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Daily Newsletter, Saturday, 1/3/2015

Table of Contents

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

Market Wrap

Glad that is Behind Us

by Jim Brown

Click here to email Jim Brown

The Dow rallied +127 points at the open then plunged -220 points to -93 before struggling back to a +10 point gain late in the afternoon. The Nasdaq spiked +40 at the open before declining -80 points to -40 with a struggle to creep higher by the close to lose only -9 points. Hopefully the sellers got it out of their system.

Market Statistics

There were multiple reasons for the Friday morning crash but the main one was probably just profit taking. Now that we are in a new tax year investors can take profits and reinvest them without having to pay taxes for another 12 months. This almost always produces some early January volatility and I warned everyone over the last two weeks to expect volatility around New Years. Hopefully everyone that was itching to sell has now accomplished that task and they will be ready to buy next week.

If you look at the stocks that declined on Friday it was the prior winners. The stocks that had a good day were the prior losers. This happens at the beginning of every year. Since we had two sell offs in the last couple months the damage on Friday was minimal.

Problems from overseas were also weighing on the market. Mario Draghi made some comments to a German newspaper suggesting in the strongest words yet that he can't rule out deflation in the euro area and saying "We have to act against such a risk." German Bundesbank President, Jens Weidman has argued that more stimulus is unwarranted claiming low oil prices are already stimulus but others have warned that falling oil prices could tip the euro area into full-fledged deflation. The Euro fell to its lowest level in more than four years.

Draghi said "We are in technical preparations to alter the size, speed and composition of new stimulus measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There is unanimity in the ECB council on that." The 25 member Governing Council will review a QE package at its next meeting on January 22nd. An interim meeting will be held on January 7th, the same day the euro-area inflation data is published.

The dollar soared on the Draghi comments to an 11.5 year high. This will further prevent the Fed from raising interest rates anytime in the near future. A 10% spike in the dollar has long been seen as the equivalent of a 50 basis point hike in rates. A high dollar weakens sales overseas that account for about 50% of revenue from S&P-500 companies. A rise in the dollar pressures commodities and the entire commodity complex declined on Friday.



Secondly, the ISM Manufacturing Index came in much weaker than expected and throwing doubt on the strength of the economy. The headline number fell from 58.7 to 55.5 and a six month low. This was the third decline in the last four months.

The new orders component fell from 66.0 to 57.3 and order backlogs declined from 55.0 to 52.5. Production fell from 64.4 to 58.9 and the inventory component declined from 51.5 to 45.5. While anything over 50 still suggests economic expansion the pace of decline from the high of 59.0 in October is concerning.

As we have seen in various regional reports the manufacturing activity in the U.S. appears to be weakening. Whether this is due to slowing overseas sales as a result of the strong dollar is still unknown. Some respondents noted problems at West coast ports and others said energy related projects are being cancelled because of low oil prices. Overall the falling energy prices will be positive for economic growth but there will be areas of weakness where business depends on the energy sector to buy their goods.


The combination of the deflation risk in Europe and the slowing manufacturing in the U.S. pushed treasuries sharply higher and yields sharply lower. Yields on the 10-year hit 2.1% intraday after hitting 2.3% just a week ago. The Treasury market is not acting like it believes the Fed will hike rates in June. Yields are threatening to dip under 2.0% for an 18 month low. We started 2014 with everyone saying yields would rise but the first week of January was the high for the year at 3.0%.

What is the bond market telling us? Bond investors are typically seen as smarter than stock investors. They have a longer time horizon and they really focus on economic matters rather than short term headlines. The decline in treasury yields suggests the bond market is expecting further declines in Europe, Japan and China and weakness in the USA. The U.S. bond market is benefitting from a flight to quality since even at our low rates we are still higher than the majority of the world plus the default risk is very low.


Even more disturbing is the yield on the 30-year treasury at 2.697% and already at two-year lows. If it falls under 2.50% it will be at a multi-decade low. My charts only go back to 1993 but I researched it online and you have to go back to 1950 to see a yield under 2.5% for more than a few days. That suggests the majority of investors are definitely not expecting any Fed rate hikes for a very long time for a multitude of reasons.



Construction Spending also weighed on the market with a drop of -0.3% in November after a gain of +1.2% the prior month. Private spending for residential construction rose +0.9% but non-residential declined -0.3%. However, the big hit came from public spending, which declined -1.7%. Total spending was still a robust $975 billion in November and +2.4% higher than November 2013. This was the first decline since June and will be a drag on Q4 GDP.

The economic calendar for next week has the biggest reports for the month with the payrolls on Wednesday and Friday. Jobs are expected to decline from their fevered pace in November but still be well over 200,000. The December number is always volatile because of the temporary holiday workers and the huge seasonal adjustments.

If the Nonfarm Payrolls on Friday come in hot again the Fed is going to be having some sleepless nights. They can't raise rates because of the items discussed above but they can't let the economy overheat either. Obviously we are a long way from overheating given the decline in manufacturing but a suddenly hot job market will perplex the Fed heads.

Personally I think we will moderate back to the 200,000 range over the next several months once the holiday workers go back on unemployment and the seasonal adjustments fade. This is what the Fed will be hoping for to match their long term forecasts.

The ISM Nonmanufacturing (services) report is Tuesday and it is also expected to decline by about a point. As long as that is the extent of the decline everyone will be fine. If it drops 2-3 points like the ISM Manufacturing then treasury yields are going lower again. All the rest of the reports for the week will only be filler ahead of the payroll report.

Fortunately we are moving into the earnings cycle and there will be something for traders to focus on other than the economic reports. Earnings are in pink on the calendar.


Split Calendar - Only one split so far for 2015.


In stock news Yahoo (YHOO) was facing double trouble on Friday. Yahoo's search engine went down on Friday afternoon for several hours following a Bing outage earlier in the day. Yahoo's search is powered by Bing. However, Bing was out for only 20 minutes while Yahoo search was out for several hours.

The search outage was not the biggest problem for Yahoo. News broke early Monday that CEO Marissa Myer may be trying to buy a cable business like CNN or Scripps Network Interactive (SNI). Scripps has been for sale for a long time with an asking price of $10 billion or so. The initial talks were to acquire the Scripps Food Network but subsequently expanded to involve all of the parent company as well. Another media industry insider said Marissa also wanted to buy CNN with a price tag of roughly $6 billion.

Scripps has multiple channels that have "super brand friendly content" according to one analyst. Many of the Scripps brands fit the female 25-35 demographic that Yahoo is seeking. Apparently Myer believes that by having some TV networks she can package online and on TV advertising and receive a higher price for the package. Also by having multiple networks available it gives Yahoo an outlet for its original content on cable as well as online. They could come closer to competing with Netflix if Yahoo had its own cable outlets. If the new shows did not work on the web they might work on TV.

Yahoo shares sold off intraday on the rumors but recovered at the close to end down only -34 cents. Most analysts felt that buying a cable network was probably not what Yahoo shareholders wanted the company to do with the money from the Alibaba sale.


Apple shares traded lower after analyst Fred Wilson trashed the Apple Watch saying it will not be a homerun product like the iPad or iPhone. "The focus on wearables will be a bit of a headfake and take up a lot of time, energy and money in 2015 without a lot of results."

Apple shares also took a hit from a new lawsuit trying to get class action status. The suit claims that iOS takes up to 21% of the available memory in an Apple device. The suit claims that Apple is fraudulently advertising when it says it is a 16GB iPhone when nearly 4gb is taken over by the OS. The suit claims Apple profits from this misrepresentation by selling iCloud space to store the pictures and videos that won't fit on the device. Microsoft has also faced suits like this in the past. They were sued over the 32gb Surface tablet because the Windows OS took over 50% of that 32gb of advertised storage. This is a nuisance suit and any eventual judgment would miniscule in the larger scheme of things.

Apple also got its first target price increase for 2015 from Argus with a bump from $120 to $125 and a reiterated buy rating. Argus expects iPhone revenue for Q1 to rise +24% to $40.4 billion on a 32% gain in sales to 67.3 million units. They also expect continued double digit earnings per share growth in 2015.


Linn Energy (LINE) joined the parade of energy companies slashing their dividends and cutting spending for 2015. The company said it could cut spending -53% to $730 million. They will also cut their annual dividend from $2.90 to $1.25. The company said it would finance the spending from internally generated cash. They are being forced to do this because they have $11 billion in debt and a market cap of less than $4 billion.

In addition Linn announced a drilling partnership with GSO Capital Partners, the credit arm of Blackstone Group, for $500 million for five years. GSO will fund the entire cost of new wells in exchange for an 85% working interest in the wells until GSO achieves a 15% rate of return on the money invested. Once that level is reached GSO's interest drops to 5% and Linn's will increase to 95%. Linn's budget for 2015 assumes a $60 price for WTI and $3.50 for natural gas. Linn shares rallied +12% on the news. Consensus estimate for LINN shares is $18.25.


The world's gambling capital in Macau finally ran out of bettors. The government corruption crackdown in China is taking its toll. Revenue for 2014 fell -2.6% for the first decline ever since numbers were first released in 2002. December was especially brutal with a -30.5% decline and the seventh consecutive month of declines. The revenues hit a record of $45 billion in 2013. The "tigers and flies" corruption crackdown in China has scooped up more than 150,000 government workers guilty of corruption. Macau is dependent on the big spending high-ranking officials described as tigers and the government is aggressively curbing lavish spending.

High rollers in China are now afraid to show their wealth by spending in public lest they become the target of a government probe. China is also squeezing the transfers of illicit funds sent from the mainland to the casinos. Analysts said Macau is now undergoing a period of consolidation until the Chinese government ends its anti-corruption drive. Beijing said Macau should diversify from gambling into other areas. Analysts believe it will take until Q2-2016 for the business to recover. There are some new properties coming online in that timeframe and they are expected to rekindle interest in Macau.


In keeping with the casino topic Caesars Entertainment (CZR) is moving closer to bankruptcy. However, it may be a friendly event as much as those can be friendly. The company said 39% of the senior bond holders had backed the reorganization plan. Caesars will put its operating unit into bankruptcy and then split into a casino operator and a property company. The casinos will pay rent to the property company. Caesars Palace Las Vegas will pay $160 million a year for five years. The base rent for the other 43 properties will be $475 million a year for three years. The bankruptcy of the operating unit will reduce the debt from $18.4 billion to $8.6 billion. The operating company will then issue about $1.7 billion in new debt and the property company $3.8 billion in new debt. Caesars Palace Las Vegas will issue $2.6 billion in new debt. Caesars still needs to garner 60% approval of the senior bond holders by January 9th in order for the restructuring plan to become effective.

Last year Caesars Entertainment (CZR) spun off Caesars Acquisition Company (CACQ). As part of the new deal those two companies will merge again.


Freeport McMoran (FCX) was cursed with a strong sell rating by Zacks but shares rallied +19 cents. Zacks warned about the potential impact to Q4 earnings from the global economic slowdown and the lower demand for copper. They also warned that strikes and accidents at the big copper mine in Indonesia would reduce copper and gold production in Q4. I agree all those things may depress Freeport but I believe that is already priced into the stock. FCX declined from $39 to $21 since July due to those headlines above. The bad news is over but the good news is yet to come. Copper prices are struggling at $2.81 and gold prices are stuck in the $1180 level. The strong dollar has crushed the commodity sector and the drop in oil prices has penalized them for their acquisitions in the energy sector last year. All of these issues will eventually turnaround and Freeport is a long term buy at this level. Resistance is $23.85 so a move over $24 would be buyable. Note that the "strong sell" by Zacks had no impact on the stock price.


Tesla (TSLA) shares declined on Friday because of the drop in oil prices to $52.03 intraday and from general profit taking on the first day of 2015. Some analysts claim lower gasoline prices make Tesla automobiles unattractive. I claim they are a luxury car that just happens to be electric and gasoline is not a factor. The new Tesla Model S P85D with dual battery motors, all wheel drive and 691 horsepower is NOT dependent on gasoline prices. The quoted range on a P85D is 253 miles with a maximum of 350 miles under ideal conditions.

I was surfing the Tesla website looking for mileage information and ran across the Driving Range Blog with some very interesting customer comments. For instance:

Morrison: Thanks for the detailed and thoughtful posting of information. I've put 500+ miles on my P85D in the first week and can say it's been nothing short of exhilarating. It's the smoothest, most amazing vehicle on the planet. Thanks for the great work, commitment, and for building the finest machines on the road. The Model S is the smartphone vs. a flip phone. No comparison. I'll never own a gas powered vehicle again.

Spentan: Thanks for the info. Picking up my P85D in 23 hours. Can't wait to own my 3rd Tesla.

In other Tesla news Elon Musk filed for divorce from British actress Talulah Riley for the second time. The couple divorced in 2012 and then remarried a year later. Riley and Musk have been living apart for the last five months while she directed her first feature film, "Scottish Mussel," which she also wrote. The divorce filing says Riley will receive $16 million as payment under a prenuptial agreement. Musk claims they are both still friends. He has five sons from his first marriage. Clearly the prenuptial payment is pocket change and will not impact his lifestyle. On the bright side he is single again and the ladies will be lining up for a chance to be wife number four.

Shares closed at $219 with price targets as high as $400.


GoPro (GPRO) rallied nearly 6% after an analyst predicted the company would announced its own drone with a built in GoPro camera in the CES presentation on Tuesday. The presentation will be at 3:55 ET on Tuesday. A JP Morgan analyst said despite the flood of competitors nobody comes close to the total GoPro platform of Capture, Manage, Share, Enjoy. The GoPro booth at CES will be one of the busiest and will be helped by free beer. The analyst is expecting strong Q4 sales and launches into international markets to drive the stock.


Markets

The Dow gained +7.5% in 2014 or +1,247 points. Since the Dow rebounded +1,962 points from the October lows of 16,141 all of the gains were made in the last two months. At the October lows the Dow was down -435 points for the year.

The majority of the Dow gains were made by only 7 stocks. Those are UNH, HD, DIS, NKE, V, MMM and GS. The biggest drag on the Dow was IBM for the second consecutive year. The table below is sorted by individual gains with Intel the biggest gainer. Coke, Pfizer, United Technologies and Caterpillar barely finished with a gain.

Only slightly more than half of the Dow components actually contributed meaningfully to the Dow's gains for the year. Low dollar stocks like CSCO posted decent percentage gains individually but contributed little to the Dow's gains. As a price weighted index the higher dollar stocks contribute the most. The Dow Points column is not exact but it is as close as I can make it without a lot of extra work. I think everyone will get the general idea of how the Dow is pushed around by half its constituents while the rest are just along for the ride.

Basically the public's view of the stock market is controlled by the actions of about 15 stocks.


The Investor's Business Daily (IBD) pointed out on Friday that the strength in the IBD50 was weakening and a "defensive investing posture is warranted." The IBD50 is a grouping of 50 top-rated growth stocks including tech stocks, healthcare, automotive, retail and biotech names. IBD pointed out that a number of these stocks closed below their 10-week moving average on Friday due to institutional selling.

I believe this is a warning for January but this could have simply been end of year portfolio restructuring. We just need to be cautious until we see what January brings.

The S&P dropped back to the 2,050 level intraday before rebounding to close on prior uptrend resistance at 2,058. Taken by itself I would be really cautious but several of the other indexes hit real support and rebounded so the S&P is just one of the group and not a leader.

We also have to remember that early January typically has some bouts of volatility as investors cash out profits from the prior year and put the money back to work for the coming year. One day does not make a trend.

Resistance is 2,090 and support 2,040-2,050.


The Dow chart is similar with a dip back to 17,730 followed by a +100 point rebound. The prior uptrend support is back in play at 17,800. The dogs of the Dow for 2014 were gainers on Friday. Of the seven Dow stocks that lost ground in 2014, five of them were gainers on Friday (BA, XOM, CVX, IBM, T) with Verizon and Boeing the ones that continued their losing ways. This will probably be the pattern over the next week since a lot of people subscribe to the Dogs of the Dow strategy. It is one of the longest running investment strategies. Those that do poorly one year are expected to outperform in the coming year.

The Dow has finally retraced some of its December rebound gains and should be open to moving higher from here. The keyword there is "should" and there is no sure thing in the market. With Dow forecasts of 20,000 by July 4th and 21,000 by the end of 2015 there is a lot of "hopium" built into those predictions. Personally I will just be happy to exit January with a decent gain and then worry about the rest of the year. "As January goes, so goes the year" is a market expression that makes the rounds every January.

Unfortunately another one is "If Santa Clause should fail to call, bears may come to Broad and Wall." Santa did not show up this year with a -220 point Dow decline last week.

Predicting market direction in early January is a fool's errand. There are so many seasonal factors that contradict each other that anything can and does happen. Fortunately the U.S is still the best house on a bad block and everyone wants to invest here. That "should" support our markets in the weeks to come.

Support is 17,800 but that was breached intraday on Friday making 17,750 the number to watch on the Dow for next week. Resistance is 18,050-18,100. Let's hope we test that again this week.



The Nasdaq retested the 4,700 level on Friday and was rewarded with a minor rebound. The Nasdaq now has a clearly defined trading range from 4,700-4,800 and plenty of room to wander. Unfortunately if it wanders below that 4,700 level we could be in for a decent bout of profit taking that retests the 4,550 level.


A lot of the symbols on the winners/sinners list for Friday are names that most investors would not recognize. This was due to the low volume, which increased the volatility and allowed stocks to bounce around a lot.


The low on Friday at 4,698 was the gap open low from the 18th. This should be decent interim support but will not likely sustain a real bout of profit taking. There are several stair steps down at 4,650, 4,605, 4,545 and 4,500. I really hope we don't have to retest them all. We are not too far away to retest overhead resistance at 4,800 next week if fund managers show up and buy something for 2015.


The Russell 2000 was the leader to the upside with a new high at 1,220 until New Year's Eve. The index took a serious beating on Friday to retest 1,190, which was rock solid as support. The next two weeks are normally small cap heaven as investors load up on small cap stocks for the new year. That seasonal trend has a lot of history but it is not infallible. We need the Russell to hold over that 1,190 support and begin to move higher early in the week. That will support market sentiment and hopefully get all the averages moving higher again.


Oil prices traded down to $52 on Friday and the Dow Transports gave back -41 points. This could be a sign the transports are done moving higher just because of cheap oil. The weak ISM number and disturbing words from Mario Draghi may have put a top on the transport index. There could be a double top forming at 9,230. Cheap oil does not help much if there is nothing to ship.


There is another negative chart. The NYSE Composite failed to reach the November high after the December rebound. The November high was the second lower high since June and the failure to reach make a new high in Nov/Dec when all the other indexes were breaking out is a serious sentiment problem. This suggests market breadth is declining and there may be trouble ahead. However, the NYSE has a lot of energy stocks and they could be the sole reason for the weakness. We need to watch the NYSE to confirm any rallies in the other indexes. If it does not confirm we should remain defensive on any long positions.


Volume was light on Wednesday and Friday averaging 5.28 billion shares but Friday was the heaviest day since Tuesday before Christmas. The sharp spike at the open and sharp drop intraday gave buyers and sellers an opportunity to do their thing in the market. It would be really nice if all the sellers were done but with the low volume we know there is likely to be some more show up next week. Friday was a holiday for most people. Next week business resumes as usual.

There are a lot of predictions for new market highs for 2015. Fundamentally they are sound with employment growing, low gasoline prices stimulating retail spending, low interest rates and a decent growth spurt in the economy. The negatives are of course the strong dollar that is depressing U.S. product sales overseas and the weakness in Europe, Japan and China. All of those countries have various stimulus programs that should begin to lift those economies in 2015.

If the pieces begin to fit together correctly in the months ahead we could have a good year. According to various seasonal patterns I discussed in recent weeks 2015 could be strong. Only one year ending in 5 has been down in the last 130 years. It is also the third year in the presidential cycle and that is normally strong. I could go on but you get the idea. Nothing prevents us from a bad year in the markets but as of today the majority of the factors are all pointing to good times ahead.

I said last week, "I am looking for a choppy market next week as the remaining tax sellers try to capitalize on the bullish end of year trend. However, window dressing should win out with funds adding to their winners for end of year statements. I would remain long into January but then maintain a cautious stance into January option expiration.

Window dressing did not appear and tax sellers were definitely driving the market. I am still advising cautious optimism into the January expiration cycle.

 

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Random Thoughts

It is time for the final wrap up on the 2014 S&P target forecasts. With the S&P closing 2014 at 2,059 the winner in this informal poll was an analyst named Edwards at Bank of America with a 2,060 target. Quite a few analysts missed the mark by a mile with estimates in the 1900s. The forecasters targeting 2,100 were very close since the intraday high last week was 2,093.

I updated the table with the 2015 forecasts when I could find them and every single forecast is above our present location with some quite bullish at 2300 or better.

This is the last time I am going to show the 2014 targets and we will focus on 2015 in the weeks ahead.

The shaded entries were revisions from the number behind their name. The average forecast was 2,030 and the average for 2015 is 2,224. That would represent a +165 point gain from here. The points on the right would be the gain from the 12/31 close at 2,059.


The Polar Vortex is returning. The nation is expected to see the coldest weather of the year this week as a polar cold wave surges down across the U.S. with freezing temperatures down to the Gulf Coast. Colorado broke temperatures records last week that lasted for 116 years with -25 degree days in the northern half of the state. We have already had more sub-zero days this year than we did all last winter. Grab those long johns and get ready to go sledding with the kids.


The average price of gasoline nationwide has now fallen for a record 99 consecutive days. Gas prices fell -9.3 cents over the last week to $2.231 per gallon. Nine southern states now have prices under $2 a gallon in some areas. More analysts are starting to predict the average price falling below $2 because of the glut of gasoline. Gasoline futures set a new five-year low on Wednesday at $1.41 per gallon. Refiners are operating at record levels of utilization at 94.4% as they tried to refine as much oil as possible before Dec-31st or be faced with paying property taxes on the oil in inventory. This pushed gasoline inventories well above the five-year average to 229.0 million barrels. The blue line in the chart below is the current inventory level.

AAA said the rout in oil prices could save consumers as much as $75 billion in 2015. The drop since June has already saved consumers $14 billon. Drivers are now saving $15 to $30 on every fill up compared to a year ago. That is some serious pocket change.



The U.S. government levied additional sanctions against North Korea for the cyberattack against Sony. President Obama issued an executive order in response to "ongoing provocative, destabilizing, and repressive actions and policies, particularly its destructive and coercive cyberattack against Sony." The White House said this was only the first phase of its response to North Korea's actions. Since North Korea is already the most sanctioned nation on earth the impact of the sanctions will be limited.

In the "you have got to be kidding" department a Russian startup announced plans to build a lunar base camp for roughly $9.4 billion to explore mining on the moon. Privately owned Lin Industrial said it was prepared to establish a moon base as soon as it received government approval. From approval to completion is expected to take about 10 years with the initial base installation in 5 years. The company said they would use readily available existing technology and would need 13 launches of heavy rockets to shuttle the required equipment for the initial base plus an additional 37 launches to establish adequate living conditions on the moon. The base would become financially viable by mining for rare earth metals.

The S&P 500 has just finished its sixth year of positive returns and its third straight year of double-digit gains. According to FactSet via the Wall Street Journal, "The S&P 500 index now trades at 16.4 times forecasted earnings over the next 12 months, compared with 15.4 a year ago…the average over the last 10 years is 13.2." Should we be worried?

Saudi Arabia has a labor force of 8.412 million of which about 80% are foreigners. Saudi Arabia spent $67 billion on its military in 2013 to put it in fourth place behind the US, China and Russia. Saudi Arabia has a deal with Pakistan to purchase nuclear weapons and delivery systems if Iran goes nuclear. The unemployment rate for Saudi males is 20.8%, under 25 youth is 30.5%, female unemployment is 54.4%. More than 46% of the Saudi population is under the age of 24 and 25% are under the age of 14. More than 45% of Saudi's GDP comes from oil. More than 95% of Saudi Arabia is desert.

The Kingdom Tower, currently under construction in Saudi Arabia, will be 1 kilometer tall (3,281 ft) and temporarily become the tallest building in the world. Why? The Burj Khalifa tower in Dubai is 2,717 feet tall and currently the tallest building is mostly vacant. Apparently nobody wants to rent an office or condo in a likely terrorist target and pay extremely high prices for the privilege. On Saturday an Indian developer said they were going to build a 1.2 kilometer tower (3,937 ft) as part of the Dream City project. Apparently there are egotistical idiots born every day.

The Hulbert Financial Digest tracked the performance of funds over the last 20 years. If you chased past performance in hopes of future gains you lost money. The top performing fund over each of the last 20 years produced an annualized loss of -17% in the following year. That means putting your money with the top fund the prior year would have been a bad idea. However, if you put your money with the lowest performing fund in hopes of capitalizing on their attempts to correct that under performance it would have cost you even more. The lowest performing funds each year averaged a -52% loss the following year. Hulbert recommends tracking performance of a fund over a 15 year period that will likely include both bull and bear markets. Funds with decent performance over a long term horizon are the ones you want to own.

Allen Greenspan said the economy is doing better than anybody else but it is still not doing well with an expected 2.5% GDP rate in Q4. He said vibrant growth will not return until the housing market bounces back and American companies invest in more productive assets. Today the biggest investment is in buying back stock and that does not help the economy grow.

The economy is shaping up as "too good to be true" for 2015 but the market may not have a banner year. Analysts expect low inflation, low interest rates, low oil prices to benefit the economy but low growth is also expected to continue and the Fed is likely to raise interest rates later in the year. Overseas economies will likely avoid deflation but they will also fail to grow. The indexes are still expected to rise double digits but not like 2013. This could be a repeat of 2014 where solid 10% gains will be the norm with a few stock rockets in the mix. The first six months of 2015 are expected to show the best gains with the markets moderating in the last six months as the divided government goes into gridlock and the presidential primary races heat up.

About half of all Obamacare enrollees for 2014 will end up owing taxes to the federal government. If they made more than they estimated when they applied then they will have to refund a portion of their subsidy payments. Since the enrollment period was in October 2013 they did not know how much they would earn in 2014. Most used their 2012 totals. If they made more in 2014 than 2012 they will owe taxes. Roughly 85% of enrollees received subsidies of roughly $264 per month. The administration said there were 6.7 enrollees at the end of 2014. Those that don't have insurance will have to pay a penalty with their taxes and that penalty more than doubles in 2015. With the employer mandate taking effect in 2015 there will be even more confusion in the months ahead.

2014 was a bad year for GM. They had 84 recalls affecting 26.9 million vehicles in the US and 30.4 million in all of North America. The costs for these recalls have yet to flow to the bottom line so GM profits are going to be under pressure for a long time.

Enter passively and exit aggressively!

Jim Brown

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A woman’s "be ready in 5 minutes" and a man’s "be home in 5 minutes" are about the same.

Joe Fahmy, Zor Capital

 


Index Wrap

Support Watch at Key Moving Average and Trendline

by Leigh Stevens

Click here to email Leigh Stevens
I assumed that slowing upside momentum meant a dip in prices which came in the holiday shortened week just ended. The pullbacks tested the 21-day averages in the S&P and Dow as support, with the Nasdaq 100 falling to near 4200 trendline support.

A rebound from any of the up trendlines seen on my charts below may suggest whether the current bout of price weakness will last much into January and volatility part of an overall consolidation of the current bull market. January has cross currents and it's wise to anticipate some short-term price swings; e.g., 2-3 days duration.

Much knowledge of trend direction over a 2-3 week span can often be seen in whether the 21-day moving average in the major indexes 'acts as' technical support on pullbacks OR as resistance on rallies. One Close below the 21-day moving average puts me on notice of possible further downside. Two consecutive Closes below this key trading average is a stronger indication of continued weakness ahead; e.g., for or within a 2-3 week timeframe.

The other technical/chart aspect of importance is what happens at the up trendlines seen on the major index charts. I anticipate that we'll get a bounce from intraday pullbacks to any of the bullish trendlines highlighted on my charts.

Lastly, trader sentiment got 'too' bearish in my estimation to suggest a big new downside push. I anticipate a rebound this week but not a major push higher.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

SPX has turned short-term bearish but with expected technical support in the 2033-2020 area. In this area if available, risk to reward looks favorable to play a potential rebound back to the he 2100 area.

The major trend is bullish. A cautionary note is suggested by the current bull market, about to hit the 6-year mark, having gone into 'overtime' so to speak. Moreover, the S&P and Dow are up against some long-term resistance trendlines that at least suggest a continued advance will slow in terms of average percent gain; e.g., the last 3 years saw high average annual gains of 10% or more in the S&P 500.

Near support begins in the 2050 area and extends to 2033-2020. A Close below 2000 is bearish but more so with a Close or two BELOW the last downswing that carried to the 1970 area. Near resistance selling interest may come in at 2090-2110, with a next upside target (and potential next 'resistance') to 2138-2140.

The RSI has fallen back to a 'neutral' reading around 50, so the prior overbought condition is no more. Moreover, bearishness showing up in my bullish/bearish sentiment (CPRATIO) model suggests an SPX rebound, perhaps with a dip to test trendline support.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has traced out more or less an 890-920 trading range over recent weeks. Further such two-sided price swings could be in the cards still for January although likely a pause before a next up leg.

Support/buying interest should be found on further weakness to 900-890. A Close below 875 continues a bearish short-term pattern especially if for more than a day.

Support points are suggested at the green up arrows; at 900, then 890. Resistance is seen at 920-924, with a decisive upside penetration of this area suggesting potential to around 940.

As with the other indices OEX's RSI reading is back into a more neutral 50 zone. I favor buying at 'proven' support points. Chart points seen as significant support get proven when there's a dip to expected support such as at a trendline, prior low, etc. AND then in that area a rebound develops.

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

The Dow 30 (INDU) Average found Friday end of week support at the 21-day moving average, currently at 17750. The area of this important 'trading' average helps determine which way I want to strategize. Trade above the 21-day suggests continued upside momentum; trade below the average suggest continued more downside, than upside, potential.

Tracking the 21-day average is something I do habitually. I'd give the SPX the benefit of the doubt that support doesn't continue to develop at this average. With the Dow especially, good to check the level of the 50-day average (currently 17530). Potential support there suggests buying interest showing up next in the 17600 area. Potential trendline support comes in around 17400 currently and if that deep of a pullback were seen, I'd be evaluating playing potential upside from there.

Possible 'wishful thinking' about buying the Dow cheap at 17400 may be at work here with me, but with fund managers happy to add to their Dow portfolio in the 17600 support area. Upside resistance looks to start in the 18000-18100 area with next anticipated resistance coming in around 18300.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is falling again from what looks to be strong selling interest in the 4800 area. A possible double top can't be ruled out with this pattern. A 'confirmation' of such a top however is a decline to a lower low than the last downswing. I doubt the Composite sees a lower low than 4600. I note potential trendline support in the 4680 area currently.

Key resistance starts in the 4800-4815 area. A decisive upside penetration of 4800 could be the start of a next up leg, possibly to 4900.

The way things a further dip to the 4700-4680 area should find buying interest/support. A Close below the up trendline suggests that 4600 might be seen however.

NASDAQ 100 (NDX); DAILY CHART:

The NDX 100 (NDX) chart has sold down below its 21-day moving average which is bearish until or unless prices recover to above the average. Absent that, look for potential for further price weakness, or at least a sideways trend, ahead.

Pivotal technical support is implied at the intersection of the trendline at 4200, with support extending to 4170. A Close below 4200 suggests that dips to 4100 might be seen. If so, bullish potential exists if a double bottom forms.

Closes back above the 21-day average (currently: 4257) or to above 4300 would keep the trend picture bullish or one suggesting more bullish potential than not.

I'm neutral on taking on any positions pending whether a short-term rally develops next, especially from the 4200 area. I'm not bearish but NDX is leading the way down which is a bit of a sea change so this development bears watching, no pun intended.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ chart/indicator pattern is mixed as prices fell sharply below the 21-day moving average but the Friday intraday low stopped at the projected October-December up trendline. Continued support at the up trendline is needed to suggest that the intermediate uptrend is continuing.

A sell off below 102.7-102 suggests potential for a retest of what is seen to be fairly major support in the 100 area.

A continued rebound from the up trendline, followed by a move back above 104 would suggest renewed bullish momentum and upside potential. 104 is the key resistance and 102 the key support. Moves of 2 points in either direction can occur on a decisive breakout above/below the 104-102 range.

The On Balance Volume (OBV) line is pointed lower so our secondary indicator of volume is bearish.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart has a bullish pattern if RUT stays above its up trendline, but which leans bearish below it.

Near support is highlighted at 1180. Pivotal support at RUT's up trendline then is seen around 1168; the 50-day moving average also intersects in this same area and implies potential technical support also.

Key overhead resistance comes in around 1220; a target on a next move above 1220 is to 1240.

If prices dip further, RUT has potential to rally from the 1180 area; more so from its up trendline per the chart highlight below. A break of the up trendline suggests potential for a retest of the 1140 low.


GOOD TRADING SUCCESS!




New Option Plays

Healthcare Technology & Tobacco

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Athenahealth, Inc. - ATHN - close: 147.99 change: +2.29

Stop Loss: 144.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 516 thousand
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in early February
New Positions: Yes, see below

Company Description

Why We Like It:
You might think Athenahealth is in the healthcare sector but it's actually in the technology sector. The company provides information services to the healthcare sector. ATHN describes itself as "athenahealth is a leading provider of cloud-based services for electronic health records (EHR), revenue cycle management and medical billing, patient engagement, care coordination, and population health management, as well as Epocrates and other point-of-care mobile apps. We connect care and drive meaningful, measurable results for more than 59,000 health care providers in medical practices and health systems nationwide."

Earnings in 2014 have been up and down. ATHN missed estimates in April 2014. They beat estimates in July and then reported in-line results in October. Their next report is expected in early February.

ATHN held an investor day on December 10th. They reaffirmed their 2014 guidance, which is essentially 22% to 27% year over year growth with gross margins in the 63% range. They also provided a 2015 forecast of +20% growth with revenues in the $900-925 million area. There was some concern that this 2015 guidance was too light but shares have been soaring in spite of the initial dip on the news.

If you're going to trade ATHN it's worth pointing out that David Einhorn, the outspoken hedge fund manager at Greenlight Capital, issued a very bearish call on ATHN back in May 2014. We don't know if he's still short ATHN but his opinion may have fueled the short interest in this name. The most recent data listed short interest at 26% of the small 37.5 million share float. Unfortunately for the bears they have been getting killed with the rally from its December lows.

ATHN's recent breakout past resistance in the $145-146 area is bullish and helped generate a buy signal on the Point & Figure chart that is suggesting at $178 target. Technicians will note that ATHN found support right where it was supposed to at prior highs (near $146).

If this rally continues ATHN could see more short covering. Tonight we are suggesting a trigger to buy calls at $150.45 with a stop at $144.90. We will plan on exiting prior to ATHN's earnings report in early February (no confirmed date yet).

Trigger @ $150.45

- Suggested Positions -

Buy the FEB $155 CALL (ATHN150220C155) current ask $6.20

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

Daily Chart:

Weekly Chart:




NEW DIRECTIONAL PUT PLAYS

Philip Morris Intl. - PM - close: 81.02 change: -0.43

Stop Loss: 82.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.4 million
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in early February
New Positions: Yes, see below

Company Description

Why We Like It:
The first thought a lot of investors have when they think of cigarette maker PM is dividends. This company has been delivering strong dividends for years. Right now the stock's dividend yield is almost 5%. Yet that hasn't stopped the bearish trend of lower highs.

PM describes itself as "Philip Morris International Inc. (PMI) is the leading international tobacco company, with seven of the world's top 15 international brands, including Marlboro, the world's best-selling cigarette brand. Until March 28, 2008, PMI was a wholly owned subsidiary of Altria Group, Inc., since that time the company has been independent and is listed on the New York Stock Exchange (ticker symbol PM)."

PM has joined the cigarette revolution with smokeless e-cigarettes and a new hybrid model they're calling HeatSticks, which doesn't burn the tobacco but instead uses a battery to heat it.

Earnings have been mixed. Back in February 2014 they lowered guidance. That allowed the company to then beat estimates in July and October. Yet in their October report PM issued cautious guidance. The rising U.S. dollar is definitely hurting margins as PM sells its tobacco products around the world.

Technically shares are weak and have been underperforming the market. The current sell-off has pushed PM to the verge of a new sell signal on its point & figure chart. These are new multi-month lows and we think the weakness continues. Friday's intraday low was $80.63. I am suggesting a trigger to open bearish positions at $79.85. Earnings are expected in early February and we'll plan to exit prior to the announcement.

Trigger @ $79.85

- Suggested Positions -

Buy the FEB $80 PUT (PM150220P80) current ask $1.57

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Sink On Data

by James Brown

Click here to email James Brown

Editor's Note:

Disappointing economic data helped spur some profit taking on Friday but losses were relatively mild.

HUM and PKG hit our stop loss.

We have updated the entry point strategy on AAPL and updated the stop losses on ANET and DOV.


Current Portfolio:


CALL Play Updates

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

Stop Loss: 106.95
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:
01/03/15: There was plenty of talk about AAPL and what to expect in 2015 this Friday. Shares struggled a bit after one analyst offered their negative opinion that the iWatch will be a flop. Meanwhile a different analyst raised their price target on AAPL to $125 on strong iPhone demand.

We are still bullish on AAPL and want to take advantage of the recent weakness. Tonight we're adjusting our entry point strategy and now want to buy calls if AAPL can trade up to $110.25. We will also move the option strike from the February $120 call to the February $115 call. Our new stop loss will be $106.95, just under Friday's low.

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 @ 110.25

- Suggested Positions -

Buy the FEB $115 CALL (AAPL150220C115) current ask $2.70

01/03/15 Strategy update: Change the entry trigger from $115.25 to $110.25. Change the stop loss from $109.85 to $106.95. Change the option strike from February $120 to the February $115 call. Option Format: symbol-year-month-day-call-strike

chart:


Royal Caribbean Cruises - RCL - close: 82.95 change: +0.52

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: - 2.1%
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:
01/03/15: RCL is still holding up well. Shares bounced off their simple 10-dma on Friday and managed to end the session with a gain. I don't see any changes from my prior comments. If the market continues to sink we could see RCL test $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

chart:


Red Robin Gourmet Burgers Inc. - RRGB - close: 76.40 change: -0.58

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: -12.1%
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:
01/03/15: RRGB was not immune to the market's weakness on Friday. Fortunately traders bought the dip near round-number support at $75.00 again. I'd be tempted to buy calls here but investors may want to wait and make sure both RRGB and the market are positive before initiating new positions.

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

chart:




PUT Play Updates

Arista Networks, Inc. - ANET - close: 62.68 change: +1.92

Stop Loss: 66.25
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
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:
01/03/15: I cautioned readers that the $60 area could be support for ANET. As of December 31st it looked like shares might breakdown below this area. Unfortunately the stock managed an oversold bounce on Friday with a +3.1% gain. Even with the bounce ANET is down five weeks in a row. The stock should find resistance at its 10-dma near $64 and the $65.00 area. Tonight we are moving the stop loss down to $66.25.

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

01/03/15 new stop @ 66.25
12/22/14 triggered @ $65.90
Option Format: symbol-year-month-day-call-strike

chart:


Dover Corp. - DOV - close: 71.98 change: +0.26

Stop Loss: 74.25
Target(s): To Be Determined
Current Option Gain/Loss: + 8.7%
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:
01/03/15: DOV managed an intraday bounce on Friday and posted a minor gain. Shares still look weak but investors may want to wait for a new lower high (like another failed rally near $74) before initiating new bearish positions. Tonight we are going to try and reduce our risk by moving the stop loss down to $74.25.

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

01/03/15 new stop @ 74.25
12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BULLISH PLAYS

Humana Inc. - HUM - close: 142.99 change: -0.64

Stop Loss: 142.45
Target(s): To Be Determined
Current Option Gain/Loss: -39.5%
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:
01/03/15: The profit taking in HUM continued on Friday and shares hit our stop loss at $142.45. I am still longer-term bullish on HUM but we may need to wait for a correction toward support near $135 before considering new positions again.

- Suggested Positions -

FEB $150 CALL (HUM150220C150) entry $4.30 exit $2.60 (-39.5%)

01/02/15 stopped out @ 142.45
12/31/14 triggered @ $146.35
Option Format: symbol-year-month-day-call-strike

chart:


Packaging Corp of America - PKG - close: 78.29 change: +0.24

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -29.5%
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:
01/03/15: PKG was up significantly in 2014 and Friday could have been more profit taking as investors locked in gains. Shares pierced support near $78.00 and hit our stop at $77.85 before bouncing. I would keep an eye on this stock.

- Suggested Positions -

APR $80 CALL (PKG150417C80) entry $4.00 exit $2.82 (-29.5%)

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

chart: