas cash boost give them a lift in December.

Fast food restaurants that should see a boost in sales include Jack in the Box (JACK) parent of Qdoba, Red Robin (RRGB), Burger King (BKW), Chipotle Mexican (CMG) and BJ's (BJRI). Of those companies JACK is performing the best. Cracker Barrel (CBRL) already said sales were up +5% because of more traffic on the highways producing more customers.


Sherwin Williams (SHW) was in the news on Friday after the company provided conservative guidance for full year 2014. They also provided initial guidance for 2015 that was weaker than analysts expected. The company said 2014 revenue would rise +9% to $11.10 billion. They guided for earnings in the $8.75 to $8.80 range and analysts were expecting $8.81 and $11.18 billion. They guided to $1.35 for Q4 and analysts expected $1.39. For 2015 they guided to earnings of $10.65-$10.85 and below estimates for $10.90. Midpoint revenue guidance for 2015 of $12.1 billion was higher than analyst estimates at $11.93 billion. The company said acquisition costs for Mexican paint retailer Comex were weighing on earnings. Shares fell -3% on the news.


Nuskin (NUS) lost -6% after guiding to lower expectations for 2015. The company projected full year earnings of $3.80-$4.00 on revenue of $2.55 billion. Analysts were expecting $4.15 on revenue of $2.55 billion. On a positive side they received approval to begin selling in five districts in Shanghai and two cities in Jiangsu Province, China.


Nuskin and Sherwin Williams are just the leading edge of a problem we are going to face over the coming weeks. We have already seen several companies warn about the strong dollar impacting sales and with economies in Europe, Japan and China weakening that will also depress overseas sales. S&P companies derive about 50% of their earnings from overseas. We are moving into the Q4 warning cycle and companies are starting to give 2015 guidance as well. Based on the guidance warnings above and some we have seen in the last couple of weeks it would appear we are heading into a potentially rough warning season.

Esterline Technologies (ESL) reported adjusted earnings of $1.82 compared to analyst estimates of $1.87. Revenue of $548.1 million also missed estimates of $557.2 million. Shares collapsed -12% on the news.


U.S. corporations are also fighting a losing battle on another front. The cost of cyber warfare is skyrocketing and for every attack that makes the headlines there are thousands that don't make it into the press. Billions of dollars are being spent to slow down hackers. The attacks can't be prevented but they can be moderated by throwing a lot of money at the problem.

The hacking problem just keeps getting worse. We are just now getting the details of the hacker attack on the Las Vegas Sands (LVS) back in February. On the morning of February 10th computers all over the LVS network were dropping offline with their hard drives wiped clean. Email was down, phones did not work and technology systems that ran most of the gaming operations had died. Engineers quickly found that a cyber attack was underway and the attackers were deleting the hard drives of every computer on the network. Engineers ran throughout the building and gaming floor of every Sands property disconnecting every working computer from the network. Even their multimillion-dollar storage system that contained all the archived records was wiped out. Sands Details

The Sands managed to keep the full extent of the hack private for 10 months and the details just came out recently. The cyber sleuths determined the hack was coming from Iran. Sheldon Adelson, 52% owner of LVS, is one of Israel's strongest supporters and friend of Prime Minister Benjamin Netanyahu. He gave a speech in October 2013 about Iran and nuclear weapons and explaining how he would handle the ongoing nuclear negotiations. It was a tough speech and it landed on YouTube almost immediately. Iran's Supreme Leader Ayatollah Khamenei said America "should slap these prating people in the mouth and crush their mouths."

The hackers spent a month trying to secretly break into a small Sands casino in Bethlehem Pennsylvania. On February 1st they found a weak spot on a web development server at the Bethlehem casino. Once inside the network they spent over a week collecting passwords and mapping out the network. On Feb 9th they found a username and password of a senior systems engineer from company headquarters that he had used on a visit to Bethlehem. That allowed them into the servers in Las Vegas and the rest is history.

The hack destroyed thousands of servers and PCs before the network could be shutdown. The Sands has over 25,000 computers. The company estimated the attack cost them more than $40 million.

This was small change compared to the attack on Saudi Aramco that wiped out more than 30,000 computers and process control systems in 2012. The attack on Sony Pictures over the last two weeks is ongoing and the damage is still being discovered. The names, addresses and social security numbers of 47,000 employees, contractors and actors were stolen and posted on the Internet. Thousand of computers remain offline for fear that connecting them to the network will risk reinfecting them. Sony said it could be 2-3 months before operations can be restored. The Sony attack has now been traced to a hacker group known as DarkSeoul, which is believed to be a group that works for the North Korean government.

With Iranian, Korean and Russian hackers known to have infiltrated the U.S. electrical grid and with their ability to destroy computers at will when they decide to take action the future is grim. It is only a matter of time before the U.S. does something that aggravates one of these entities and they attack our infrastructure. Knocking out a few computers on the grid is no more difficult than killing thousands at the Sands, thousands at Sony or 30,000 at Saudi Aramco. We are heading into dangerous times. The attacks will grow and the lack of a material response will embolden the hackers to try even bigger attacks.

On Friday the FBI sent out a flash memo claiming Iranian hackers were currently targeting defense contractors, energy firms and educational institutions. The flash report contained technical details about the attacks and advice on how to thwart the invasion. The memo claimed Iran's government was behind the attacks.

Here is a list of the worst hack attacks of 2014. Worst 2014 Attacks

Market

Last week was ugly. There is no other way to state it. Analysts, including myself expected the market to be bullish because of the historical trends for December. Apparently the market was not paying attention to the calendar.

The Dow lost -678 points for the week, the Nasdaq -127 and the S&P -73. Critical support levels were broken and analysts were left scratching their head over market direction next week. Many analysts blamed the decline on oil prices and I am sure that was a factor. Others blamed it on tax loss selling and that could have been made worse by the drop in oil prices. There were definitely a lot of energy stocks being sold last week. Others felt the market was rolling over because of the economic weakness overseas, the election in Japan, worry over the FOMC meeting next week and a potential government shutdown.

I don't see the FOMC meeting as a problem. They can't do anything but change the language slightly. I think that worry is overblown.

The election in Japan could be a problem if the snap election called by Prime Minister Shinzo Abe does not turn out as he expects. He called the election after the Q3 GDP came in weaker than expected and Japan had slipped back into a recession. Abe is hoping the election will be a vote of confidence on Abenomics, a three pronged policy of monetary easing, public spending and structural reform. Abenomics is the last hope for Japan's struggling economy and its massive debt. If Abe were to lose the election it could prompt a global sell off. Japan is a bug in search of a windshield with debt at 220% of GDP. The election is widely expected to be decided in Abe's favor but there is always risk.

The House finally passed a bill to fund the government by 219-206 after Democrats tried to scuttle the bill to preserve portions of the Dodd Frank regulations. The bill went to the Senate where it failed to come up for vote on Friday and they will reconsider it on Monday. The president has already said he would sign it so the press is ignoring potential deadline miss. The market was not so sure there would not be a repeat of the last government shutdown that caused a serious market decline. To avoid a repeat the House also passed a second temporary measure that would prevent a shutdown until the larger budget bill is complete. The stop-gap funding bill will extend funding until next week. The first temporary measure extended funding from Thursday until Saturday at midnight. The Senate is expected to vote on that on Saturday.

Regardless of the reason the market declined sharply and threw the month of December into uncertainty. Fund managers don't know whether to buy or sell on Monday. Do they protect profits and close positions or take advantage of the opportunity to buy more?

The S&P has crashed back from last Friday's high at 2,079 to close at 2,003 this Friday. A -76 point decline in one week on the S&P is brutal. That erased the gains made since October 30th.

The 50-day average is 2,000.78 and traders are counting on that being strong support but that was not the case in the October crash. The next material support is the 1,985 level and the 100-day average at 1,987.

Since we have already wiped out the potential for another new high before the end of December I would like to see a decline to that 1,985 level to flush out any remaining weak holders before January. I was expecting a sales event in early January but this drop could take the place of the January event if it is deep enough. In theory that would leave the entire first quarter open for gains as long as the Q4 earnings and 2015 guidance didn't get in the way.

Unfortunately I believe investor sentiment has been damaged. We had several attempted buy the dip rebounds that failed and now traders are going to be more cautious about catching another falling knife.

Short term resistance is 2,025 and 2,055.


The Dow closed at 17,280 and just above the 50-day at 17,267 but the Dow is not really reactive to averages because of the impact of single stocks on the narrow 30 stock index. The 678 point drop (-3.78%) erased 25 trading days of gains. It was well overdue but the drops are still painful. Markets tend to take the stairs up and the express elevator down.

All 30 Dow stocks closed in the red with Visa, the largest weighting in the Dow, losing -6.34 points and the equivalent of more than -50 Dow points. IBM and Goldman Sachs were close behind with losses equivalent to more than -80 Dow points.

Support on the Dow is 17,130 and possibly the 100-day at 17,096.



The Nasdaq Composite chart is a joy to behold. Unlike the Dow and S&P the Nasdaq actually stopped at support at 4,650 and well above the corresponding averages being tested on the other indexes. It was still a nasty decline of -2.6% but well within the realm of reasonableness especially when compared to the Dow's -3.78% decline.

Dip buyers should be looking at the Nasdaq chart with excitement ahead of Monday. The support is clear enough that even a novice trader should see it. The challenge here is Apple. Shares have declined -$10 over the last two weeks and support at $110 is being threatened. If Apple continues to slide it will drag the Nasdaq along with it.


The second problem is Google (GOOGL). Shares of Google are testing support at $520 and the trend does not look promising. A break below $520 could suggest a longer term retest of $425. We do not want to see that because it could be a major drag on the Nasdaq for weeks to come. Google is expected to miss on Q4 earnings and the worry is dragging down the stock.


If support at 4,650 fails the nest likely support point is 4,605. Initial resistance if 4,705 followed by 4,760. We can only hope that level is tested again next week.



The Russell 2000 declined -3.4% but did not break support at 1,150. I view this as a major achievement given the 195 energy stocks in the Russell. We are approaching the historical period where small cap stocks shine. Late December and January are typically the best period for the R2K. Historical trends have not played out well this year so it is a tossup on whether we are going to see a miraculous recovery here. However, I see the failure to break below support as a positive sign.


Despite the -315 point decline in the Dow on Friday the advance/decline ratio was only 3:1 in favor of decliners on volume of 7.6 billion shares. There was no panic selling. This was calm and orderly and the volume was just slightly higher than normal. The VIX barely broke 20 and that level is normally considered a signal to buy.

I want to be bullish on stocks for next week because we are now oversold and next week is quadruple expiration. That normally produces a bullish week. However, as I said in past commentaries having Europe, Japan and China all declining at the same time is a serious counterpoint to historical trends. The falling oil demand in Europe, Japan and China is proof the countries are slipping away economically. Yes, China did have lower oil demand in November even though they have a record number of tankers heading in their direction.

I think investor sentiment has been damaged. The buy the dip gang has been successful for the majority of the last two years. The volatility over the last week with alternating spikes and declines may have exhausted their patience and made them a little gun shy. It would be nice to have a day with a minor decline and a narrow range to reenergize the dip buyers.

However, there is a good possibility the equity markets are starting to catch the deflation flu. Everyone always says "this time is different" or "the U.S. has decoupled from overseas economics" but in reality we always seem to catch whatever economic flu is circulating around the world. We may not react as negatively but that does not mean we should be constantly making new highs while the rest of the world is sinking. For 2014 the U.S. markets did relatively well considering the global economic weakness. The U.S. market is up an average of +9% while the rest of the world is down an average of -7%. We were the best house in a bad neighborhood. Unfortunately as the neighborhood continues to decline the value of the best house will also decline. More than $1 trillion in value was erased from global equity markets last week.

The Europe, Australia, Asia and Far East ETF (EFA) declined to two-month lows on Friday with most of the losses coming from Europe. The Russian ETF (RSX) is collapsing as a result of the drop in oil prices and the currency. These charts make our markets look very strong.



Lastly this chart compares the S&P in black to the Vanguard FTSE All-World ex-USA ETF (VEU) in red. Clearly the rest of the world is doing significantly worse than the U.S. and while we may have temporarily decoupled the odds are good we are about to follow the rest of the world lower in the months ahead.


For more than three years now the S&P has been moving steadily higher with only minimum declines until October. We have only touched the bottom of the channel three times since October 2011. We are due for a return to the bottom of the channel and in reality we are due for a breakdown below that channel. The 50-week average has been support/resistance for a long time. It was pierced briefly in October but averages don't rise forever. There is a support break in our future.

I am not expecting it next week but definitely in 2015 and probably early in the year. As the market begins to worry about rate hikes in Q2 we could see some increased volatility. I am pointing out the potential for a retracement to 1,800 or even lower to caution readers to always be aware that some future dip may not be bought. After three years of gains we tend to forget that markets also go down and they don't always need a reason.


Another way to look at the divergence in the markets is with the High Yield ETF (HYG). Typically this ETF trades in tandem with the S&P. Since earlier this year the index and the ETF have diverged significantly and accelerating. The high yield debt market is collapsing. Eventually the S&P will follow.


Last week somebody bought 50,000 January $20/$30 VIX call spreads at a cost of $1.60 each or roughly $8 million. That is a bet that the VIX will rise significantly higher than 20 over the next five weeks. That is an extremely confident investor. A similar thing happened before the October crash. Somebody may know something we don't like a major fund liquidation is about to occur. When people bet extreme amounts of money on a market timing play I definitely take notice. They can lose money if they are wrong but very few hedge funds will bet $8 million on a five-week speculative trade.


I am going all in on oil stocks this weekend. Like the fund managers I mentioned earlier I think this is a major long term buying opportunity. However, we need to be prepared for oil to decline even further. I view $53-$55 as the bottom. That is a 50% retracement from the highs. Oil crashes tend to go to extremes so anything is possible. I think investors are astute enough to see the beginning of a change in posture by energy companies. The drop in rigs, the cancelling of the Enterprise pipeline and capex cuts from major energy players all point to lower production 6 months from now. Also, with Brent at $61 there is a lot of pain in OPEC. I would be really surprised if we did not see an emergency production meeting in the near future. The announcement of a new meeting would be the starter's gun on an oil rebound. I want to be invested before that happens.


(Be sure to check the bottom of this commentary for a special offer.)


Random Thoughts

In what may have been the worst trade in the last 40 years Ron Wayne, a cofounder of Apple, sold his 10% stake in the company for $800 and put the money in gold. He is now 80 and currently living off social security and selling some early Apple artifacts in a Christies auction for extra money. He said he will put that in gold as well.

If he actually bought gold when he sold his shares that gold would be worth $1,750 today. If he had kept his 10% stake in Apple it would be worth $64.4 billion. However, he was twice as old as Jobs and Wozniak and said if he had stayed at Apple he would now be the richest man in the cemetery. He said Jobs and Wozniak were a "whirlwind" and he never regretted his decision to leave. When he joined the pair it was to give them some adult supervision but they were too much for him to work with.

Apple shares went public in 1989 at a split adjusted price of $1.26.


Want to buy a cheap iPhone 6? Head on down to Walmart where they have the base model on sale for $129 with a 2-year contract from either AT&T, Verizon or Sprint. That is $50 less than their normal price and the cheapest price on the Web. If you want the 6 Plus it will cost you $229, down from $279. The 5S is $49 and the iPhone competitor Galaxy S5 is $79, down from $139.

Walmart is battling to get people into the stores and away from their computers where Amazon rules the retail world. Having the cheapest prices on iPhones is one way to do it.

Did you know that the top 25 U.S. banks currently hold more than $302 trillion in derivatives contracts? Those same banks have a total of about $14.1 trillion in assets. We saw what happened to AIG in the financial crisis when counter parties to their derivatives holdings started demanding payment. It was a disaster and the government had to step in and cover those payments to prevent a total system meltdown.

You have to wonder what would happen if we had another meltdown in credit, options, futures, commodities, etc. How would 14.1 trillion in assets cover $303 trillion in liabilities? Wait, we are seeing a meltdown in the biggest commodity of all, oil. With the potential for oil prices to fall to 50% of their highs next week that has got to be stressing the bank positions. Those 25 banks hold more than $20 trillion in futures and options contracts.

Obviously we hope these banks have hedged themselves in some way against a pricing disaster that impacts their holdings. Surely they learned a lesson from the AIG crash. Also, there have to be offsetting positions where they are long a commodity to one party and short that same commodity to another party. The banks take a commission on the trades and in theory they lay off the risk on other parties. Unfortunately Albert Einstein once said, "In theory, theory and practice are the same. In practice they are not." What looks good on paper most often turns out badly in reality.

When a bank is called to cover a derivative and they turn to their counter party on the opposite side of the transaction they have no assurance that party will be liquid at the time and that puts the onus back on the bank.

The top 25 banks hold these derivatives.

Exchange Traded Futures $9.479 trillion
Exchange traded Options $11.296 trillion
Over the Counter Forwards $50.259 trillion
Over the Counter Swaps $176.571 trillion
Over the Counter Options $39.675 trillion
OTC Credit Derivatives $15.363 trillion
Spot FX contracts $2.561 trillion
Total $302.526 trillion.

Top Five Banks

JP Morgan $68.326 trillion
Citigroup $61.753 trillion
Goldman Sachs $57.695 trillion
Bank of America $55.472 trillion
Morgan Stanley $44.134 trillion

Does that give you confidence in the stability of the U.S. banking system?

After a lot of research I am ready to post the first summary of 2015 forecasts for the S&P. There are no bears in sight. Every single estimate is higher with 2,100 the lowest so far. After last week there may be some changes ahead. This is sequenced by the 2014 forecast. Those names in pink have revised their 2014 forecasts higher since earlier in the year.


China has offered to help Iraq defeat ISIS but it will not be part of the international coalition. China's foreign minister said their policy does not allow them to be involved in international coalitions. China is the largest foreign investor in Iraq's oil sector. China's support would be in the form of air strikes. With Iraq, China, Iran, Saudi Arabia, Kuwait, several EU nations and the U.S. all bombing ISIS positions. Those skies are going to be really crowded.

This is an interesting chart but it is too big to display in the newsletter. Capital Market Labs put together a list/chart of the top 28 banks that are in serious trouble. Most are in Europe and Asia. Bad Bank Chart

Christmas and New Years gatherings in Sierra Leone have been banned this year because of the Ebola epidemic. Soldiers will be patrolling the roads to enforce a lockdown to prevent travel from spreading the sickness. Nighttime curfews are in effect. All street celebrations have also been outlawed. All public gatherings have also been prohibited. Schools are closed, bars and clubs are closed. Football games have been banned. The WHO said of the 18,000 people that have contracted the virus more than 6,600 have died.

What is more dangerous than Russia and China combined? The answer is a solar storm or coronal mass ejection (CME). There are solar storms all the time but most are not a problem. There have only been a couple in the last 150 years that would have been killers. Those occurred in 1859 and 1921. There are two factors that control the destructive power of a CME. As we follow the path around the sun it is spitting out these CME events every few weeks. However, the earth is only 1 degree of the sun's 360 degree firing line. The sun can fire off CME events in any direction at any time. The only ones that impact us as the ones where the coronal mass is ejected in our direction or more accurately where we will be in 48-72 hours. That is the time it takes for the mass to reach our orbit.

A CME similar to the 1859 and 1921 events could knock out power to the majority of the U.S. for a year or more by destroying the electrical grid. The CME creates a giant electrical surge similar to an EMP that sees the millions of miles of wire in the electrical grid as a giant antenna. The electrical surge builds up in the wires and overloads transformers and fragile electrical circuits. Back in 1859 it melted telegraph wires and set telegraph offices on fire. There was very little electricity back then so there were not a lot of devices to destroy.

If we were hit head on by a G-5 class storm we could be without power for a year or more. It is estimated more than 100 million people would die. There would be no food, no gasoline, no water, no electricity, no banking, no salaries, no medical care for a year or more. The transformers are built in China and it would take years to replace all those that could be burnt out.

I am bringing this up because Congress is finally going to do something about it. There is a committee that has finally begun the effort to protect the grid by spending billions on new infrastructure and mandating that utility companies maintain certain standards that will make the grid EMP/CME proof. While I doubt it will happen in my lifetime it is a start. It could take a decade or more once the law is actually passed to make the changes. Read More Here

In the last 100 or so years there has only been one girl born in my family. That is my daughter Jessica. We welcomed her third son into the world a couple weeks ago and while she was really wishing for a girl I think this one is a keeper. This is my fourth grandson, Grayson, age 2 weeks. Yes, I am a proud grandpa.


Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2015. You will not be disappointed!

Only 11 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"On a long enough timeline the survival rate for everyone drops to zero."

Fight Club 1999

 


Index Wrap

Brakes Locked, Market Then Skids

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

After repeated highs in the same areas the major Market Indices finally succumbed to a swoon. This is what happens in overbought markets as corrections come eventually. This current short-term bearish dip could next morph into an intermediate trend pointed down by the Indices dropping below indicated support levels suggested on my charts below.

An indication of the sea shift this past week was seen in the S&P Volatility Index, VIX, which shot up to 21.1 from 11.8 the week before. The Nasdaq 100 Volatility Index (VXN) went from 14.4 to 22.5 from Friday to Friday, which classifies as a spike higher.

The charts were showing, in the all the major indexes, repeated highs in the same area and what (Charles) Dow called a line formation. Such leveling off of prices after a prior very strong run up that created high Relative Strength Index (RSI) readings is a correction 'waiting' to happen so to speak. Sometimes the wait can be long! Sometimes relatively short as in this most recent tradable dip.

Technical Analysis 'works' on the principle that the overall actions of the Market 'forecasts' many NEXT moves such as trend corrections or an acceleration of an existing trend. In our current Market the aforementioned 'line' formations, coupled with overbought RSI readings was in turn coupled with periodic and relatively HIGH bullish sentiment readings; all together these were pointing to this most recent dip in stocks, brought on as it turns out by the sharp drop in oil prices.

If it wasn't the accelerating oil price decline to create Market pressures, it (the 'bearish factor') would have been something else since price and indicator patterns were suggesting that stocks had hit peak levels for now. Chart and indicator patterns suggested SOMETHING was coming that would drag stocks down. We didn't have to know that that 'something' was an oil price shock, but we had help in Jim Brown's oil analysis.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500

(SPX) saw a bearish break below it's 21-day moving average this past week which suggested a further move lower which was acutely illustrated on Friday. The short-term trend turned lower with the break below 2050-2055. The intermediate trend is mixed. Long-term trend no change: up.

SPX could easily dip to 1980 or to around 1950 at a potential conclusion of this down price swing.

Upside resistance, at what was previously technical/chart 'support', is highlighted in the 2055 area, with resistance/selling interest extending to 2075.

This past week's fall was enough to bring the RSI from an overbought extreme to the beginnings of an 'oversold' condition. Bearish sentiment readings have increased per my CPRATIO indicator at bottom, but have not yet seen a 1-day or more extreme. The last major bottom (mid-Oct) was accompanied by an 'extreme' in bearishness. We haven't seen the same yet on the current decline.

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) broke under key technical support at 910, at the 21-day moving average and from then we have an accelerating decline coming into Friday. This was all fairly predictable once OEX kept hitting highs in the SAME area, suggesting the Index was probably 'fairly' valued or at the top of its value range in the eyes of big money managers.

After a period of stalled upside momentum, following a very strong 6-week rise, it wasn't surprising to see this recent fall on profit taking and speculative shorting as the market was overvalued. The Market tends to swing from under to over-valued.

880 is a next anticipated OEX support; we then have highlighted a possible next target to 870-868 or taken as a lower 'support'. Key near resistance, at the recent 'breakdown' point, is at 900, with likely resistance extending to 910.

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 Industrial Average (INDU) finally stopped its mini 'solitary walk of the Dow' as its 30 monster-cap stocks continuing moving to new highs for a time contrary to the stalled S&P.

A key turn technically was when INDU decisively pierced 17800, which had been support on the apparent continued march higher in the Industrials. The drop below the 21-day moving average was the next telling development technically. Trade ABOVE this key trading average tends to 'define' the short-term trend as UP; trade BELOW this key trading average marks the short-term trend as bearish.

I've calculated potential support/buying interest coming in at 17200-17175 and next at 17000, which should mark the beginning of fairly major support.

I've been expecting a fall and I expect more but in the way of measuring these things not necessarily a reversal of the intermediate-term trend. I see the end of this fall as setting up another buying opportunity, which is appropriate in a long-term bull move.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is mixed in its pattern since short-term upside momentum has reversed from up to declining.

The chart and indicator pattern suggests that COMP may fall further. My downside objectives and potential support points are noted at 4600 with next support projected at 4510-4500. I anticipate tech stocks holding values better than the S&P currently and don't see for example 4400, at my lower trading 'band' or envelope line, as a target.

Key near-term resistance is at 4700, extending to the 4750 area.

COMP now appears headed toward a lower 'oversold' reading in terms of my preferred momentum indicator, the Relative Strength Index. From extreme to extreme, the Market we know and love from a trading opportunity perspective!

NASDAQ 100 (NDX); DAILY CHART:

The NDX chart has seen a reversal in its short-term up trend, which isn't too surprising after the 6-week gains that preceded the recent sideways trend; which in turn 'set up' declining momentum, tipping then into a sharper sell off.

Anticipated support points are highlighted (with the green up arrows) at 4150, then at 4100. I can envision NDX winding up getting to or near 4100 as a low but not much below that. 4000 is the beginning of expected major support. Key overhanging resistance is seen at 4300-4320.

I noted in my initial 'bottom line' comments above how the Nasdaq 100 Volatility Index (VXN) shot up over the course of last week from the prior week's reading at 14.4 all the way to 22.5 at the most recent Friday Close. A sharp spike of 9.3 points! VXN may go still higher if NDX 4200 is decisively penetrated and panic selling comes after. At some point a very high level in VXN suggests potential for an upside trend reversal.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ chart has the same developing bearish trend as the underlying NDX. Key prior support was at 104, now highlighted as initial expected resistance; next key resistance comes in at 105-105.5

102 is anticipated next support, with the low-100 area to 100 even as the low end of any downswing I currently envision. I'd love to cover short positions in the stock in that area.

Per my suggested QQQ short in the 105-106 area; last week I suggested a lower (buy) stop to 107. This week I suggest a lowering this stop further to 105. My current objective is for a decline into the 102-101 zone.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has been trending sideways between 1160 and 1190. The weekly Close below 1160 suggests further downside ahead as momentum looks to be down in the near-term, next 1-2 weeks.

Resistance is highlighted at 1180, extending to 1190. Potential technical/chart support is seen at 1140, then at 1120. I'd be a buyer in the 1109-1120 area.

I anticipate RUT continuing to have broad two-sided price swings, and tend to evaluate bullish strategies and positions when the Index is at an 'oversold' RSI extreme and bearish strategies and positions when the Relative Strength Index is up at a typical 'overbought' extreme.


GOOD TRADING SUCCESS!




New Option Plays

Underperforming The Market

by James Brown

Click here to email James Brown

Editor's Note:

We are adding a put play tonight.

If you are looking for bullish candidates consider FRGI and JACK. Both are restaurant stocks. Falling fuel prices mean consumers have more money to spend on dining out.



NEW DIRECTIONAL PUT PLAYS

Arrow Electronics - ARW - close: 56.06 change: -1.35

Stop Loss: 57.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 585 thousand
Entry on December -- at $---.--
Listed on December 13, 2014
Time Frame: Exit PRIOR to January option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
ARW is in the services sector. The company sells electronic components at the wholesale level. The company describes itself as "a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions. Arrow serves as a supply channel partner for more than 100,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of more than 460 locations in 58 countries."

Most of this year ARW has been reporting results that beat Wall Street's bottom line estimates but they kept missing the revenue number. That changed with their Q3 results when ARW reported on October 29th. ARW managed to beat estimates on both the top and bottom line with revenues up +11% from a year ago. Management offered relatively bullish guidance. Yet the stock did not react. That appears to be the mystery.

ARW's share price performance immediately slowed down following its Q3 report. You can see on the daily chart below that ARW plunged with the market's correction in September and October. Yet while the S&P 500 lost about -10% during that pullback shares of ARW lost more than -25%. When the market started to bounce ARW followed but its rally stalled after its Q3 report. The S&P 500 and the NASDAQ continued to rally and broke out to new highs for the year. ARW was unable to follow suit. Now the stock appears to be reversing after a failed rally at round-number resistance near the $60 mark.

With the new lower high there is a good chance the weakness in ARW continues. The stock never reversed its massive sell signal on its P&F chart. Tonight we are suggesting a trigger to open bearish positions at $54.75. More aggressive traders may want to jump in earlier (like a drop under $56.00) but we would like to see ARW trade below its simple 50-dma (currently $55.22).

Trigger @ $54.75

- Suggested Positions -

Buy the Jan $55 PUT (ARW150117P55) current ask $1.35

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

Daily Chart:



In Play Updates and Reviews

Locking In Potential Gains On SHW and SMH

by James Brown

Click here to email James Brown

Editor's Note:

SHW and SMH hit our new stop losses during the market's widespread sell-off on Friday. Both were strong performers for us.

HAIN wasn't quite so strong and also hit our stop on Friday.

We are updating our strategy on the DIN trade.

Don't forget that normal December options expire in five days.


Current Portfolio:


CALL Play Updates

DineEquity, Inc. - DIN - close: 99.82 change: -0.11

Stop Loss: 97.35
Target(s): To Be Determined
Current Option Gain/Loss: +275.0%
Average Daily Volume = 154 thousand
Entry on November 05 at $91.55
Listed on November 04, 2014
Time Frame: Exit PRIOR to December 20th option expiration
New Positions: see below

Comments:
12/13/14: DIN continues to hold up really well in spite of the market's worst week in years. The stock looks poised to breakout higher but it's been stuck at the $100 mark. We are starting to worry that further market weakness might finally drag DIN lower. Therefore we will boost our gains by selling the December $100 call, which currently has a bid/ask of $1.00/1.30. We'll collect an extra $1.00 on this trade and reduce our risk.

If DIN hits our stop loss (currently $97.35) then we want to exit both positions. We'll also need to close both call positions on Friday, December 19th, since these options will expire on the 20th.

Trading note: You will want to "sell to open" the DEC. $100 call. Once filled we will be short the DEC. $100 call and long the DEC. $ 95 call. This will cap our potential gains but also reduce our risk by reducing the cost of our initial trade.

Earlier Comments: November 4, 2014:
Restaurant stocks were showing relative strength today. Better than expected earnings results from the likes of Red Robin (RRGB) and Bloomin Brands (BLMN) helped buoy the group. Additional stocks in this industry showing relative strength on Tuesday are: BWLD, PNRA, JACK, EAT, SONC, TXRH, KKD, DNKN, CAKE, DRI, and PBP. The one we like tonight is DIN.

According to a company press release, "Based in Glendale, California, DineEquity, Inc., through its subsidiaries, franchises and operates restaurants under the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,600 restaurants combined in 19 countries, over 400 franchisees and approximately 200,000 team members (including franchisee- and company-operated restaurant employees), DineEquity is one of the largest full-service restaurant companies in the world."

The company has seen success with a steady improvement in earnings. DIN has beaten Wall Street's estimates on both the top and bottom line three quarters in a row. Their most recent report was October 28th. Analysts were looking for a profit of $1.05 a share on revenues of $157.2 million. DIN served up $1.14 per share with revenues climbing to $162.85 million.

The company saw domestic system-wide same-store sales up +2.4% at IHOP and +1.7% at Applebee's. Management then raised their sales guidance on both Applebee's and IHOP. DIN also raised its dividend by 17% to $0.875 per share and they boosted their stock buyback program from $40 million to $100 million.

The restaurant industry should be a major beneficiary of the drop in oil prices. Lower gasoline prices at the pump mean consumers have more spending money and will likely burn a lot of that cash eating at restaurants.

Shares broke out to new highs on this earnings report and bullish guidance. Today the stock is at all-time highs. The point & figure chart is bullish and forecasting a long-term target at $118.00.

Tonight we are suggesting a trigger to launch bullish positions at $91.55.

- Suggested Positions -

Long DEC $95 call (DIN141220c95) entry $1.20

Also consider selling the December $100 call (expires Dec. 20th)
Short DEC $100 call (DIN141220c100) current bid/ask $1.00/1.30

12/13/14 Sell the Dec. $100 call on Monday, Dec. 15th
12/10/14 new stop @ 97.35
12/06/14 only two weeks left on our December options
11/29/14 new stop @ 96.85
11/26/14 new stop @ 94.85, traders may want to take profits here!
11/22/14 new stop @ 93.85
11/19/14 new stop @ 92.75
11/13/14 new stop @ 92.25
11/12/14 new stop @ 91.45
11/08/14 new stop @ 89.65
11/05/14 triggered @ 91.55
Option Format: symbol-year-month-day-call-strike

chart:


F5 Networks - FFIV - close: $130.55 change: -1.84

Stop Loss: 129.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 965 thousand
Entry on December -- at $---.--
Listed on December 11, 2014
Time Frame: Exit PRIOR to earnings on January 21st, 2015
New Positions: Yes, see below

Comments:
12/13/14: The stock market's pullback accelerated again on Friday. Shares of FFIV followed the market lower with a -1.3% decline. The stock did find some support near $130 but FFIV is in jeopardy of breaking down under its trend of higher lows if the market continues to sink.

Currently we are on the sidelines. Our suggested entry point to buy calls is at $133.80.

Earlier Comments: December 11, 2014:
It has become a hostile world for corporations and their biggest weakness is online security. It feels like every day we hear about another company getting hacked. Last year the big story was Target (TGT). This year there were several companies, including Home Depot (HD). Just recently the current story is the terrible hacking incident at Sony, specifically their Sony movie studio. Fortunately for FFIV all of this plays to their strength as more corporations seek to beef up their cyber security.

According to company marketing, "F5 provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, and software defined networking (SDN) deployments to successfully deliver applications to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and data center orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world's largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends."

FFIV introduced a host of new products late last year and they have been knocking it out of the park with their "good, better, best" pricing strategy. Earnings this year have been consistently strong. Their report in January 2014 beat earnings on both the top and bottom line and FFIV raised guidance. The company did it again in April and July by beating Wall Street's estimates on both the top and bottom line and raising guidance.

Their most recent earnings report was October 29th, which was the company's fiscal year 2014 Q4 results. GAAP earnings came in at $1.26 a share. That's up 18% sequentially and up +23% from a year ago. Non-GAAP net income was $1.57 a share versus $1.26 a year ago. Their quarterly revenues rose +6% sequentially and +17.8% year over year to $465.3 million. Their fiscal year 2014 saw total revenues up +17% to $1.73 billion.

John McAdam, FFIV's president and chief executive officer, commented on their results saying,

"The fourth quarter of fiscal 2014 was a solid finish to a year characterized by positive customer and partner response to our Synthesis architecture, the array of new products we rolled out in fiscal 2013, our Good Better Best pricing strategy, and the enhanced capabilities of our BIG-IQ management platform... During the quarter, product revenue grew 20 percent from the fourth quarter of 2013, driven by strong sequential growth of Enterprise sales in the Americas and solid year-over-year growth in EMEA and APAC. Contributing to that growth, rising concern over the increasing number and variety of security threats helped stimulate demand for our security solutions and drive sales of our Better and Best software bundles, which include our most popular security products. This quarter, we will expand our portfolio of security offerings with the launch of our WebSafe and MobileSafe anti-malware solutions, available as software modules on TMOS, and Defense.Net, cloud-based DDoS protection that complements our on-premise DDoS solution."

FFIV management issued guidance that was in-line with Wall Street who had finally raised their estimates on the company. Speaking of Wall Street, analysts are bullish on the stock. FFIV has seen several price target upgrades in recent months with numbers like $136, $140, $150, and $151 a share. The point & figure chart is even more bullish with a long-term target of $182.00.

Investors have been consistently buying the dips and FFIV has a bullish trend of higher lows. Today shares are consolidating sideways beneath short-term resistance in the $133.50-133.75 area. Tonight we are suggesting a trigger to buy calls at $133.80.

Earnings are expected on January 21, 2015, so we'll plan on exiting ahead of the report. I don't see any February options available so we'll use the normal January calls that expire on the 17th.

Trigger @ $133.80

- Suggested Positions -

Buy the Jan $135 CALL (FFIV150117C135)

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

chart:


The Home Depot - HD - close: 99.78 change: -0.49

Stop Loss: 97.25
Target(s): To Be Determined
Current Option Gain/Loss: +28.1%
Average Daily Volume = 6.4 million
Entry on December 08 at $100.25
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/13/14: HD actually ended the week with a gain in spite of the market's poor performance. It's worth noting that shares have been struggling with resistance in the $101.00-101.40 area.

Investors may want to wait fro a close above $101.40 before considering new bullish positions.

Earlier Comments: December 6, 2014:
Shares of HD ended the week at an all-time closing high, just below the $100 mark. The company had a bit of a rough start to 2014. They missed estimates on both the top and bottom line when they reported back in February and management lowered their forward guidance. They missed estimates again in May. Momentum changed with their August earnings report as HD beat Wall Street's bottom line estimate and raised their 2015 guidance.

HD appears to be benefitting from the growing U.S. economy. Falling unemployment means more people are working. Homebuilders are feeling confidence. The U.S. is seeing strong housing starts. Consumers are remodeling their homes. The do-it-yourself trend remains strong. HD is starting to see growth in the "connected home" concept, which is part of the Internet of Things (IoT) with remote control garage doors, home monitoring, thermostats, and light fixtures.

HD is in the services sector. According to the company website, "The Home Depot is the world's largest home improvement specialty retailer, with 2,269 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2013, The Home Depot had sales of $78.8 billion and earnings of $5.4 billion. The Company employs more than 300,000 associates."

Investors were keenly focused on the company's latest earnings report, HD's Q3 report, which came out on November 18th. Analysts wanted to know if the massive data breach reported by HD in September would negatively impact sales. It looks like the data breach has been overlooked by most if HD's customers.

Wall Street was looking for Q3 results of $1.14 per share on revenues of $20.47 billion. HD said their earnings per share rose +21% to $1.15 (up from $0.95 a year ago). Revenues improved +5.4% to $20.52 billion. The company said their overall comparable store sales were up +5.2% while inside the U.S. comps were up +5.8%. Online sales surged +40%.

HD gave relatively bullish guidance. They still expect +21% earnings growth in 2015. However, they noted that current guidance does not include any probable losses from the data breach. Last year Target (TGT) was a high-profile company that confessed to a huge data breach where millions of customer credit card data was stolen. This year Home Depot has been another high-profile company targeted by hackers.

HD said approximately 56 million cards may have been compromised. They have since plugged the hole in their cyber security. HD did confess in a recent SEC filing that they are facing 44 civil lawsuits in U.S. and Canada in response to the data breach. In spite of all the bad news investors continue to bid the stock higher.

Since HD's earnings report in November the stock has received several price target upgrades. The point & figure chart is also bullish and forecasting at $110 target.

Friday's November jobs report shows that the U.S. economy could be picking up speed, which would be bullish for HD. It looks like shares are going to breakout past significant round-number, psychological resistance at the $100 level.

Tonight we are suggesting a trigger to buy calls at $100.25.

Interesting factoid: HD's last stock split was a 3-for-2 split back in 1999 in the $90-100 range. I'm not predicting they will announce a new split but you never know.

- Suggested Positions -

Long FEB $105 CALL (HD150220C105) entry $1.21

12/08/14 triggered @ 100.25
Option Format: symbol-year-month-day-call-strike

chart:


iShares Russell 2000 ETF - IWM - close: 114.71 change: -1.41

Stop Loss: 113.75
Target(s): To Be Determined
Current Option Gain/Loss: -11.8%
Average Daily Volume = 40 million
Entry on December 12 at $114.78
Listed on December 10, 2014
Time Frame: exit prior to January option expiration
New Positions: see below

Comments:
12/13/14: We were expecting the IWM to decline toward support in the $114.35-115.00 area. The plan was to buy calls on a dip at $115.00. Friday provided an even better entry point with the gap open lower at $114.78. Although it looks like the IWM still has further to fall. This ETF closed near its lows for the session on Friday. That could mean we see the IWM dip toward its 200-dma and the $114.00 level. Should it fall any farther we'll likely be stopped out at $113.75.

Earlier Comments: December 10, 2014:
The IWM is the exchange traded fund (ETF) that mimics the performance of the small cap Russell 2000 index.

Wednesday proved to be a rough day for U.S. equities. The Dow Jones Industrials were off as much as -285 points near its lows for the session. It closed down -268 (-1.5%). The S&P 500 and the NASDAQ composite also dropped with -1.6% and -1.7% declines, respectively. Small caps tend to be more volatile so it's not surprising that the Russell 2000 index dropped -2.1% on the session.

So why are we adding a bullish trade on the IWM if they underperformed today? Just as the small caps tend to underperform on the way down they also tend to outperform on the way up. We are speculating that the market's current pullback will be over soon. Let me repeat this is a speculative bet that dip buyers are still out there. The average hedge fund manager has drastically underperformed the market this year and is desperate to generate some last minute gains before the year is over. Therefore they are likely to use this market pullback as an entry point for bullish positions.

Tonight we are suggesting a buy-the-dip trigger on the IWM at $115.00. This ETF has found support in the $114.35-115.00 area multiple times in the last few weeks. I would keep positions small to limit risk.

*small positions* - Suggested Positions -

Long Jan $115 CALL (IWM150117C115) entry $2.72

12/12/14 triggered on gap down at $114.78, suggested trigger was $115.00
Option Format: symbol-year-month-day-call-strike

chart:


Starbucks Corp. - SBUX - close: 83.25 change: +0.13

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: + 3.1%
Average Daily Volume = 4.0 million
Entry on December 10 at $83.55
Listed on December 09, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/13/14: SBUX has been pretty resilient this past week. While the broader market was sinking shares of SBUX managed to just hover at all-time highs in the $82-84 zone.

The simple 10-dma (currently $82.25) should be support but if the market sees another spike lower I would not be surprised to see SBUX trade below $82.00. Any dip in SBUX is likely to be a bullish entry point but you may want to wait for a decent bounce first (maybe a +85 cent rebound or +1%) from its intraday low before jumping in.

Earlier Comments: December 9, 2014:
The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results have only been so-so this year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. The good news is that looks like it's about to change.

Five-Year Plan

SBUX recently announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company just launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Wall Street is bullish on the stock. Several firms have upgraded shares recently. Carter Worth, chief market technician at Sterne Agee, thinks SBUX could rally +10% to +15% in the short-term. JP Morgan raised their price target to $89. Goldman Sachs just added SBUX to their conviction buy list with a $95 target. Piper Jaffray has a $100 target. The same analyst at Piper believes SBUX's stock could double in the next four years. The point & figure chart is bullish and forecasting at $105.00 target.

The breakout past its all-time highs set in Q4 of 2014 is very bullish. This pullback is a gift. Tonight we are suggesting a trigger to buy calls at $83.55.

- Suggested Positions -

Long Feb $85 CALL (SBUX150220C85) entry $2.29

12/10/14 triggered @ 83.55
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates


Currently we do not have any active put trades.




CLOSED BULLISH PLAYS

The Hain Celestial Group, Inc. - HAIN - close: 110.26 change: -2.76

Stop Loss: 111.35
Target(s): To Be Determined
Current Option Gain/Loss: -30.6%
Average Daily Volume = 615 thousand
Entry on November 26 at $110.25
Listed on November 25, 2014
Time Frame: Plan on exiting PRIOR to the stock split
New Positions: see below

Comments:
12/13/14: It was bad enough that the stock market produced its worst week all year. The Friday drop in shares of HAIN was exacerbated by an analyst downgrade on Friday morning. Our stop loss was at $111.35 but HAIN gapped down at $109.57. Shares closed near support around the $109-110 zone.

- Suggested Positions -

2015 Jan $115 call (HAIN150117c115) entry $1.80 exit $1.25 (-30.6%)

12/12/14 stopped out on gap down at $109.57
12/09/14 new stop @ 111.35
11/29/14 new stop @ 109.85
11/26/14 triggered @ $110.25
Option Format: symbol-year-month-day-call-strike

chart:


The Sherwin-Williams Co. - SHW - close: 247.24 change: -6.97

Stop Loss: 249.45
Target(s): To Be Determined
Current Option Gain/Loss: +288.7%
Average Daily Volume = 526 thousand
Entry on November 05 at $231.00
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/13/14: The last couple of days have been pretty volatile for SHW. On Thursday the stock added +7.41 only to lose almost -7.00 on Friday. I'm really glad we raised the stop loss in Thursday's newsletter to $249.45. Friday morning the company lowered its sales outlook. Naturally the stock sold off on this news. SHW gapped down at $250.09 and then dropped to $244.30 before paring its losses.

It's been a great run. We can't complain with SHW's performance.

- Suggested Positions -

2015 Jan $240 call (SHW150117c240) entry $3.37 exit $13.10 (+288.7%)

12/12/14 stopped out
12/11/14 new stop @ 249.45
12/09/14 new stop @ 245.65
11/22/14 new stop @ 238.25
11/15/14 new stop @ 234.45
11/13/14 SHW is hitting potential resistance at $240. Traders may want to take profits now.
11/08/14 new stop @ 229.75
11/05/14 triggered @ 231.00
Option Format: symbol-year-month-day-call-strike

chart:


Semiconductor ETF - SMH - close: 54.21 change: -0.82

Stop Loss: 54.45
Target(s): To Be Determined
Current Option Gain/Loss: +300.0%
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:
12/13/14: The semiconductor stocks followed the market lower on Friday. The SMH actually underperformed the NASDAQ composite with a -1.49% decline. This ETF has been a terrific performer with gains eight weeks in a row. It was due for a pullback and hit our stop at $54.45.

- Suggested Positions -

2015 Jan $50 call (SMH150117c50) entry $1.10 exit $4.40 (+300.0%)

12/12/14 stopped out
12/11/14 new stop @ 54.45
11/29/14 new stop @ 53.85
11/22/14 new stop @ 52.25
11/20/14 new stop @ 51.40
11/12/14 new stop @ 50.85, readers may want to just take profits now!
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: