Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/7/2015

Table of Contents

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

Market Wrap

Oversold Bounce

by Keene Little

Click here to email Keene Little
Following 5 straight-down days in the market we were due a bounce and today provided it. Now we wonder if the dead cat will quickly revive itself before landing back on the ground.

Wednesday's Market Stats

Today was spelled R-E-L-I-E-F. Following 5 straight-down sessions off the December 29th high, today's bounce was a relief to investors who are starting to worry about the idea that this market can't go down. Exceeding 3 straight-down days, on Monday, had broken a string that was not broken in all of 2014. Not once in 2014, since December 2013, did the market drop more than 3 days straight. So dropping 5 straight days had some sitting on the edge of their chairs wondering what was happening.

January is still very young, with only 4 trading days so far but following yesterday's loss for SPX it made for the 4th worst start to the new year in all of its history. The three previous worse starts were in 1932, 2000 and 2008. Those years were not very kind to the stock market and that kind of statistic is also going to spook investors who up until now were not even contemplating a down January, or year for that matter.

The rally started overnight as equity futures started rallying as soon as the closing bell rang so it appeared somebody wanted to spark a rally this morning, which they got. Now we wonder if it was the dead-cat variety or something more bullish. At the moment I'm leaning toward the former, which I'll explain further when I review the charts. This morning's ADP employment data, which was OK but not great, and the FOMC minutes this afternoon was credited for today's rally. Hogwash. The rally was already well underway before this morning's report and the release of the FOMC minutes did nothing for the market (expect a tiny jiggle in prices at 14:00).

One of the recent fears that has caused a stronger selloff in the stock market is what's been happening to oil. While we high-five each other at the gas pumps as well as with the home heating oil delivery guy, there are many companies and employees that are not so happy. With oil prices below the cost to produce at many of the shale and tar sands areas, the drilling companies have had to slow down their activities. That means layoffs at these companies.

When you think about the number of companies supporting the oil industry you'll start to get an idea what kind of negative impact declining oil prices will have on a lot of people. Lower prices at the pump aren't going to help much if you're out of a job. Whether its producers of drilling pipe (WSJ reported this morning that U.S. Steel announced it will idle plants in Ohio and Texas, affecting 756 workers) or builders of housing in the shale oil locations, the oil industry has a huge impact on many businesses.

Much of the drilling in shale oil fields has been done with borrowed money. This is an area that was distorted by the Fed's accommodation policies -- cheap money was available for borrowing and the costs of the loans weren't much of a factor in the profit/loss formula. Just as their easy-money policies led to malinvestments (defined as flow of capital into areas that would not have otherwise received investments) in the dot.bomb industry, leading to the 2000 high, the same policies led to malinvestments in the housing industry, which led to the 2007 market high. Now we've likely had malinvestments in the oil patch and that very likely will lead to market highs here.

The assumption by the banks was that the loans would be paid back with the profits from oil that was selling for more than $80. After all, a decline below $80 would be a 6 sigma event and I mean, how often does that happen (wink)? Now those loans are starting to look like the sub-prime problem in real estate back in 2007 and the dot.bomb euphoria into 2000.

Many of the loans to the oil industry were the riskier higher-yield (junk) bonds and as I've shown many times recently, HYG (the high-yield bond ETF) actually peaked in May 2013 and then made a lower high in June 2014. Investors in these bonds started to get a whiff of the deterioration in the fundamentals well before oil started coming down. The weekly chart of HYG shows the recent break of support at the June 2013 low, at 88.27, a bounce back up from December 16th (with the stock market) but now heading back down and again testing the June 2013 low. Another break below 88.27 might not recover.

High Yield bond fund, HYG, Weekly chart

Russia also owes U.S. banks a lot of money but no one feared they wouldn't pay when they were pulling in boat loads of money from their oil and natural gas sales. Between economic sanctions, led by the U.S., and the drastic reduction in income, the Russian ruble has collapsed and this has forced Russia's central bank to prop up their currency and bail out some of their banks. How much do you think Russia will be interested in paying its debt to U.S. banks? The $60B (maybe more) that's owed might have to be written off by U.S. banks and on top of the bad loans to drillers, home builders in the oil patch regions and the plethora of businesses associated with the oil business, we could some real stresses placed on the banking sector soon. A JPMorgan analyst recently stated energy junk bonds could see a 40% default rate if oil stays below $65. All of these concerns are weighing on investors (those who are paying attention anyway), especially for the banking sector. The chart of BKX, which I'll show later, certainly looks like investors are becoming more than a little concerned. And investors in general should follow the money (banks).

The bottom line is that there are so many tentacles reaching out from the oil industry and many reach deep into non-oil related industries and jobs. Workers moving away from the Bakken field? What happens to the homes there (and their mortgages)? What happens to the extra teachers who were hired? What happens to the Walmart employees who were being paid $17/hour in order to compete with the oil industry's needs for employees? All of these things might not happen until later in 2015 and 2016 but smart investors like to look out at least 6 months and watch for what's coming. Unfortunately retail investors tend to do their investing by looking in the rear view mirror and extrapolate from there. Did I say retail investors? Actually economists (the Fed most certainly included) do that and then make their predictions based on their rear-end assessments and then retail investors respond.

As for oil/gas prices, all of this means we should enjoy our cheap gas and home heating oil but recognize as traders and investors that the stock market doesn't like it when there's a fundamental shift in what was a driver of growth for our economy. Cheap energy will of course be of great benefit for many industries, such as the airlines, but the negative aspects of a shrinking energy industry but the negative ripples through the economy will be greater and that's what the stock market's decline in the past week has been reflecting. Scooby Doo is looking ahead and just said "ruh-roh."

The strong rally in the dollar is also causing concerns about the harm that it creates for big international companies, where the higher value of the dollar makes it more expensive to sell overseas. Reduced earnings will make it more difficult to justify the already-high P/E ratios for many of these companies.

I know 100% of the analysts who predicted what 2015 will be like are all bullish. Not one predicted a down year for 2015 and that itself should be a warning to any card-carrying contrarian. Now with the 4th worst start for a January, and what I believe will be additional downside pressure this month, we might end up with a negative January barometer. All of this is to say I think it behooves everyone to keep an open mind about the downside potential. I've received some hate mail recently about my bearish opinion, which I take as another contrarian signal. When a rally is obvious to everyone it's obviously wrong and the start to this month could be a wake-up call to some.

I'll start out with the RUT's charts tonight because it has the most bullish potential. While I am bearish the current market and believe we'll see lower prices in the coming week, it's the RUT that I'm using to keep me honest (and scared when short). The RUT has been a good canary index and I'll continue to use it that way.

The RUT's weekly chart below shows yesterday's decline found support at its 50-week MA, near 1153, and today it bounced back above to its uptrend line from October-December, currently near 1169. This keeps the ending diagonal 5th wave possibility alive (rising wedge for the move up from October to complete the 5th wave of the rally from June 2012), which calls for one more leg up to a new high. As long as the December 16th low near 1134 is not broken I'll continue to respect the bullish potential here.

Russell-2000, RUT, Weekly chart

The RUT's daily chart below zooms in on the move up from October. Today's rally stopped at its broken 50-dma, near 1176, so any failure here would leave a bearish back-test and kiss goodbye. A drop back down and below 1153 would be a bearish heads up that all we had today was a dead-cat bounce, which I think is all we'll get but I'm looking for a higher bounce before continuing lower. A rally above 1200 would have me a very nervous bear and above 1217 would be a sure bet for a new high, potentially up to about 1235 in opex week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1153

The uptrend line from October for SPX was broken yesterday and so far the only thing today's bounce has accomplished is a back-test of the trend line. A selloff from here would leave a bearish kiss goodbye but I'm looking for a higher bounce before selling off. The 20-dma is coming down and looks like it will cross the 50-dma tomorrow near 2043. That's the level I'll be watching to see if a back-test leads to a bearish kiss goodbye there. I'm showing the potential for a larger 5-wave decline into the end of January, getting down to perhaps the 1870 area by the end of the month. That would then set up a large bounce correction in early February before heading lower again. The bullish potential for one more new high, like the RUT, requires the bulls keep this bounce going but so far I think it's a lower probability move.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2072
- bearish below 1992

The bold blue lines on the SPX 60-min chart below are for the rising wedge pattern and the first indication that it might not result in one more new high was yesterday's breakdown. It's fighting to get back above the line, currently near 2025, and I think we'll get another leg up for the bounce, as depicted, but if it stalls around the 2043 area it will be an opportunity to short it for the next leg down. If it rallies strongly above 2045 or only pulls back in a choppy pattern I'll then be more inclined to believe in the "one more high" scenario.

S&P 500, SPX, 60-min chart

The DOW did a better job holding onto its uptrend line from October-December, breaking it yesterday but closing only slightly below it. Today's bounce brought it back up to its broken uptrend line from October 2011 - November 2012 (bold green line) and is only a little shy of its 50-dma, near 17632 today. It should be close to its 20-dma in the next day or two, probably near 17650. A 50% retracement of the decline is at 17683 so that gives us a target zone to watch for the bounce to set up a reversal for a short play. Much higher than 17800 would have me thinking a little more bullishly for the same pattern as discussed for the RUT and SPX.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,262

NDX never achieved a new high in December, above its November high so it's tough to tell if we've got a slightly different wave count. For now I'm calling the December high a truncated finish to its rally, to keep it in synch with the other indexes, in which case the depiction for a 5-wave decline (bold red) is the same as the other indexes as well. But if the lower high in December is a b-wave bounce in what will be a large a-b-c pullback from November then the rally to a new high will come after the pullback completes, possibly down near its 200-dm that's currently nearing 3930, as well as its uptrend line from November 2012 - June 2013. That's just food for thought for now and something I'll contemplate further if and when NDX gets down there and looks to be finding support.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4277
- bearish below 4064

As the stock market sank lower this past week the bond market enjoyed another rally, which drove yields lower. It's now decision time for the bond market, at least for the 30-year bond. As can be seen on its weekly chart below, TYX dropped down to a price projection at 2.476 with yesterday's low at 2.472. This is a price projection for two equal legs down from December 2013 and could be setting up a big bounce back up within its longer-term down-channel. The decline is also testing price-support near 2.5, which is where it dropped to in 2008 and 2012, as well as the bottom of a down-channel for its decline from December 2013. So there are plenty of reasons for a bounce from here (selling in bonds) and stock market bears should remain aware of the potential for rotation out of bonds and back into stocks. But if TYX drops much below 2.47 it's going to add to the bearishness for the stock market. I continue to believe TYX will see 2% before it sees 4%, maybe even before it sees 3%.

30-year Yield, TNX, Weekly chart

The banks are perhaps providing one of the stronger hints that we've had a change in character for this market. Unlike the broader averages, BKX has dropped below its December low. More than half of the 2-1/2-month rally from October was given back in a week and while it's possible we'll get another v-bottom reversal like we saw in October (where's a Fed head and a bullish statement when you need one?), I think the bearish setup into the December 29th high, followed by the very strong decline, tells us something has changed. The 3-drives-to-a-high pattern in November-December, with bearish divergence provided a strong hint of a coming reversal.

KBW Bank index, BKX, Daily chart

On the BKX chart above I added the trend lines that show an expanding triangle, which is an ending pattern that shows how price volatility can increase dramatically at an important high. But, not surprisingly, support at its uptrend line from March 2009 - October 2011, near 69.90, pulled in the buyers (and short covering at support) and now we wait to see if support will hold longer-term. If a bounce is followed by another break lower it's going to be a strong signal that the 2009-2014 bull is finished. The bulls still have a chance here but at the moment I think it's for the bears to lose.

The Energizer Bunny. That's the name we need to give to the U.S. dollar right now. The rally just keeps going regardless of resistance levels that it runs into or target prices achieved. It's hard to see on my weekly chart below, but the dollar has now reached a price projection at 92.46 (with this morning's high at 92.51) where the 5th wave of the rally from May is equal to the 1st through 3rd waves, a common projection for an extended 5th wave. If the 5th wave extends to where it will be 162% of the 1st through 3rd waves it will continue to rally to about 97. There's another projection at that level, which is where the 2nd leg of the rally from May 2011 would be 162% of the 1st leg (for either an a-b-c or 1-2-3 move up). The top of a parallel up-channel for the rally from April 2008 is currently near 93.30 so that's a level of interest if reached. Unfortunately we've got mixed signals between RSI and MACD, as far as divergence, so they're not helping. The dollar is bullish until we get a sizeable breakdown.

U.S. Dollar contract, DX, Weekly chart

Gold gets a relatively small bounce and I get inundated with emails telling me why this is it! This is the time to buy gold before it heads for $5000! As long as so many keep looking to buy the low in gold we should keep looking for new lows. The bounce off the November 7th low has been very choppy and therefore it continues to look like a correction to the longer-term decline. It's once again testing the top of its down-channel from 2011-2012 so a break above yesterday's high at 1223 would be at least short-term bullish, perhaps for a run up to a price projection I have for a larger bounce at 1276 but regardless, I think we're looking at lower prices still to come.

Gold continuous contract, GC, Weekly chart

How low can it go? That's of course the question everyone is asking about oil. As can be seen on its daily chart below, the steepening downtrend lines is an indication of a waterfall decline and not something you want to try to catch. There are a lot of bloody hands out there trying to catch falling knives. The last downside projection I have for oil, once it broke below 49.81, is 43.63-44.42, which are price projections based on the wave pattern. At 43.63 the extended 5th wave of the move down from June would equal the 1st through 3rd waves. At 44.42 the 5th wave of the leg down from November 21st (which is the larger 5th wave down) would equal the 1st wave. Once this leg down from December 22nd completes it should complete the larger 5-wave move down from June and set up a multi-month bounce/consolidation. If we're to get a 4th wave correction in the decline from August 2013 it's not going to be a good environment to trade since the only ones who benefit in a 4th wave correction are the brokers.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports will not have anything that's market moving but Friday morning will be important as we get the NFP report. About this time traders are getting a little nervous about how the Fed is going to deal with an improving employment picture (which won't last if the energy market starts to deteriorate further) while the stock market declines. Do they talk about QE4 (wait, you'll see, and it won't be far away) or do they start trying to remove their accommodative stance. The Fed is boxed in and it's just a matter of time before the market really gets it.

Economic reports and Summary

The Santa Claus rally is from about mid-December through the first few trading days in January so one could argue it was a bust this year. Maybe a little net rally but certainly nothing like the bulls had expected. And when Santa fails to call at Broad and Wall...plus now we've got a negative start to January (4th worst one in its history and only matched by previously bad years for the market) and that portends a negative January. A negative January says the year will be negative. Fighting all this are bullish tendencies for the market (3rd year in a 2nd term presidential cycle, year ending in '5') so traders can take their pick of signals, especially if January finishes negative, which at the moment I think will happen.

As for me I'd rather stick to the charts rather than Trader's Almanac or any other source of "well, normally the market is bullish/bearish during this period." There is nothing normal about this market and all the false propping by the Fed (much of it only verbal, which Mario Draghi has perfected) has led to enormous economic distortions, which I discussed in the beginning of the wrap about what's going on in the oil field and its huge impact on the economy. I can only derive clues about the coming year from what the EW pattern is telling me and that's hard enough (subject to interpretation). At the moment I'm expecting more downside this month, possibly starting from a slightly higher bounce on Thursday, but after that I'll put the pieces together as they develop and my opinion will be based on the developing pattern.

In the meantime I think it's prudent to trim your stock holdings, establish hard stop levels and trade short-term. If you're bearish and itching to get in on the short side I think we've got a good trading opportunity here. It goes without saying bears should be trading short term and go for base hits -- bear markets are tough to trade, especially when you have central bankers coming out and promising more money in an effort to stop any market decline. Bear market rallies tend to produce the sharpest rallies that then fail in v-top reversals, catching both sides offside.

Good luck in the coming month 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


New Option Plays

A Natural Retailer

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Whole Foods Market, Inc. - WFM - close: 50.17 change: +0.71

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.9 million
Entry on January -- at $---.--
Listed on January 07, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WFM is in the services sector. As of November 2014 the company had 401 stores in the U.S., Canada, and the United Kingdom. Founded in 1978, WFM has become synonymous with healthy, organic food, at least for a growing portion of the population.

In early May 2014 the stock was crushed when the company missed Wall Street's earnings estimates and lowered its 2014 guidance. Investors were very unhappy with WFM's same-store sales growth as well. The organic food space has been growing more competitive in recent years as other retail groceries seek to boost their profits with wider margin "organic" fare.

WFM spent months languishing in the $36-40 zone before finally surging in early November. The big rally was sparked by better than expected earnings results and management raising their 2015 guidance. Shorts panicked and the stock exploded higher.

WFM has been slowly working its way higher since then but now WFM looks poised to breakout past key resistance at the $50.00 level.

The huge drop in gasoline prices is very bullish for the U.S. consumer. They now have more money in their pocket that they can spend on other items, like high priced organic foods at WFM.

Traders have started buying the dip and shares hit an intraday high of $50.18 today. Tonight we are suggesting a trigger to buy calls at $50.30. We will plan on exiting prior to WFM's earnings results in mid February.

Trigger @ $50.30

- Suggested Positions -

Buy the FEB $50 CALL (WFM150220C50) current ask $2.18

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Snap 5-Day Losing Streak

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market shrugged off news of a terrorist attack in Paris and managed to rebound from short-term oversold conditions. It was the best one-day gain for stocks in three weeks.

Tonight we have adjusted the entry point on both the ATHN and PM trades.


Current Portfolio:


CALL Play Updates

Alkermes plc. - ALKS - close: 66.75 change: +5.82

Stop Loss: 57.25
Target(s): To Be Determined
Current Option Gain/Loss: +74.2%
Average Daily Volume = 833 thousand
Entry on January 07 at $63.01
Listed on January 06, 2014
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/07/15: It was a big day for shares of ALKS. This morning the company issued a press release discussing positive results for its Phase 2 clinical trials for a schizophrenia therapy.

The stock gapped open higher on this news at $63.01 and then soared to $68.05 before trimming its gains to close up +9.55%. Our plan was to buy calls on a rally at $61.75 so the gap higher immediately triggered our play.

I would not chase ALKS here. Shares are short-term overbought and likely due for a dip.

Earlier Comments: January 6, 2015:
Biotech stocks were not immune to the market's widespread sell-off today. Yet one stock was bucking the trend. That's biotech stock ALKS.

According to the company's marketing material, "Alkermes plc is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. The company has a diversified portfolio of more than 20 commercial drug products and a substantial clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

Investors want to see companies with a growing pipeline of drugs and ALKS certainly qualifies. Here is a list of treatments in various stages of clinical trials at ALKS current pipeline .

The stock's jump today was thanks to a press release issued this morning. Here's an excerpt from ALKS' press release:

[ALKS] today announced topline results from FORWARD-1, one of a series of supportive clinical studies in the comprehensive FORWARD phase 3 pivotal program for ALKS 5461, a once-daily, oral investigational medicine with a novel mechanism of action for the adjunctive treatment of major depressive disorder (MDD). The FORWARD-1 study was designed to evaluate the safety and tolerability of two titration schedules of ALKS 5461. In addition, the study assessed the efficacy of ALKS 5461 over an eight-week period, compared to baseline, in patients with MDD.

...significantly reduced depressive symptoms from baseline starting at Week One and continued to the end of the treatment period at Week Eight...

If this treatment gets approved by the FDA it could be huge. According to a Thomson-Reuters article, depression is a massive opportunity going forward. Almost 350 million people worldwide suffer with depression and it's the leading cause of disability in the world. As more and more healthcare systems around the world get better at diagnosing depression it's going to drive demand for treatment.

Jim Cramer, on CNBC, mentioned ALKS this morning and commented on the company's press release about this new depression drug.

Technically shares have been showing relative strength the last few days and ignoring the market's sell-off. Today's breakout past resistance at $60.00 has also produced a new point & figure chart triple-top breakout buy signal with a $100 price target.

I am cautioning readers that biotech stocks are volatile. ALKS is no different. This is another higher-risk, more aggressive trade. The option spreads are pretty wide, which puts us at a disadvantage.

Tonight we are suggesting small bullish positions if ALKS can trade at $61.75. I would prefer to buy March calls since ALKS reports earnings in late February but March options are not available yet.

- Suggested Positions -

Long Feb $65 CALL (ALKS150220C65) entry $3.10

01/07/15 triggered on gap higher at $63.01, suggested entry was $61.75.
Stock rallied on positive Phase 2 trial data for schizophrenia drug.
Option Format: symbol-year-month-day-call-strike


Athenahealth, Inc. - ATHN - close: 143.85 change: +2.62

Stop Loss: 139.15
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

Comments:
01/07/15: The last couple of days we have been considering the idea of buying a bounce from support near $140. ATHN finally bounced today with a +1.85% gain. We are going to adjust our entry point strategy tonight. Our new suggested entry point to buy calls is at $146.25. We'll move the stop loss down to $139.15, just below yesterday's low. I am going to leave the option strike at February $155 call.

Earlier Comments: January 3, 2015
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 @ $146.25

- Suggested Positions -

Buy the FEB $155 CALL (ATHN150220C155) current ask $4.70

01/07/15 strategy update: move the entry trigger from $150.45 to $146.25, move the stop loss to $139.15
Option Format: symbol-year-month-day-call-strike


Royal Caribbean Cruises - RCL - close: 83.19 change: +1.24

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: + 0.9%
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:
01/07/15: RCL is still performing well. Today's +1.5% gain lifted RCL back toward recent resistance in the $84.00 area. If you missed buying the dip then consider waiting for a breakout past $84.00.

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




PUT Play Updates

Arista Networks, Inc. - ANET - close: 65.14 change: +1.33

Stop Loss: 66.25
Target(s): To Be Determined
Current Option Gain/Loss: -27.1%
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:
01/07/15: ANET followed the market higher but managed to outperform the major indices with a +2.0% gain. Today's rise marks this stock's fifth gain in a row. We discussed closing this ANET trade tonight but if you look at the intraday chart it appears that ANET is still struggling with resistance near $65.00. Our stop loss remains $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


Dover Corp. - DOV - close: 69.71 change: +0.57

Stop Loss: 74.25
Target(s): To Be Determined
Current Option Gain/Loss: +43.5%
Average Daily Volume = 1.7 million
Entry on December 29 at $73.40
Listed on December 27, 2014
Time Frame: Exit PRIOR to earnings on January 27th.
New Positions: see below

Comments:
01/07/15: The bounce in DOV faltered around the $70.25-70.30 zone and shares pared their gains back to +0.8%. That compares to the S&P 500's +1.1% gain today. More conservative traders may want to start moving their stop loss lower. I am not suggesting new positions at this time.

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


Philip Morris Intl. - PM - close: 81.71 change: +0.61

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

Comments:
01/07/15: The market's widespread bounce also lifted shares of PM. Yet the stock underperformed with a +0.75% gain versus the S&P 500's +1.1% gain. PM has been struggling with resistance near $82.00 the last couple of sessions.

Tonight we are adjusting our entry point. Move the trigger from $79.85 to $80.85. We will leave everything else unchanged.

Earlier Comments: January 3, 2015:
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.

- Suggested Positions -

Buy the FEB $80 PUT (PM150220P80) current ask $1.35

01/07/15 adjust the entry trigger from $79.85 to $80.85
Option Format: symbol-year-month-day-call-strike