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Newsletter

Daily Newsletter, Wednesday, 12/31/2014

Table of Contents

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

Market Wrap

The Three Ps -- Partial Profit Protection

by Keene Little

Click here to email Keene Little
The stock market has been doing its best to hold onto gains into the end of the year (today) but there were some traders who decided to get ahead of the crowd and take some profits off the table. The bigger question is whether the profit protection will continue into the new year.

Wednesday's Market Stats

HAPPY NEW YEAR!

The bulls will be glad to be done with December, which turned out to be a bit of a story about how Grinch stomped on Santa Claus. We got the Santa Claus rally but it basically saved the bulls from the first half of December's selloff. Today's decline put us back into the red for the month, except for a few indexes, including the RUT as traders bought into the idea that the small caps will outperform into the early part of January. So far so good on that. As you can see in the table below, 2014 was a good year for bulls and they obviously hope for a repeat performance in 2015. Many repeating patterns support the bulls, including the presidential cycle and years ending in '5', but there are some darkening skies on the horizon so it's at least going to be a very interesting year and one I think traders will enjoy.

Market Stats for December and 2014

For the past week we've seen the market struggling to hold on at the end of each trading day. The market would work its way marginally higher and then get with some selling into the close. Rinse and repeat the next day and it was a classic sign of distribution, which is basically controlled selling. Today's selling became a little less controlled as the selling started to accelerate into the close. It would appear that some money managers are not sure the rally will continue in the new year.

It's been a quiet week for economic reports and this morning we received a day early the unemployment claims data, which ticked higher last week. It might have been a result of a loss of temporary holiday retail jobs since the retailers did not do as well as they had hoped. The other report, shortly after the opening bell, was the Chicago PMI, which came in lower than expected, 58.3 vs. 60.0, and lower than November's 60.8. Even though the last estimate for GDP showed strengthening, there have been many individual economic reports that have not supported the government's claim.

Consumer confidence is dropping, even though it's the holiday period and gas prices have plummeted, and we're seeing signs of slowing in factory orders, Fed regional surveys and now Chicago PMI. It all must mean the Queen of Accommodation, otherwise known as Janet Yellen, is going to spread pixy dust all over the stock market. Why else would the stock market continue to completely ignore all the signs of slowing in the U.S. and especially globally. As I'll touch on later, with the discussion on oil, signs of slowing in China make it an excellent canary for the rest of the world's economies.

As part of a year-end review, and to show how truly extraordinary the disconnect has been between the stock market and other measures, I've got a couple of charts to share. The chart below is one I've shown before, which shows SPX vs. TNX (10-year yield) and the DJUBS Commodity index. The enormous divergence between SPX and DJUBS (pretty in pink for commodity bears) continues to widen and it's a clear sign of a lack of demand for commodities in general; i.e., a global slowdown. TNX has been in a steady decline but it tends to rise and fall with the stock market, at least until the peak in yields in early November. Since then TNX has been in decline while the stock market has continued to rally.

SPX vs. TNX and DJUBS, Daily chart

As analysts have been busy with their end-of-year prognostications for 2015 I've been hearing a lot about rising interest rates and why that will be good for the stock market. First of all I don't see rising rates but once again that's what most are predicting and based on those predictions they're expecting it to be good for the stock market. The rationale is good but first we need to see some evidence of rising rates? There are some fundamental reasons why interest rates could rise but we're not in that environment yet. Rising rates would mean bond players are worried about inflation and therefore require higher yields to compensate for the risk. An increase in inflation typically means an increase in demand for products and services, which drives up prices and then higher wages follow. That's certainly been a goal for the Fed.

Declining yields on the other hand signify no worries about inflation and a period of "disinflation" typically means less demand for goods and services. Producers produce less, people get laid off from their jobs, people can't buy or decide to put off purchases when they see prices coming down and the dreaded 'D' word -- deflation -- is what we get. This environment is not good for the stock market, typically. But the stock market has long been ignoring these signals because they've been hooked on Fed intervention. Unlike the bull market in the 1990s, which was on the back of a strongly growing economy, the bull market of the past almost six years has been on the back of the Fed. Never mind that the Fed has been wholly unsuccessful and hasn't a clue what they're doing (Fed governors have admitted this many times in private conversations). The only thing they've really been able to do is affect the mood of market participants, who continue to pin their hopes and dreams on the Fed.

It's been my contention for a long time that the bull market since March 2009, which has continued much longer than I thought possible, is a cyclical bull within a larger secular bear. The secular bear pattern calls for one more leg down to complete the cycle, which will then set us up for the next secular bull. My worry, for those who have bought into this bull market, with the intent to buy and hold, is that the next cyclical bear is going to be strong and violent. By the time it completes we will see all those buy-and-holders puking up their positions, broke and swearing off stocks forever, feeling they were lied to at the top. That's what sets up the next secular bull, unfortunately on the backs of retail traders who bought into the hype at the top and then got out at the bottom, handing off their entire expensive-now-cheap inventory to smart money managers (surprisingly few mutual fund managers fit into the smart category).

In fact, while I was writing tonight's report I got an email with the chart below, which shows past bull and bear markets since 1900. It's a very interesting chart and it demonstrates how one's opinion (filter) determines how you view the chart. The author's point with this chart is that the current bull market has much longer to run, which is based on the previous four strong bull markets running for an average of 164 months. That would mean another 100 months for the current bull market (9 more years).

Bull and Bear Markets, 1900-2014, chart courtesy businessinsider.com

But if you believe we're still in a secular bear, as I do, then the pattern is going to be closer to what was seen in the 1960s-1970s. In that secular bear there were two intervening cyclical bulls lasting 77 months and 30 months. There were three declines, each worse than the previous. I placed a question mark at the right side of the chart, within the oval, to indicate the potential for the 3rd decline that could be worse than the previous -51% decline.

For those who say it's different this time, I'll argue we're in the same pattern as the previous bear market, except on a larger scale. I study fractal patterns, which is what EW Theory is based on, and it's amazing how many times human nature can be seen in repeating patterns in the stock market, which reflects social mood swings. The chart below shows the expanding triangle for the previous bear market that ran roughly from 1966 to 1982. The current one is running from 2000 (by many measures it started in 1999) and could finish around 2016-2018. The next leg down to complete the bear market could be a doozy, one that lops off about 75% of the current market value. Do you really want to hold through that? Do you want your parents to hold through it?

SPX, 1928-2014, Daily chart

The Fed has distorted this stock market rally worse than what we had in the late 1990s (with the Fed's Y2K concerns), a time that led to a relatively small dot-com bubble burst. The market is further distorted and the banks are in worse shape than where we were in 2007, which led to a violent drop in 2008. The chart above is a reflection of how distorted this market is today and I fear the coming correction will make 2008 look like a walk in the park, which had made the 2000-2002 decline look like an ordinary correction (which felt very painful at the time, especially for yours truly).

Here's another chart to show the message from the bond market, who are the recognized smarter crowd in the market. Stock market participants get caught up in the excitement of the Ponzi scheme while the bond market participants have their ears to the railroad track listening for a train coming before the rest see the light. The junk bond market, otherwise known as the high-yield market, can be followed with the fund HYG and it's been warning us since June that not all is right with the financial world.

SPX vs. HYG-ZN, Weekly chart

The blue line on the chart is tracking the difference between HYG and ZN, which is the price of the futures (e-mini) for the 10-year Treasury Note (I tried to use the TLT bond fund but it's giving me spiky results). When risk is on and traders are willing to bid up the price of HYG the spread between HYG and Treasury prices increases and the blue line rises. When traders take risk off the table and HYG declines we'll see the blue line drop. It's been dropping hard since June while the stock market continues to climb higher. I think the stock market's scary dip in October and the smaller one in December were shots across the bow of the USS Bullship and the next shot could be a direct hit.

There's been some fear creeping into the market recently, as shown by the VIX. Or at least it's indicating more hedging going on behind the scenes. The chart below compares SPX to the VIX and you can see how a higher low for VIX (compared to the higher high for SPX) has been a warning sign for stock market bulls at the highs in July and September. It's flashing another warning sign here as the stock market made another new high above its December 5th high but VIX made a higher low.

SPX vs. VIX, Daily chart

I've been showing the SPX weekly chart using the arithmetic price scale to show the parallel up-channel from October 2011, the top of which has been acting as resistance since December 2013 -- a full year of highs up against the top of the channel and no breaks above it. The double test in early- and late-December shows bearish divergence on the weekly chart below and it's looking like that line will once again act as a deterrent to more rally.

S&P 500, SPX, Weekly chart

On the chart above, as well as the daily chart below, I show the potential for a rising wedge pattern off the October low, which could be an ending diagonal pattern for the 5th wave off that low. A drop down to the uptrend line from October-December, which crosses price-level support near 2019 on January 5th (next Monday) could set it up for a final rally into mid-January (opex Friday?), topping out around 2110. This is just an idea for now but something I'll be watching for, if and when SPX makes it down to that level. In the meantime there's potential support at its 20-dma, near 2054, and its 50-dma, near 2038 by Monday. A drop below 2019 would confirm something more bearish has started.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2100
- bearish below 2019

Depending on whether the log or arithmetic price scale is used on the DOW's chart you'll see different trend lines in play here. The daily chart below is using the arithmetic scale to show how once again the DOW pushed marginally above the trend line along the highs from May 2011 - December 2013 but was unable to hold above the line. I'm wondering if the downside reaction this time will be similar to the one off the December 5th high. Similar to SPX, I see the potential for an ending diagonal 5th wave for the move up from October, which calls for one more leg up following a pullback so keep that possibility in mind and it's a reason for bears not to get complacent, no matter how strong the decline appears. There are a few support levels between here and about 17450 and the bears will not be in stronger shape until the DOW breaks its uptrend line from October-December, currently near 17350.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,450

In November NDX was able to climb above its trend line along the highs from April 2010 - March 2012 but it dropped back below the line on December 9th. NDX then made it back up to the line on December 23rd but was unable to climb back above it. This week's selloff has NDX looking like a bearish kiss goodbye following the back-test and it finished back below its 20-dma today. Its 50-dma will be near 4215 on Friday and its uptrend line from October will be near 4185 so the bulls have some support levels to watch. The bears would be in better shape below 4185 and a top would be confirmed in place with a drop below the December 16th low at 4089.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4320
- bearish below 4089

As mentioned with the second table at the beginning of this report, when reviewing the returns for December, the RUT has been the stronger index and it was showing relative strength this morning and even made another new all-time high (1221.44 vs. Monday's 1220.81). But when the selling started around midday today the RUT joined in, leaving a bearish daily candlestick (new high followed by a new closing low below its previous three days. It closed Friday's gap up, at 1203.66, just before the close. The rejection from its broken uptrend line from March 2009 - October 2011, near 1220, as well as the trend line along its March-July highs, near 1215, looks bearish with today's kiss goodbye. This gives us a sell signal that can only be negated now with a rally above today's high at 1221.44.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1220
- bearish below 1135

Last Wednesday I showed the RUT's weekly chart to point out why I think this is such an important setup for the bears. The 3-drives-to-a-high pattern, with double-trendline resistance in the 1215-1220 area, makes this a very important area for the bulls to overcome and today's rally failure is not a good sign for them. The sell signal should be taken advantage of by the bears since their stop level can be kept very close. It's for the bears to lose here (which they've done countless times before so nothing is guaranteed here; it's just a real nice reversal setup).

Russell-2000, RUT, Weekly chart

My belief that Treasury yields will continue to drop lower into next year is about to be tested, at least for the short term. The daily chart for the 30-year yield (TYX) is shown below and as you can see, there was only a 3-wave bounce off the December 16th low into the December 24th high (see the disconnect between this and the stock market's new high?), which was a back-test of the bottom of its down-channel from December 2013, as well as its 20-dma, which is now trailing price lower. The December 16th low was the first test of support at its uptrend line from July 2012 - October 2014, which shows traders are watching that line. Currently near 2.70% it will be important to see if it holds as support or instead breaks. A break of that support line would likely lead to a drop to support near 2.5%, the lows in 2008 and 2012.

30-year Yield, TYX, Daily chart

I had mentioned the VIX earlier, comparing its higher low at the end of December, which provided a bearish warning to stock market bulls. The daily chart of the VIX below shows today's sharp rally but still within the confines of previous swings. When I see big swings, especially up, in the VIX it's time to look for a possible reversal. Today's +21% rally in the VIX seems like a lot of fear/hedging suddenly entered the market. What it does after the first couple of days of January, especially next week, will tell us more. If the VIX climbs above its downtrend line from October, currently near 23.70, I'd then start to think the VIX is supporting a more bearish move in the stock market.

Volatility index, VIX, Daily chart

Similar to other indexes, at the end of November the TRAN was able to push above its trend line along the highs from March-May 2013 - July 2014 but it wasn't able to hold above the line. The December rally brought it back up to the line for what is so far just a back-test followed by today's kiss goodbye. It's leaving a lower high in its wake, as opposed to the DOW which made a higher high. So we've got bearish non-confirmation of December's rally between these two (a Dow Theory sell signal).

Transportation Index, TRAN, Daily chart

I keep thinking the U.S. dollar is completing its rally leg from May but the dollar bulls are tenaciously holding on and keep pressing it marginally higher. Its pattern can be considered complete at any time and the bearish divergence at the new highs supports the idea that it's finishing its 5th wave so at any time we should see the dollar start a larger pullback in a multi-month correction to the rally. At 90.31 it also achieved the price projection for two equal legs up from May 2011 for what could be a completed a-b-c bounce.

U.S. Dollar contract, DX, Daily chart

If the dollar tops out soon it could help give the commodities a lift, including the metals. But gold's bounces continue to look corrective (choppy overlapping highs and lows) and that keeps me looking for lower prices for the shiny metal. I can't rule out the possibility for a higher bounce before it heads lower but so far the pattern fully supports lower prices. The next lower support level is 1090 (50% retracement of its 2001-2011 rally) and then near 1000 (2008-2009 price support level).

Gold continuous contract, GC, Daily chart

Nothing much has changed on silver's weekly chart and while I see the potential for a higher bounce before heading lower it's the same thing here as for gold -- lower prices are expected. Back above 18.60 would have me thinking something a little more bullish about silver but really not until it can break free from its down-channel, the top of which is currently near 20.80, would I think it's anything more than just a correction to the decline. This is especially true as long as the bounce pattern remains corrective as it is.

Silver continuous contract, SI, Weekly chart

Looking for a bottom -- that's what I'm thinking about oil at this point. Oil has dropped lower this week and today's decline to 52.44 (-1.68, -3.1%), before an end-of-day spike back up to 53.71 (-0.41, -0.8%), was attributed to news out of China. Their factory business declined in December, the first time in seven months, which is another bearish sign about the global economy. With less demand for China's manufacturing there will be less demand for oil products and with inventory levels climbing it's a simple matter of supply vs. demand that's affecting price. Brent crude has dropped -48% this year, the worst decline since the -51% decline in 2008. That decline followed the financial crisis and the negative impact on economies. This time we have a global slowing without the stock market reflecting it. That will soon change.

As for oil's price pattern, last week I had thought oil needed one more new low to complete a 5-wave move down from November 21st, which is what we got this week. It does a good job completing a larger 5-wave move down from June and a low this week, possibly next week, should have oil close to a tradeable bottom. It's always dangerous trying to catch falling knives, especially with a waterfall decline like we've seen for oil, but the wave pattern and price projections are now suggesting the decline could be near an end.

Oil continuous contract, CL, Daily chart

In oil's 5-wave move down from June, the 5th wave has extended and at 49.84 it would equal 162% of the 1st through 3rd waves, a common Fib for an extended 5th wave. The 5th wave, which is the move down from November 21st, is itself a 5-wave move and the 5th wave would equal 62% of the 1st wave at 49.81. That gives us good Fib price correlation at that level to look for support if tested. From a pattern perspective, the final 5th wave can be considered complete at any time and therefore a break of the downtrend line from November 21st, currently near 54, would be a signal the decline might have finished. A rally back above the December 23rd high at 57.56 would confirm a low is in. The bounce could get very choppy and whippy though if we're going to see a multi-month consolidation before dropping lower next year so traders should remain cautious about trading oil.

The commodities index is also looking like it should be near a tradeable bottom. The DJUSB weekly chart below shows the index has now dropped down to the bottom of a parallel down-channel for its decline from September 2012. It could be completing an a-b-c move down from September 2012, which could be completing a double zigzag move down from May 2011. There's not much in the way of bullish divergence but from a pattern perspective I would certainly be reluctant to chase commodities lower. Its February 2009 low at 101.48 should be solid support.

Bloomberg Commodity index, DJUBS, Weekly chart

The way it's looking to me at the moment is that we're going to see reversals in January. Today's decline in the stock market might have been the kickoff for its reversal. But as discussed with the charts, there is the possibility for another scary little selloff that's smaller than December's and then one more new high to complete a 5-wave rising wedge pattern from October. But the upside potential for that kind of move is significantly dwarfed by the downside risk and buying dips from here could be dangerous to your financial health.

The U.S. dollar also looks ready to put in a top at any time while commodities look like they could find a bottom here. The exception to that might be the metals -- they could continue to sink lower while the other commodities bounce. Bonds look ready for a rally and drive yields lower. If yields drop below their December 16th lows it could start more talk about declining interest rates as a sign of a softening economy, which in turn could spook stock market bulls. It's going to be an interesting month ahead and it could provide some important clues as to how the rest of the year is going to go. Hopefully all of you will be coming along for the ride with us at OIN (see the offers below).

I hope everyone has (had) a good time New Year's Eve and drank responsibly (if at all). Let's look forward to a very good year for 2015 and as traders let's look forward to lots of good trading opportunities. Enjoy your holiday weekend and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

 

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New Option Plays

S&P 500 Up +12.5% in 2014

by James Brown

Click here to email James Brown

Editor's Note:

It's been another incredible year.

The S&P 500 ended 2014 with a gain of +12.5%. That's on top of the +29% gain in 2013. The U.S. economy has improved significantly this past year and we look poised to enter 2015 with positive momentum.

Trading was super light today. Much of Wall Street is still on vacation for the holidays. Friday could see more of the same.

We are not adding any new trades tonight.

See you next year!

"The heights by great men reached and kept, were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night."
~ Henry Wadsworth Longfellow




In Play Updates and Reviews

Stocks Fade From Their 2014 Highs

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market faded lower after setting new record highs just a few days ago. The S&P 500 lost -1% the last trading day of the year. Stocks were down almost across the board today.


Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 110.38 change: -2.14

Stop Loss: 109.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 56 million
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 4 to 6 weeks, exit ahead of Q4 earnings
New Positions: Yes, see below

Comments:
12/31/14: One of the headlines today was AAPL being sued over false advertising of memory storage in its iPhones, iPads, and iPods. The lawsuit was just filed so we don't know if it will even make it to court. I doubt the story had any real impact on AAPL but shares did underperform the market today with a -1.9% decline and a close beneath its simple 50-dma.

If shares breakdown and close below the $110 mark we might decide to just drop AAPL as a bullish candidate. We are on the sidelines with a suggested entry point to buy calls at $115.25.

Earlier Comments: December 27, 2014:
There are a lot of Apple fan boys and girls out there, especially on Wall Street. The stock has been a big performer this year with a +42.2% gain in 2014. This has pushed AAPL to new highs and the stock is now the biggest of the big cap names with a valuation of almost $670 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

The company's latest earnings report was super strong. AAPL reported its Q4 (calendar Q3) results on October 20th. Wall Street was expecting a profit of $1.31 a share on revenues of $39.84 billion. The company delivered a profit f $1.42 a share with revenues up +12.4% to $42.12 billion. The EPS number was a +20% improvement from a year ago. Gross margins were up +1% from a year ago to 38%. International sales were 60% of the company's revenues.

AAPL's iPhone sales exceeded estimates at 39.27 million in the quarter and up nearly 16% from a year ago. The only soft spot in their ecosystem seems to be iPad sales, which have declined several quarters in a row. The company hopes to rejuvenate its tablet sales with a refresh of the iPad models. More importantly AAPL management raised their Q1 (calendar Q4) guidance as they expect revenues in the $63.5-66.5 billion in the quarter. Recent news would suggest that AAPL might deliver an incredible 50 million iPhone 6s in 2014. That's not counting their new iPhone 6+.

It looks like bearish investors are giving up on AAPL seeing a correction. There was a new report out Christmas week saying short positions in AAPL had collapsed 31% to 53.7 million shares. AAPL currently has a float of 5.86 billion shares.

Right now all the focus is on AAPL's iPhone sales. They're expected to be huge. If they miss estimates the stock could see a significant sell-off. That's why we do not want to hold over the earnings report expected in late January.

The three-week pullback from the late November (Black Friday) highs has provided a new entry point for bullish investors. AAPL did see its rebound pause for a few days but traders bought the dip on Friday and AAPL displayed relative strength with a +1.7% gain and a breakout above its 20-dma and 30-dma.

Tonight we are suggesting a trigger to buy calls if AAPL trades at $115.25. We are not setting an exit target tonight but I will point out that the point & figure chart is forecasting a long-term target of $165.00. I anticipate an exit for us in the $120-125 area given our time frame.

Trigger @ 115.25

- Suggested Positions -

Buy the FEB $120 CALL (AAPL150220C120)

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


Humana Inc. - HUM - close: 143.63 change: -2.14

Stop Loss: 142.45
Target(s): To Be Determined
Current Option Gain/Loss: -34.9%
Average Daily Volume = 1.1 million
Entry on December 31 at $146.35
Listed on December 30, 2014
Time Frame: Exit prior to earnings in February
New Positions: see below

Comments:
12/31/14: Ouch! Our new HUM trade is not off to a very good start. Shares started today pretty strong and rallied up to $148.14. Our suggested entry point to buy calls was hit at $146.35 this morning. Unfortunately for us the rally reversed and HUM plunged from $148 to $143.50. If there is any follow through lower on Friday we could see HUM hit our stop loss at $142.45.

I am not suggesting new positions at this time.

Earlier Comments: December 30, 2014:
Business is destined to improve when the U.S. government is essentially forcing citizens to buy your product. The Affordable Care Act (a.k.a. Obamacare) requires people to have health insurance or pay a penalty. In 2014 the penalty was $95 per adult or one percent of your taxable annual income, whichever is greater. In 2015 that penalty rises to $325 per adult or 2% of your taxable income. Putting politics aside on Obamacare it has been a blessing for the health insurance companies with millions of new customers.

HUM is in the healthcare sector. According to a company press release, "Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company focused on making it easy for people to achieve their best health with clinical excellence through coordinated care. The company's strategy integrates care delivery, the member experience, and clinical and consumer insights to encourage engagement, behavior change, proactive clinical outreach and wellness for the millions of people we serve across the country."

Investors have been pretty forgiving with HUM. Back in November they missed Wall Street's earnings estimates. The stock did drop from $140 to $130 on this miss but less than two weeks later it was trading near $140 again. Investors could be betting on even more enrollments for Obamacare. The Congressional Budget Office is forecasting 13 million enrollments by the end of 2015. On a side note it doesn't hurt that HUM recently authorized a $2 billion stock buyback program to replace their $1 billion plan.

In early December shares of HUM received a couple of price target upgrades. One was for $160 and another for $165 as analysts believe HUM should grab market share in 2015. The point and figure chart is bullish and forecasting a long-term target of $173.00.

Technically we like how HUM has found support near its bullish trend of higher lows and just started to bounce. Shares displayed relative strength today with a +0.89% gain. The intraday high was $146.14. Tonight we are suggesting a trigger to buy calls at $146.35.

- Suggested Positions -

Long FEB $150 CALL (HUM150220C150) entry $4.30

12/31/14 triggered @ $146.35
Option Format: symbol-year-month-day-call-strike


Packaging Corp of America - PKG - close: 78.05 change: -0.89

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -28.8%
Average Daily Volume = 1.0 million
Entry on December 18 at $78.94
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/31/14: Shares of PKG ended the year on a down note. Shares dropped -1.1% and closed near the bottom of its $78-80 trading range. If there is any follow through lower on Friday we will see PKG hit our stop loss at $77.85. I am not suggesting new positions at this time.

Earlier Comments: December 17, 2014:
PKG is in the consumer goods sector. The company operates eight paper mills and 100 corrugated products plants and related facilities. Put it all together and PKG makes packaging products around the world.

According to company materials, "PCA is the fourth largest producer of containerboard in the United States, based on production capacity, and the third largest producer of uncoated freesheet in North America. We have approximately 13,600 employees, with operations primarily in the United States and some converting operations in Europe, Mexico and Canada."

It's been a pretty decent year for PKG earnings. Back in February they beat Wall Street estimates and guided higher. They beat estimates again in April and July. Their most recent report was October 20th. Earnings per share were only in-line with estimates at $1.26 but that is a +37% improvement from a year ago and a +8.6% improvement from the prior quarter. Revenues soared a whopping +79% to $1.52 billion, slightly above estimates. Management then raised their Q4 EPS guidance above Wall Street's estimates.

Mark W. Kowlzan, Chief Executive Officer, said, "This was our 8th consecutive quarter of record earnings driven by strong sales volume, record mill productivity, and mill cost reductions. The integration of Boise packaging continues to generate significant synergies, and operational improvements in White Papers have resulted in lower costs and higher margins."

Technically PKG looks bullish. The early 2014 high near $75.00 was resistance but the stock broke through this level in early December. Traders have since bought the dip at this level so $75 is now new support. The stock is near all-time highs. The point & figure chart is forecasting a very long-term target of $121.00.

The December 4th intraday high was $78.50. Tonight I'm suggesting a trigger to buy calls at $78.55. We are listing the April calls. More nimble traders may want to trade the January calls instead but they only have about four weeks left. There are no February or March calls available yet. After option expiration this coming Friday (December 19th) we should see more options listed.

- Suggested Positions -

Long APR $80 CALL (PKG150417C80) entry $4.00

12/23/14 Caution: PKG has created a potential reversal pattern
12/22/14 new stop @ $77.85
12/18/14 triggered on gap open at $78.94, trigger was $78.55
Option Format: symbol-year-month-day-call-strike


Royal Caribbean Cruises - RCL - close: 82.43 change: -0.10

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: - 5.0%
Average Daily Volume = 2.9 million
Entry on December 24 at $82.30
Listed on December 22, 2014
Time Frame: We will likely exit prior to earnings in very late January
New Positions: see below

Comments:
12/31/14: RCL also faded lower on the last day of the year but shares only lost 10 cents. RCL appears to be inside a new $82-84 trading range although I do not expect $82 to hold if the broader market accelerates lower on Friday. The level to watch is probably $80.00.

Earlier Comments: December 22, 2014:
The cruise line stocks have been pretty strong this year. Carnival Cruise (CCL) has been the weakest of the big three with a +11.5% gain in 2014. That compares to the S&P 500's +12.0% gain. Norwegian Cruise Line (NCLH) is up +32% this year. Meanwhile RCL has outpaced them all with a +69.9% gain in 2014 as of today.

According to a company press release, "Royal Caribbean Cruises Ltd. is a global cruise vacation company that owns Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisieres de France, as well as TUI Cruises through a 50 percent joint venture. Together, these six brands operate a combined total of 42 ships with an additional seven under construction contracts, and two on firm order. They operate diverse itineraries around the world that call on approximately 490 destinations on all seven continents."

CCL has suffered a series of mishaps, bad decisions, and just poor luck in recent years and RCL has managed to capitalize on its rivals misfortune, especially in Europe. Earnings growth for RCL has kind of mediocre. Their most recent report was October 23rd. RCL beat estimates by a penny while revenues were only in-line with Wall Street estimates. Management then guided lower for Q4. So why has the stock performed so well? Normally when a company lowers their earnings forecast the stock gets hammered!

A big part of the stock's rally has been weakness in crude oil. These are massive ships. They burn between 140 to 150 tons of fuel every single day. That's about 30 to 50 gallons a mile. Falling oil prices mean that fuel costs for these companies has plunged dramatically and should boost their profit margins.

Tigress Financial Partners recently shared their opinion that the cruise liner industry has "benefited from strong demand trends both domestically and globally and more recently the swoon in oil prices has helped to reduce one of their largest costs - fuel. We think long-term demand trends are bullish for the sector and lower oil prices not only mean lower fuel costs but more discretionary cash in consumers' pockets that can be used for additional expenditures on leisure time." Their point about consumers having more cash to spend on leisure is a big one.

The month of December has brought more good news for shares of RCL. On December 1st the S&P Dow Jones Indices announced they would replace Bemis (BMS) with RCL in the big cap S&P 500 index. That means all the mutual funds that track RCL have to buy it eventually. That went into effect on December 4th.

On December 8th analyst firm Jefferies said "The cornerstone of our view on RCL has been that it offers a superior product, this is based on the following: it has a younger fleet, more new ships being built, more impressive features available (e.g. high-speed internet), a better strategy with respect to distribution of cabins (more Balcony berths available) and better brand perception." Jefferies then raised their price target on RCL from $73 to $87.

The analyst love continued on December 22nd when Stifel analyst Steven Wieczynski said, "you have a stock that is trading at 14x forward earnings (2016) for average EPS growth of 28 percent/year for the next three years. When we look back at where Carnival Corp. has traded (15x-17x) on average on a forward EPS basis and then apply the same multiple to RCL, there is clearly a significant amount of upside from current levels" for RCL. Stifel raised their price target on RCL from $88 to $96.

Technically the stock has been showing strength with a bullish trend of higher lows and higher highs. The breakout past resistance at $80.00 is bullish. Today's intraday high was $82.20. Tonight we're suggesting a trigger to buy calls at $82.30.

- Suggested Positions -

Long MAR $85 CALL (RCL150320C85) entry $3.37

12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike


Red Robin Gourmet Burgers Inc. - RRGB - close: 76.97 change: -0.88

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: - 4.4%
Average Daily Volume = 276 thousand
Entry on December 24 at $76.71
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/31/14: RRGB was not immune to the market's widespread weakness today. If this dip continues I would watch for a pullback toward $75.00 or the 10-dma near $75.60.

Earlier Comments: December 22, 2014:
The price of gasoline in the United States has fallen for 89 days in a row as of today. That's the longest streak on record. The current national average is down to $2.376 a gallon. That's more than $1.00 off the recent peak. Who stands to benefit from this major correction in fuel prices? Restaurants.

Americans love to dine out. Paying less at the pump means a lot more disposable income to blow on casual dining. One firm that should benefit is RRGB. The company press describes RRGB as "Red Robin Gourmet Burgers, Inc. (www.redrobin.com), a casual dining restaurant chain founded in 1969 that operates through its wholly-owned subsidiary, Red Robin International, Inc. There are more than 500 Red Robin restaurants across the United States and Canada, including Red Robin Burger Works® locations and those operating under franchise agreements."

A couple of weeks ago Wunderlich Securities commented on the restaurant industry. They believe that industry sales could see some of their strongest monthly gains in years and restaurants are poised to do well in 2015. The combination of strong consumer confidence, improving labor trends, and falling gasoline prices is a great recipe for stronger sales at restaurants. The major restaurant chains have been reporting positive same-store sales for the fifth month in a row. That hasn't happened since early 2012.

Technically shares of RRGB have been showing some relative strength the last few days. The stock spent the first half of December consolidating sideways above support near $70.00. Now it's breaking out to new multi-month highs. If this rally continues RRGB could see some short covering. The most recent data listed short interest at 10% of the very small 13.8 million share float. The Point & Figure chart is very bullish and forecasting a long-term price target at $115.00.

Tonight we are suggesting a trigger to buy calls at $76.65. I do see potential resistance at $80.00 (round-number resistance) but we suspect RRGB could run for a while.

- Suggested Positions -

Long MAR $80 CALL (RRGB150320C80) entry $3.87

12/24/14 triggered @ 76.65
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Arista Networks, Inc. - ANET - close: 60.76 change: +0.12

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: +10.4%
Average Daily Volume = 534 thousand
Entry on December 22 at $65.90
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/31/14: ANET started to see an oversold bounce this morning but gains faded. Shares closed with a 12-cent gain and near its lows for the session. ANET looks poised to breakdown under support at $60.00 but keep an eye on the December 8th low at $59.16 as potential support.

I am not suggesting new positions at this time.

Earlier Comments: December 18, 2014:
ANET is in the technology sector. The company makes networking applications and cloud technology. According to company marketing materials, "Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista's award-winning 10/40/100GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista's platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers."

Shares of ANET held their IPO in June 2014 with 5.3 million shares priced at $43.00. The first trade was $55.25. The stock has been volatile but almost doubled with highs in the low $90s by September. Unfortunately for the bulls the rally has reversed.

ANET produced bearish double top near $94 in September. The stock did see a sharp pre-earnings rally before they reported results on November 6th. ANET beat estimates by 12 cents and beat the revenue estimate as well. Yet guidance was only in-line with Wall Street's estimates and traders sold the post-earnings pop. That has proved to be a new lower high.

Following its post-earnings reversal lower the company and the stock has been plagued with trouble. The stock has suffered thanks to two different lock ups expiring. November 11th was a lock up that allowed some ANET employees to sell about 50% of their stock. Then December 2nd was the 180-day lock up that allowed insiders to sell their shares (up to 53 million shares).

ANET was struggling with all of this additional supply coming to market. Then the company was hit with a massive lawsuit by networking giant Cisco Systems (CSCO) on December 5th. CSCO is a much larger rival and claims that ANET has violated patent and copyright infringement on several technologies. CSCO might have a case. ANET's CEO, Jayshree Ullal, spent fifteen years working for CSCO in its enterprise business. ANET claims that CSCO is merely trying to use the legal system to slow down a competitor.

It could take a couple of years for the legal battle to be resolved but Wall Street is turning more cautious. Since December 5th a few analysts have been lowering their price targets on ANET. Meanwhile bears are arguing that ANET is still too expensive with a P/E of 60 at current levels.

The U.S. stock market just produced its best two-day rally since 2008 and yet ANET did not participate. Instead shares faded lower. This relative weakness looks like a clear signal that the path of least resistance is lower.

Today's intraday low was $66.00. I'm suggesting a trigger to buy puts at $65.90. The $60.00 level could be round-number, psychological support but I suspect ANET could decline toward the $55 area. I want to reiterate that shares of ANET have been volatile so I'm suggesting smaller positions to limit risk.

*small positions to limit risk*- Suggested Positions -

Long MAR $60 PUT (ANET150320P60) entry $4.80

12/22/14 triggered @ $65.90
Option Format: symbol-year-month-day-call-strike


Dover Corp. - DOV - close: 71.72 change: -1.75

Stop Loss: 75.25
Target(s): To Be Determined
Current Option Gain/Loss: +15.2%
Average Daily Volume = 1.7 million
Entry on December 29 at $73.40
Listed on December 27, 2014
Time Frame: 4 to 8 weeks, exit ahead of Q1 earnings
New Positions: see below

Comments:
12/31/14: So far so good in DOV. The stock underperformed the market today with a -2.3% decline. Today's drop is also a breakdown under its 10 and 20-dma.

Earlier Comments: December 27, 2014:
DOV is part of the industrial goods sector. They make an array of equipment and parts for multiple industries. According to the company, "Dover is a diversified global manufacturer with annual revenues of $8 billion. We deliver innovative equipment and components, specialty systems and support services through four major operating segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. Dover combines global scale with operational agility to lead the markets we serve."

Unfortunately for DOV investors the company's earnings picture has soured. Back in October they reported their Q3 results that beat Wall Street estimates on both the top and bottom line. Yet management issued relatively bearish guidance. It would appear that the outlook is worse than previously thought. On December 8th DOV issued an earnings warning and lowered their 2014 guidance. They're blaming restructuring costs and downsizing expenses.

The very next day (Dec. 9th) an analyst at Deutsche Bank downgraded DOV to a "sell" and lowered their price target from $83 to $65. Deutsche Bank's concern is DOV's exposure to the U.S. oil and gas industry. More than 33% of DOV's profits come from sales to the U.S. oil and energy sector. Given the plunge in crude oil prices this year (to five-year lows) the United States is already seeing a slowdown in oil rig use. A lot of the shale oil is expensive to drill and oil needs to be above $75 to be truly profitable. Right now oil is closer to $55 a barrel. That's going to significantly encumber capital spending for the oil industry and DOV could suffer as a result.

Technically shares of DOV broke their long-term up trend in 2014. Shares have developed a bearish trend of lower highs and lower lows. It looks like the most recent oversold bounce has just started to stall. We want to catch the next wave lower. Tonight I'm suggesting a trigger to buy puts at $73.40.

- Suggested Positions -

Long MAR $70 PUT (DOV150320P70) entry $2.30

12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike