Option Investor
Newsletter

Daily Newsletter, Saturday, 1/24/2015

Table of Contents

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

Market Wrap

Kings Passing, Countries Collapsing

by Jim Brown

Click here to email Jim Brown

The markets were positive for most of Friday but global headlines and earnings misses produced too much uncertainty for traders to hold long positions over the weekend. However, the indexes posted their first positive week for 2015.

Market Statistics

On Friday the Dow was handicapped by the weeks -$3.50 plunge in oil prices to $45 with Exxon and Chevron heading the list of losers. The Dow Transports lost -161 points after UPS lost -10% on higher than expected holiday costs.

The Nasdaq posted the only gains for the day with support from the Netflix, Starbucks, Google, GoPro and Zillow.

The market week was looking good until Friday's open and everything began to fall apart. There was an attempt to move higher throughout the morning but there was no volume and no conviction. The death of King Abdullah caused uncertainty about the current policies on oil, the alliance with the U.S. on terror and whether terrorists would take advantage of the change in leadership to attack Saudi Arabia.

There was also profit taking after the big reactionary gains from the ECB decision on QE. After multiple analysts talked down the possible economic impacts of that move and the potential for Europe to continue sliding towards the abyss it is not surprising that traders wanted to take profits on Friday.


On the economic front the Chicago Fed National Activity Index showed that U.S. growth slowed in December. The headline number fell from 0.92 to -0.05 and the first negative reading in four months. The production component fell -0.12 after a -0.1% decline in Industrial Production.

However, here is the key point. A slowdown in "oil related activity" also contributed to the decline. Oil companies buy stuff that is manufactured in the U.S. and they are going to be buying a lot less in the coming months.

Hiring also declined from November's level of +353,000 to +252,000 and this weighed on the index. Housing permits also declined along with retail sales.

All is not well in the U.S. economy despite being the best house on a bad block.

On the positive side the rate of Existing Home Sales for December rose from 4.93 million to 5.04 million. That was actually below expectations but still a gain of +3.5% from the prior December. Sales in the Northeast declined -2.9%, Midwest -3.5% and rose +3.8% in the South and +9.8% in the West. The supply of homes on the market declined from 5.1 months to 4.4 months. The average home price rose slightly from $207,200 to $209,500.

However, only 29% of the home purchasers in 2014 were first time buyers. That is a three decade low and suggests there are still challenges in the economy. Wages are declining. People are forced to work two part time jobs because they can't get 40 hours at their primary job and credit requirements are still very high.

With 30-year mortgage rates near record lows we should see a surge of buyers as spring approaches. Mortgage applications surged 49.1% the prior week and +14.2% last week. In the prior week when applications surged, 66.4% of them were refinance applications.

The SEMI Book-to-Bill ratio fell from 1.02 in November to 0.98 in December. Orders have been lower than billings for 3 of the last 4 months suggesting demand is slowing. Bookings were $1,366.2 billion compared to shipments at $1,391.9 billion.

The calendar for next week has some definite problem areas. The Greek elections on Sunday could throw Europe into a tailspin if the left wing Syriza party wins as expected. Less than 18% of the public approves of the current Greek leadership and they have experienced two years of crushing austerity and 29% unemployment. This has given rise to Syriza party pledging to renegotiate the bailout terms on the nearly 200 billion euros of loans. The rise of "protest parties" in the polls suggests trouble ahead for Greece with the potential for an exit from the euro. However, in the last couple weeks the Syriza has tempered its comments on an exit probably in an attempt to attract more moderate voters to the party.

On Wednesday the FOMC will give us another update on their plans to raise rates later this year. This is not a quarterly meeting so there is no press conference. However, since there have been significant changes in the economic outlook, oil prices, the rise in the dollar and the QE from the ECB the post meeting statement could be different than what we got after the last meeting. This could be a challenge for the market.

Lastly the first look at the GDP for Q4 will be out on Friday. The official consensus estimate is for a decline from +4.97% in Q3 to +3.1% in Q4. However, there are multiple individual estimates in the 2.0% to 2.5% range. If the number comes in much under the 3.1% consensus it would cause some market stress since there is already some concern about the economy slowing.


Two new splits were added to the split calendar this week but neither are exciting. NJ Resources (NJR) is a small energy services holding company that supplies natural gas to about 504,000 customers in northern New Jersey. Westmorland Resources (WMLP) owns 15 surface mines and six mining complexes in eastern Ohio. The 5:4 split is uninteresting and shares outstanding at only 898,000 makes it untradeable.


The move by the ECB to launch a monster QE program disrupted currency markets around the world as the euro collapsed and moved even closer to parity with the dollar. The main points of the program are as follows.

Each of the 19 central banks in the eurozone will buy bonds issued by its own government and take the losses should that government default. That solves the problem of taxpayers in one country getting hit by losses in another country. Of course that only emphasizes the main problem that the eurozone is not one country but a loose collection of 19 different economies each with its own problems.

The program will begin in March and the 19 banks, using new money from the ECB, will buy a total of 60 billion euros of bonds every month until at least September 2016 or until inflation rises to the 2% target. The theory of QE is that it will lower the interest rates and make it more attractive for companies to increase investments and thereby grow the economy. By making the program unlimited in duration it shows the central bank is committed to fighting deflation however long it takes.

The side effect of the bond buying pushing interest rates lower is the deflation in the currency. A cheaper euro means products from Europe are cheaper and exports should rise. However, in order to offset the decline in the euro other countries are faced with their own currency problems. If the euro goes down it basically means other currencies are rising. Stronger currencies mean exports from those countries will decline. It is called a currency war. Everyone, except the USA, is working to weaken their currencies to maintain the status quo.

In addition to the ECB action and the Swiss removing the peg on the franc we also saw central bank actions from India, Denmark, Canada and Peru. Others are sure to follow.

Currency war cartoon from Hedgeye.

The downside to this is the dollar strength. With all the other countries pushing their currencies lower the U.S. dollar surged to a new 11-year high. That means U.S. companies are going to have a lot harder time selling overseas. We have already had a multitude of warnings about "currency headwinds" and the earnings cycle is just getting started. With the euro headed for parity with the dollar that means the dollar strength is only going to increase.

A sharply rising dollar means a continued fall in commodities. That means more deflation in costs and lower profits for producers. We may have just seen the ECB trigger an entirely new round of deflationary concerns.



The earnings calendar for next week has 25% of the S&P 500 reporting. The most watched events will probably be Apple on Tuesday, Facebook on Wednesday and Amazon, Alibaba and Google on Thursday. Over 450 companies report earnings this week. By the time this week is over we should have a very good idea how the rest of the cycle will play out. Only 179 companies have reported for Q4 and 60% beat street estimates on earnings and 60.1% beat on revenue. As the earnings progress they normally worsen as the big companies report early and smaller companies report later.


UPS upset the market on Friday after it warned that Q4 earnings were going to be ugly. The company spent millions to prevent a repeat of the 2013 holidays when a last minute flood of packages and bad weather led to more than a million packages not being delivered before Christmas. Unfortunately all that extra spending helped to avoid the late deliveries this year but it also led to higher costs that weakened earnings. The company said they expected package volume to rise +11% in December. They prepared for the "extreme spike" on Cyber Monday and again on December 22nd the last shipping day before Christmas and those problem days were handled. However, the company said package volume the rest of December was lackluster. They had far more staff on hand than they needed and the lack of volume led to higher costs per package. The peak staffing led to higher training costs and inefficiencies related to contract workers.

UPS now expects full year earnings of $4.75 compared to prior estimates between $4.90-$5.00. Analysts were expecting $4.96. For Q4 they now expect to earn $1.25 compared to $1.47 analysts expected. The company said strong "currency headwinds" would negatively impact results for 2015 and growth would be below their prior expectations of 9% to 13% for the year. UPS shares fell -10% on the news and knocked nearly 1.8% off the Transport Index.


Zillow (Z) soared +13% early in the day but faded to +8% by the close. The motivation for the move came from news regulators were going to approve the merger with Trulia (TRLA). Zillow is buying Trulia for $3.5 billion in stock. TRLA shares rallied +10%. Shares in both companies had declined significantly since the merger was originally announced.


Netflix (NFLX) shares are still in rally mode after the big earnings win on Tuesday evening. Shares are up almost $100 since the report. The big jump in Netflix shares was a major mover of the market on Wednesday. The company said it expected to complete its international roll out to more than 200 countries over the next two years and "generate material global profits from 2017 forward." Subscribers outside the U.S. rose by a record 2.43 million in Q4 to 18.3 million. They expect to add another 2.25 million in Q1. Netflix said it was planning on producing 320 hours of original content in 2015. That is three times the amount produced in 2014.


Starbucks (SBUX) exploded higher with a +7% gain to a new high after the company reported earnings that rose +82% to $1.30 compared to 71 cents in the year ago quarter. That met analyst estimates but the company said same store sales rose +5% compared to 1% in the year ago quarter. CEO Schultz said one in seven Americans received a Starbucks gift card for Christmas. More than 2.6 million cards were activated on Dec 23rd alone.

Starbucks has been expanding its food line and offering alcohol in some stores. The pilot programs have been so successful they are expanding the roll out to hundreds of additional stores. The company is now allowing customers in 150 stores to order their drinks online through their smart phones. That is expanding to 600 stores in Q1 and then nationwide later this year. Starbucks already processes more than 7 million mobile payment transactions every week. Over 13 million U.S. customers are using the Starbucks mobile app, up +30% since March, with more than 9 million using the mobile payment app. Schultz said numerous companies were knocking on the door to gain access to the mobile payment app technology for their own stores.


GoPro (GPRO) shares rallied after the company signed a deal with the National Hockey League to put cameras on players to put fans closer to the action on the ice. The partnership begins this weekend with the All-Star game. The cameras will transmit live HD video for broadcast. This is the first partnership with a sports league but you can bet there will be more. This is a big win for GoPro and could mean an end to the decline in the stock. Earnings are Feb 5th.


Got BOX? Shares of the cloud computing company were priced at $14 on Thursday night and closed at $23.15 for a +66% gain. Somebody priced that IPO too low. Analysts were surprised at the reaction to the IPO since Box lost $121 million for the first 9 months of 2014. Rapid Ratings, which rates companies on financial health on a scale of 0-100 gave Box a 23. The CEO of Rapid Ratings said the company had about a year to prove itself or be in serious trouble. They are spending twice what they earn and recently went through an identity crisis.

Originally they were going to compete with DropBox and Google Drive and sell to individual consumers. They suddenly changed direction and now sell only to corporate accounts. They have 44,000 paying customers including NBC, Fox and General Electric. Rather than just a place to store photos and emails they are focusing on developing tools for enterprise users to share and collaborate on stored data. Revenue for the first 9 months of 2014 rose +80% to $154 million.


Kimberly Clark (KMB) posted adjusted earnings of $1.35 which missed analyst estimates at $1.37. Revenue of $4.83 billion also missed estimates of $4.91 billion. The company warned that sales were expected to fall 3-5% in 2015 and that would reduce earnings from the current $6.00 estimate to a range of $5.60-$5.80. The reason for the big drop was the strong dollar and weak currencies elsewhere. The company expects the strong dollar to reduce revenue by 8-9% in 2015.

When overseas sales of Kleenex and Huggies diapers are impacted by the strong dollar you know that higher priced items from any U.S. company are going to be impacted as well. Kimberly Clark gets about half its revenue from international sales. In 2014 the company benefitted from strong demand in Brazil, China, South Africa and Vietnam helping to offset declines in other countries. In Q4 the company said volumes fell significantly in Venezuela as a result of the currency crisis there. Nobody has any dollars to pay for importation of their products and the official exchange rate of 6 Bolivars to the dollar is not even a fraction of the black market rate of 184 to the dollar. It makes no sense to accept Bolivars for your imported products. Shares fell -6% on the news.

This is a very obvious sign that the dollar strength is going to be a challenge for S&P earnings since about 50% of the revenue on the S&P comes from international sales.


Honeywell (HON) reported adjusted earnings that rose +15.3% to $1.43 that beat estimates of $1.42. Sales declined -1.1% to $10.3 billion and narrowly beating estimates of $10.2 billion. However, Aerospace sales declined by -6% to $4 billion as a result of the strong dollar. They reaffirmed full year guidance of $5.95-$6.15 and sales of $40.5-$41.1 billion. Analysts were expecting $6.11 and $41.7 billion. The company blamed the strong dollar and currency translation issues for the weak forecast. Shares responded positively to the news with many analysts expecting an earnings miss.


Market

We have reached the fork in the road as Johnny Carson joked so many times in decades past. The rebound last week from oversold conditions was basically a short squeeze and traders positioning themselves ahead of the ECB decision. The S&P rebounded to prior resistance at 2,064 and stalled. The coming week is going to be crucial for longer term market direction.

The FOMC meeting, the GDP and the Employment Cost Index could represent potholes in the rally road. Earnings reports from 25% of the S&P could either propel us higher or kill the rebound depending on the results. Eventually the strong dollar excuse will be a "get out of trouble free" card once enough companies use it. Initially it could be a slick spot in the market's uphill climb. We have seen in quarters past when there is a common excuse that is not the fault of the companies that the excuse is eventually ignored. Investors just accept it and overlook it. I don't think we are there yet although Ford (F) warned it was taking an $800 million charge for currency issues and the stock declined only 12 cents.

The election in Greece will be a lingering trouble spot all week. Whichever party wins they will have three days to form a coalition. If they can't form a coalition the country would be forced into new elections. They need 38% of the vote for a parliamentary majority and the Syriza party is expected to win with only 32.5% of the vote. There are 22 parties in the election. Syriza will have to form a coalition with one or more to reach the 38% control needed for Parliament. Since only a handful of those 22 parties will garner the minimum 3% of the vote to gain a seat in parliament that will limit the possible coalition partners willing to join with Syriza. Greek elections are very confusing because of the wide number of parties and the rules governing the resulting parliament. This means just winning the election on Sunday is only the first step and we will be faced with Greek headlines for the rest of the week. Assuming Syriza does win and is able to form a coalition they will then have about five weeks until the payment deadline on the nearly 200 billion euro loan from the Troika bailout. Syriza claims they are not going to pay it and will scrap existing austerity measures and those headlines will roil the European markets.

Now that the State of the Union is behind us the next problem from Washington will be the expiration of funding for the Dept of Homeland Defense on Feb 27th. Congress is going to use that deadline to pressure the president on his executive actions on immigration. While this is not as big as shutting down the entire government it will be a huge fight with homeland defense as the main topic. With terrorist actions rising the administration will be hammering home the point that we can't do without homeland defense. It could become a very high profile skirmish between the president and Congress so once Greek headlines fade the funding headlines will begin.

Don't you wish this was the good old days when all the market had to worry about was earnings and analyst recommendations?

While all these problems exist in our immediate future we have no idea how they will play out. We need to just follow the charts and not get married to our positions. All the charts are showing key resistance levels and a failure at those levels could lead to another round of market weakness.

The S&P level to watch is 2,064 and the resistance high from January 9th. If we don't exceed that level it would be another lower high and project the potential for a lower low in the days ahead. Breaking through and closing above that level would be bullish and project a return to the December highs at 2,093. Clearly a move through 2,064 would trigger additional short covering but not guarantee a breakout to new highs. There are far too many headlines in our future although bull markets do like to climb a wall of worry.


The Dow failed to return to the January resistance highs at 17,915-17,923. Friday's resistance failure at 17,800 was a lower high and right at downtrend resistance from the December highs. What we have is a triangle forming and eventually there will be a high velocity breakout but today the direction is unknown.

The Dow is particularly at risk because the Dow components are all international companies. They will all have significant currency issues and earnings problems.

Support is 17,275 and resistance 17,800 and 17,915.



The Nasdaq 100 was my key index for the last two weeks and it outperformed by a mile. The index gained +3.28% for the week compared to +0.9% for the Dow and +1.6% for the S&P. The Russell 2000, normally the best performer in January gained only +1.0%. The Nasdaq 100 made a higher high and came very close to downtrend resistance at 4,300 with a high at 4,292 on Friday. The Nasdaq big caps will be driven by the Apple earnings on Tuesday. Traders will be cautious ahead of the event and then follow Apple on Wednesday. Microsoft reports on Monday and they could also be a lift or an anchor.

This is a somewhat bullish chart with the triple bottom just below 4,100 and the approaching resistance test at 4,300. If the $NDX breaks through that 4,300 level it will be very close to a new relative highs at 4,321 for December and 4,337 from December. If the large caps decide to run they could drag the rest of the market with them.


The Nasdaq Composite is less defined but the objective is clear. Resistance at 4,800 from November would be a triple top head and shoulders formation if the index failed at that level. The 14 year high in December of 4,813 would be the next challenge. The Composite index could struggle if a lot of the smaller stocks start missing on earnings. I would rather key on the $NDX and let it pull the composite index along.

Support 4,570 and resistance 4,800.



The Russell 2000 is underperforming and stuck in its recent range between 1,150-1,190. The small caps are being avoided even though they are primarily U.S. focused and have little currency exposure. The weakness stems from the constant whining about deflation in Europe contaminating the rest of the world economy and eventually dragging our markets lower. Since most small caps are U.S based this European malaise excuse is unfounded.

However, we have to trade what we see rather than what we believe. If small caps are not performing then trade something else. This is a stock pickers market rather than a market of stocks.


The NYSE Composite is still the weakest index. This is probably due to the number of energy and financial stocks in the index. This is a market breadth indicator and it is telling us the broader market is still weak.


The Dow Transports collapsed on Friday with a -1.7% decline thanks to UPS. Earlier in the week the transports tried to rally with the market but the effort was lackluster despite the low prices on oil.


The Goldman Sachs Commodity Index continues to decline with Friday's close the lowest since the financial crisis. Copper, iron, coal, oil, etc continue to push lower as institutional traders are forced to close positions to escape margin calls. Speculators continue to short the commodities because of the rising dollar. It takes less dollars to buy the same pound, barrel, etc, and because of expectations for lower demand in Europe.


I am neutral on the market for next week because of the whirlwind of cross currents in the headlines and the various economic events. This could be a very choppy week for trading. Try not to launch a lot of big bets because the market will almost always go against you when there is a lot of money at risk. Maintain small positions and trade in the direction of the trend. After this week we should see the market turn directional based on the combination of all these events.

Random Thoughts

Many U.S. companies have assets stuck in Venezuela which they are unable to extract. American Airlines (AAL) has $721 million held in the Venezuelan Bolivar currency. It can't remove this money from the country because it can't get dollars in Venezuela. If the airline converted the money at the current market rate of 184 to the dollar they would only receive $25 million. Overall foreign companies have about $16 billion in cash in Venezuela that they can't repatriate. These companies are going to have to take significant charges for currency conversion in their future earnings. Currently the official government exchange rate is 6.4 Bolivar's to the dollar but nobody is willing to do the transaction. There are no dollars in Venezuela. The government said on Friday it is considering merging the three exchange rates that exist and the result would be something in the 50:1 range but even at that level there are no dollars to exchange. If the government does devalue the Bolivar every company with dollars held hostage will be forced to take a charge on their statements. Expect a lot of Venezuelan line items in the coming earnings reports. P&G, Ford, General Motors, Baker Hughes, Brinks and others have already announced charges.

Saudi Arabia is in trouble. King Abdullah died last week and King Salman has taken over as his successor. Immediately the new king is facing a world of problems. With Iranian backed rebels taking control of Yemen last week and the U.S. backed government dissolving that is one more country bordering Saudi Arabia that is hostile to that country. Iranian backed rebels or Iranian troops now control significant portions of Iraq, Syria, Jordan and Lebanon.

Saudi is currently constructing a high tech 600 mile long border fence along the Iraq border to keep ISIS and refugees from Iraq out. Called the Northern Border Security Project it is a high tech way to provide alerts if ISIS decides to cross the border into Saudi Arabia. One of the ultimate goals of ISIS is to capture Saudi Arabia, home to the "Two Holy Mosques" of Mecca and Medina. The project had been discussed since 2006 but work began on a crash basis in September after ISIS began charging across Iraq. The border defense zone includes five layers of razor wire fencing, watch towers, night-vision cameras and radar cameras. There are underground censors, sand berms, reconnaissance vehicles, 240 rapid response vehicles, helipads, 1,450,000 meters of fiber optic cable and 30,000 troops. Despite all this preparation this may not be enough to protect the country with Iranian backed forces on nearly every side. Description of fence with pictures

If those are not enough problems the new king is 79 years old, is partially crippled by a previous stroke and suffers from dementia.

Since the attack on Charlie Hebdo in France more than 19,000 French websites have been hit by cyber attacks according to a top French security official. Many of those were carried out by well-known Islamic hacker groups. The sheer volume of attacks had never been seen before according to French officials. Military authorities have launched round the clock surveillance to protect government sites coming under attack.

In the unbelievable but true column President Obama agreed to be interviewed after the SOTU speech by GloZell, a self described YouTube star with more than 3 million subscribers to her channel. Her claim to fame is filling a bathtub with milk and fruit loops and then swimming in the mess while slurping up the cereal. Other programs on her channel include stuffing a condom up her nose. Meanwhile the president refuses to meet with Israeli President Netanyahu when he visits the U.S. in early March.


The president has also refused to put combat troops on the ground in Iraq but there are rumors there will be U.S. military advisors (translation = SEALS) on the front lines when the Iraqi military attempts to retake Mosul in the coming weeks. The retaking of Mosul is likely to be an intense and long lasting battle. Coalition forces have intensified air strikes around Mosul in an effort to cut supply lines and degrade the forces currently holding the city. General Dempsey said the U.S. advisors would "support Iraqi forces on the ground." They could call in air strikes and direct Iraqi forces during the battle. Anyone close enough to do those things would have to be close enough to be targeted by ISIS artillery.

Business Insider published a great chart of past bull/bear markets and their durations. This reduced size version is a little hard to read but click the link for the full size version. It is worth the click. Bull and Bear Markets


Despite the weak economics, record lows on the 30-year treasury, monster QE in Europe and shrinking economies in China and Japan, the Fed is still pushing the mid-year rate hike scenario. They believe the falling oil prices are going to be so stimulative to the economy that rate hikes will be necessary to slow inflation. We don't have any inflation now but they are convinced it will appear by summer. Future employment reports could throw a wrench into their plans. With hundreds of thousands of energy related workers losing their jobs it will be tough for the economy to offset that drain. Also, removing hundreds of billions in spending by energy companies is going to be a serious drag on GDP. Thanks to cutbacks in energy employment initial jobless claims have risen about 50,000 per week since the cycle low in October. Stay tuned!

A survey by ConvergEx Group of 306 investment professionals found that crude prices are just $17 away from triggering a global recession. They found that at some point low oil prices are no longer stimulative and the decline in exploration and production spending triggers a global slowdown. The $30 level is the most common trigger point according to the analysts surveyed. $35 was the second most common level listed with 26% of respondents believing that would trigger the global recession. Over 68% of respondents believe oil prices have not yet bottomed.

Active rigs drilling for oil and gas declined -43 to 1,633 for the week ended on Friday and is now down -15% from the highs at 1,926 back in September. This is the lowest level of activity since August 2010 and dropping fast. Despite the decline in active rigs U.S. production declined only 6,000 bpd from the 35 year high of 9.192 mbpd in the prior week. Crude inventories rose 10.1 million barrels last week and the largest increase since March 2001 and the highest inventory level for late January in 8 decades. It will take 6-12 months for the impact of the rig declines to be reflected in oil production.


Green = recent highs, yellow = recent low.

Gasoline prices continue to decline with the streak currently at 119 days. Oklahoma is in the lead with gasoline prices at $1.49 at several stations. AAA reported on Saturday the national average was $2.03 and still declining. They are predicting sub $2 gasoline by the end of next week.

So far every trading day in 2015 has seen a Dow trading range of more than 200 points. This is extremely rare. Fifteen days in a row of 200 point ranges has not been seen in a long time. On analyst pointed out that even moderate orders are moving markets and nobody appears ready to take long term positions. Funds are trying to move money around but having a very hard time doing it because of the volatility. Volume is shrinking with only 6.2 billion shares on Friday. Volume has been heavy on the down days and light on the rally days. The higher we move the lighter the volume. Indecision is rampant. Conditions are setting up for another flash crash.

The Transportation Security Administration (TSA) found more than 2,200 guns in airport carry-on bags in 2014. That is 400 more than they found in 2013 and three times the number found in 2005. Over 80% of those guns were loaded. This statistic is unbelievable. Why anyone would think they could just walk on an airplane with a loaded gun in their bag after 14 years of increased airport security is unknown.

Israel released security video of new Iranian Intercontinental Ballistic Missiles capable of reaching the USA. The video shows a long-range 27 meter missile on a launch pad outside Tehran. There are U.N. sanctions against Iran to prevent them from developing long-range missiles. Apparently the sanctions are not working too well. Also, the IAEA now says Iran has enriched enough uranium to construct between 8-12 nuclear weapons within 3-6 months. More than 86% of Middle Eastern experts surveyed believe President Obama will not be able to stop Iran from constructing and testing nuclear weapons over the next 12-18 months. That is really unsettling.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"It is the soldier who salutes the flag,
Who serves beneath the flag,
And whose coffin is draped by the flag,
Who allows the protester to burn the flag."

Charles Province

 


Index Wrap

Bottoms Made and 'Tested' and Rebound Followed

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Bottoming action was apparent coming into this past week. Good sized rebounds followed that put the major indexes back above their 21-day moving averages in a 'confirming' upside momentum shift.

Secondary lows were traced out recently that formed lines of support that held a bit above the mid-December bottom in the S&P and Dow. At the recent bottom touching oversold readings again, the RSI was also suggesting upside reversal potential. As noted already piercing the 21-day moving averages is a potential confirming shift in momentum back to advancing.

The key Nasdaq Composite and Nas 100 traced out double and triple bottoms, with RSI 'oversold' readings at the mid-January bottom. The subsequent sustained move above the 21-day moving averages suggests more upside to come.

VIX Technical Commentary; Daily and Hourly charts

I'm featuring commentary on the VIX, the S&P 500 Volatility Index along with my commentaries on the major stocks indexes; this week will feature both the VIX daily and hourly charts. I may continue VIX commentary every week or for when a VIX trend develops (or one that may be developing) worth looking at.

My two most recent Trader's Corner articles were on the S&P 500 Volatility Index (VIX) in general and toward the goal of finding winning trade ideas:

1.) "Trading volatility, Pt.1" (1/15/15): The tremendous growth in volume in VIX options on the CBOE, ideas on trading strategy and contract specifications.

2.) "Trading volatility with VIX options, Pt.2" (1/22/15): Spotting tradable shifts in trend based VIX chart pattern and indicator analysis and discussed and illustrated.

VIX trends, both on a 2-3 day basis and on a 2-3 week outlook, can be assessed with the same chart analysis and related technical indicators, that work with any other index or stock; e.g., pattern recognition, overbought/oversold considerations (especially when VIX is at overbought extremes), etc.

My VIX daily chart below illustrates the recent 'extreme' upside area where VIX has been tending to make tops. VIX relative to the price of the S&P 500 (SPX) tends to have an inverse trend relationship. When VIX has shot up into a possible TOP in the higher 'extreme' ranges shown below we can anticipate a BOTTOM in the S&P. Conversely, when VIX has bottomed in the areas highlighted, we can anticipate a counter-trend move HIGHER in VIX at some point ahead, coupled with a DOWNWARD slide in SPX.

It has often been easier to anticipate VIX falling back toward the 14 to 12 range from spikes into the 22 to 26 zone, by buying VIX puts than it has been to anticipate a SIZABLE upside move per the VIX daily chart below. Although, 'oversold' RSI readings, at 40 in the period shown below (on a 13-day basis) in the Relative Strength Index (RSI) has suggested a reasonably good 'bet' on the Call side; e.g., late-August and early-December.

I find considerable value in analyzing the hourly VIX chart, accompanied by use of the 21-hour Relative Strength Index (RSI). There's quite a bit of trend analysis that can be made on based on the hourly chart seen next.

Note the periods since early-December with two bearish VIX/RSI divergences. In two instances per my chart highlights, VIX was going up but its 21-hour RSI was trending LOWER in the first example OR simply not 'confirming' VIX action into its second peak in the second example.

Also of course in the recent late-December to mid-January example VIX made a distinct double top which is a POTENT top pattern. RSI was trending lower during the period when this double top was made.

I made the point in my week-ago Trader's Corner to look for a potential break of the up trendline intersecting just under 21, which would then suggest a move to at least 18 and possibly or probably lower such as to support in the VIX 16 to 14 zone. I would exit VIX puts on dips to 16 or under. I'm less inclined to buy VIX calls in the 16 to 14 range (perhaps at 14) as volatility, represented by VIX can be down for weeks at a time as seen on the daily chart above. Whereas, peaks in VIX above 22, tend to be relatively short-lived.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The SPX index is bullish in its recent rebound form a line of support that formed just under 2000. SPX might continue to be confined to its current 1970-2100 trading range; hard to say, but this price range in SPX has been in place for nearly 3 months now. Upside potential for a time anyway could be limited to around 2100.

Near SPX resistance is highlighted in the 2063 area, then at 2090-2100. Longer-term weekly charts (not shown) suggest potential chart resistance in the 2130 area, also the current intersection for my upper 'resistance' moving average envelope line.

Near support is suggested at 2020, extending to the 2000-1990 area. The recent bottom also saw the RSI back into it's typical oversold zone, so the subsequent rebound was 'supported' by that oversold reading even if it was 1-day there only. In a rising trend, as we continue to have in this 6-year bull market, oversold 'extremes' such I highlight on the chart are potent places to look for 'confirming' upside reversal PRICE action.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has regained bullish upside momentum after continuing to find support/buying interest on dips to the 880 area. The longer that similar lows were traced out (2-3 days might be it), the stronger the potential for a rebound. An upside penetration of the 21-day moving average line then 'defines' for me a bullish breakout. Not so if prices start quickly sliding back below this key trading average.

Near OEX chart support is suggested at 890, extending to 880. Near resistance in the Index is at the line of prior highs in the 910 area. Pivotal technical resistance is anticipated in the 920-925 price zone.

From current levels the odds favor some further upside. A key upside test for the bull would be their ability to push OEX above 920 and go on from there. Even so, OEX might not have potential to beyond 933-940 for awhile.

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

The Dow 30 (INDU) Average is neutral to bullish in its pattern. INDU has rebounded from the line of lows seen in the chart and of course bullish price action. The 'neutral' consideration relating to INDU's now 3-month old trend that the Dow has been bouncing between repeated highs and lows, perhaps stalling the intermediate-term to long-term trend in coming weeks.

A continued broad trading range has opportunities if the Dow were to remain within 17100 to 18100. A 1000 point price range, as long as it's predictable, is a great environment for my options account, not so much for owned stocks.

INDU needs to climb above 17800 to get enough momentum to suggest a test of resistance in the 17920-18100 zone. Fairly major resistance starts in the 184000 area.

Support is expected around 176000, with more pivotal technical support at 17400 in the near-term.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is trending a bit above the middle of its nearly 3-month old price range. Upside potential is to a retest of 4800 resistance most likely and possibly for a further rally above 4800 that carried to a peak 4875-4900.

Upside potential would look increasingly promising if the 4800 level was not only exceeded but then became a support on pullbacks. Good potential from 4800 would then project to the 4900 area. Eventually COMP looks headed to 5000.

Near support is 4700. Next support is 4600. I'd look for good bounce back potential on dips to under 4700. Inability to find support in the 4700 area suggests a possible dip again to 4600.

Nothing more than neutral in the RSI or CPRATIO (bullish/bearish) sentiment) indicators. Price action above the 21-day moving average suggests a projected 'maximum' upside potential to my upper trading 'band', at 3 percent above the 21-day average.

NASDAQ 100 (NDX); DAILY CHART:

The NDX 100 (NDX) made a bullish double bottom in the 4100 area then has rallied strongly as seen in the Index cutting sharply through implied resistance at the 21-day average. 4300 is near resistance, but above 4300 there are prior highs in the 4327-4347 area that is a next implied resistance.

A bullish pattern continues given a move above 4300 and support established after that close the 4300 breakout point; if this pattern then on perhaps to 4400 and my 'maximum' upside target on a 2-3 week horizon.

Near support is in the 4200-4215 area, extending to 4150.

The Nasdaq 100 volatility index, VXN, is trending lower with the Index now at 17, but which could be headed back to 16 at a minimum and perhaps back to very low volatility implied if VXN dropped back to the 14 area. From there a next rally around the corner? Stay tuned!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ pattern of the rebound from long-standing support in the 100 area wasn't surprising. The strong subsequent rebound took the Q's swiftly back above its 21-day average and it appears that QQQ could next challenge its most recent prior high at 105.2. 106-106.2 then looms as a next key resistance.

Near support begins at the 21-day average at 102.6 and extends lower to the highlighted (up green arrow) 102 support. Should 102 give way, 101 is a next likely support.

Upside potential looks like from 104 to 106; downside 'risk' suggests from 104 back to 102. A balanced 50/50 risk relative to reward potential is a new directional trade (calls or puts); not my kind of risk-to-reward. I don't like could be heads, could be tails.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is bullish near term; intermediate-term we have to see the Index as in a sideways trend; actually commonly called 'non-trending'. No, RUT is just going laterally.

The 1160 area was and is key support. Near support is 1180. Assuming no break below 1180 I anticipate further upside, such as to 1200 next, then to a re-test of the prior 1220 high.

Odds suggest a move to 1220 quite possibly, no certitude beyond that but downside doesn't look lower than to 1165-1160.


GOOD TRADING SUCCESS!




New Option Plays

Technology & Healthcare Winners

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Avago Technologies - AVGO - close: 106.98 change: +1.78

Stop Loss: 101.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.2 million
Entry on January -- at $---.--
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below

Company Description

Why We Like It:
AVGO is in the technology sector. They are part of the semiconductor industry. They make chips that speed up mobile phones while reducing interference. According to company marketing materials, "Avago Technologies is a leading designer, developer and global supplier of a broad range of analog, digital, mixed signal and optoelectronics components and subsystems with a focus in III-V compound semiconductor design and processing. Backed by an extensive portfolio of intellectual property, Avago products serve four primary target markets: wireless communications, wired infrastructure, enterprise storage, and industrial and other."

AVGO is probably best known as a part supplier to Apple Inc. (AAPL). AAPL's huge success with the iPhone 6 and 6+ has been a blessing for AVGO. Earnings and revenue growth is seeing significant moment. The last few reports have all come in above expectations with revenues up +25% in the second quarter, +100% in the third quarter, and up +115.4% year over year in AVGO's fourth quarter (last October). Earnings growth surged +58% quarter over quarter and up +123% from a year ago. Gross margins also improved quarter over quarter and rose from 51% a year ago to 58% in their most recent quarter. Management then raised their guidance for Q1 2015.

Following their December 3rd, 2014 earnings report several Wall Street analysts raised their price targets on AVGO into the $115-122 range. The point & figure chart is even more positive with a forecast of $127.00.

The stock was showing strength again on Friday with a +1.7% gain. AVGO appears to have short-term resistance near $107.50. Tonight we are suggesting a trigger to buy calls at $107.75. I do want to caution investors that AVGO could be heavily influenced by AAPL's earnings report. AAPL reports earnings this coming Tuesday (Jan. 27th, after the closing bell). If AAPL somehow disappoints it could negatively impact shares of AVGO.

Trigger @ $107.75

- Suggested Positions -

Buy the MAR $110 CALL (AVGO150320C110) current ask $4.70

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

Daily Chart:

Weekly Chart:


Valeant Pharmaceuticals - VRX - close: 159.66 change: +0.47

Stop Loss: 154.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.5 million
Entry on January -- at $---.--
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below

Company Description

Why We Like It:
Healthcare stocks have been some of the market's best performers in 2015. VRX is helping lead the group higher with a +11.5% gain already.

The company's website says, "Valeant Pharmaceuticals International, Inc. is a multinational specialty pharmaceutical company that develops and markets prescription and non-prescription pharmaceutical products that make a meaningful difference in patients' lives. The company's growth strategy is to acquire, develop and commercialize new products through strategic partnerships, and strategically expand its pipeline by adding new compounds or products through product or company acquisitions. Headquartered in Laval, Quebec, Valeant has approximately 17,000 employees worldwide and is listed on both the New York Stock and Toronto Stock Exchanges under the symbol VRX."

VRX made a lot of headlines last year with its attempted hostile takeover of Allergan (AGN). Eventually VRX lost out to a rival. AGN agreed to a takeout by Actavis (ACT) for $219 a share, which was more than VRX wanted to pay.

Meanwhile VRX has been doing just fine on the earnings front. The company is developing a trend of beating analyst estimates. Plus they guided higher in April 2014, in September and with their last earnings report on October 20th. In November VRX's Board of Directors announced at $2 billion stock buyback program.

This year VRX has already raised guidance again. They see Q4 results above Wall Street estimates. They also raised their guidance for FY2015 into the $10.10-10.40 range compared to consensus estimates near $10.01.

The stock has been surging with a rally to new all-time highs. The point & figure chart is bullish and forecasting at $180.00 target.

Currently VRX sits just below round-number resistance at $160.00. We are suggesting a trigger to buy calls on a breakout at $160.55.

Trigger @ 160.55

- Suggested Positions -

Buy the MAR $170 CALL (VRX150320C170) current ask $4.80

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Snap 4-Day Win Streak

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 ended a four-day winning streak as investors worried over Greek elections and crude oil hitting new multi-year lows.


Current Portfolio:


CALL Play Updates

Alkermes plc. - ALKS - close: 69.81 change: +0.81

Stop Loss: 66.85
Target(s): To Be Determined
Current Option Gain/Loss: + 61.3%
Average Daily Volume = 833 thousand
Entry on January 07 at $63.01
Listed on January 06, 2015
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/24/15: Friday proved to be a relatively quiet day for shares of ALKS. However, when the S&P 500 was trending lower Friday afternoon shares of ALKS were actually rising.

Tonight we are moving the stop loss up to $66.85.

I am not suggesting new positions.

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

01/24/15 new stop @ 66.85
01/10/15 new stop @ 59.25
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

chart:


Big Lots Inc. - BIG - close: 46.76 change: +1.59

Stop Loss: 43.40
Target(s): To Be Determined
Current Option Gain/Loss: -10.5%
Average Daily Volume = 1.26 million
Entry on January 15 at $45.75
Listed on January 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
01/24/15: The rebound in BIG accelerated on Friday. Shares are up three days in a row. The stock's big +3.5% surge on Friday broke through recent resistance near $46.00.

I'm not suggesting new positions at this time.

Earlier Comments: January 14, 2015:
It would appear that investors have a pretty short memory when it comes to BIG. This company is in the services sector. They're part of the discount store industry.

According to company marketing materials, "Big Lots Inc. (BIG) is a unique, non-traditional, discount retailer operating 1,495 BIG LOTS stores in 48 states with product assortments in the merchandise categories of Food, Consumables, Furniture & Home Decor, Seasonal, Soft Home, Hard Home, and Electronics & Accessories."

The stock saw big gains in 2014 at least until they reported their Q3 earnings in December. That big drop on the daily chart was a reaction to BIG's earnings results. Analysts were expecting a loss of $0.05 a share on revenues of $1.12 billion. BIG reported a loss of $0.06 with revenues virtually flat at $1.11 billion. Guidance was only in-line with Wall Street's estimates.

The good news is that BIG does expect to see a profit again in the fourth quarter. They also reported +1.4% comparable store sales growth in the third quarter, which not only beat the -2.5% comp sales from a year ago but was the first positive growth in three years. None of that mattered. BIG plunged -17% on its Q3 report and didn't find support until the $38.00 area.

Since then shares have seen something of a turnaround. After consolidating sideways for a couple of weeks BIG has shot higher in January while most of the broader market has been sinking. The breakout above technical resistance at its 50-dma and its 200-dma is encouraging.

This morning the U.S. retail sales data came in below expectations and yet BIG managed to shrug off this headline. Traders bought the dip near the 50-dma (around $44) this morning. By the closing bell BIG was outperforming with a +1.6% gain.

It looks like this relative strength may continue. Further gains could spark some short covering. The most recent data listed short interest at 17% of the relatively small 52 million share float. Today's intraday high was $45.65. We are suggesting a trigger to buy calls at $45.75. The 200-dma is at $43.50. We'll start this trade with a stop at $43.40.

- Suggested Positions -

Long Apr $47.50 CALL (BIG150417C47.5) entry $2.85

01/15/15 triggered @ 45.75
Option Format: symbol-year-month-day-call-strike

chart:


Cracker Barrel Old Country Store - CBRL - cls: 134.46 chg: +1.04

Stop Loss: 129.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 248 thousand
Entry on January -- at $---.--
Listed on January 22, 2015
Time Frame: Exit prior to earnings in late February
New Positions: Yes, see below

Comments:
01/24/15: CBRL continued to rally on Friday as we expected. However, the stock did struggle with short-term resistance at $135.00. Our suggested entry point to buy calls is at $135.15.

Earlier Comments: January 22, 2015:
The falling price of gasoline in the U.S. is a significant tailwind for the restaurant industry. AAA said the price of gas has fallen 119 days in a row with the national average down to $2.04 a gallon. Looking in the rearview mirror we can see how it affected the restaurant industry.

According to TDn2K's Black Box Intelligence data restaurants saw their same-store sales grow +3.1% in December, the fastest pace in three years. The fourth quarter of 2014 delivered the fastest same-store sales growth in the last six years. Another industry analyst believes that having more money in their pocket from low gas prices means that consumers are willing to trade up from fast-food to more traditional dining options.

One firm that should benefit is CBRL. According to the company, "Cracker Barrel Old Country Store, Inc. provides a friendly home-away-from home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that’s surprisingly unique, genuinely fun and reminiscent of America's country heritage … all at a fair price. Cracker Barrel Old Country Store, Inc. (CBRL) was established in 1969 in Lebanon, Tennessee and operates 634 company-owned locations in 42 states." Another detail that makes CBRL unique is that 85% of the company's locations are at Interstate highway exits (likely near a gas station).

Earnings last year were decent. The company has developed a trend of beating Wall Street's estimates and then guiding lower. Management has either been super cautious on guidance or they're trying to manage expectations. Their most recent earnings report was November 25th. CBRL earnings were up +16% to $1.42 a share. That beat estimates of $1.29. Revenues came in at $683 million, above the $665 million estimate. CBRL said their same-store sales surged +3.3%, which was above the industry average.

Once again CBRL management lowered their immediate quarter guidance but this time they did raise guidance for FY2015.

Looking ahead the restaurant industry should see easy comparisons to January and February last year since much of the country was blanketed by winter storms. On the other hand several states raised their minimum wage, which began on January 1st this year so that has the potential to impact restaurant industry margins.

Technically shares of CBRL have just performed a 38.2% Fibonacci retracement from their recent high. This bounce might be an entry point. However, I want to see CBRL break through some short-term resistance. Tonight I'm suggesting a trigger to buy calls at $135.15. We will plan on exiting prior to the company's earnings report in late February.

Trigger @ $135.15

- Suggested Positions -

Buy the MAR $140 CALL (CBRL150320C140) current ask $2.85

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

chart:


Monster Beverage Corp. - MNST - close: 119.31 change: -0.68

Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: -22.2%
Average Daily Volume = 1.1 million
Entry on January 23 at $120.25
Listed on January 17, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: see below

Comments:
01/24/15: MNST finally broke through resistance near $120 on Friday morning. The stock hit our suggested entry point at $120.25. Unfortunately the rally didn't last very long. Shares treated and followed the market lower. Nimble traders could try and buy calls on a bounce from short-term support at the 10-dma (currently $117.00) but I am suggesting we wait for a new rally past $120.25.

Earlier Comments: January 17, 2015:
Shares of MNST have been extremely effervescent. Last year the NASDAQ composite rallied +13.4%. Yet MNST soared +59% in 2014. Thus far in 2015 the NASDAQ is down -2.1% while MNST is up +9.7%. The stock looks poised for more gains.

The company's market material describes MNST as, "Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks and alternative beverages including Monster Energy® brand energy drinks, Monster Energy Extra Strength Nitrous Technology® brand energy drinks, Java Monster® brand non-carbonated coffee + energy drinks, M3® Monster Energy® Super Concentrate energy drinks, Monster Rehab® non-carbonated energy drinks with electrolytes, Muscle Monster® Energy Shakes, Übermonster® energy drinks, and Peace Tea® iced teas, as well as Hansen's® natural sodas, apple juice and juice blends, multi-vitamin juices, Junior Juice® beverages, Blue Sky® beverages, Hubert's® Lemonades and PRE® Probiotic drinks."

A big part of last year's gains in MNST came in August. On August 15th, 2014 it was announced that Coca-Cola (KO) was buying a 16.7% stake in MNST. This is part of a long-term strategic partnership to conquer the energy drink category. This generated a +20% pop in shares of MNST and the stock has been in rally mode ever since.

Earnings have been mediocre. MNST has beaten Wall Street's bottom line earnings estimate the last three quarters in a row. Yet they also missed analysts' revenue estimates those same three quarters. Revenue growth has actually been slowing down. Their Q4 2013 revenues grew +14.7% while their Q3 2014 revenue growth was down to +7.7%. Investors don't seem to care.

There has been a lot of analyst action on this name with both upgrades and downgrades in the last several weeks. So far the upgrades are outnumbering the downgrades. This past week saw Cowen upgrade MNST and give it a $140 price target.

The bears are that MNST will suffer from stronger competition from Red Bull, their main rival. They've been rival for years, so what's going to change? There is the valuation argument that MNST is too expensive with the stock trading at 36 times earnings.

Bulls can argue that MNST will see stronger growth when they make the switch to KO's global distribution system. Right now international sales only make up 22% of MNST's total revenues and MNST only has 5% of the international energy drink market. That compares to 37% of the energy drink market in the U.S. By joining KO's distribution platform it's going to give MNST a lot more exposure overseas, especially in Latin America and China. Currently MNST has zero exposure in China. There is speculation that MNST could double its market shares internationally pretty quickly.

Another bonus for MNST is the consumer spending situation in the United States. About 70% of MNST's sales come from convenience stores and gas stations. The massive drop in gasoline prices is very bullish for MNST since consumers will have more money in their pocket after filling up.

At a recent investor meeting MNST said that sales growth in the energy drink category had "re-accelerated" after three consecutive quarters of slowing sales growth (not declines, just slower growth).

There is speculation that MNST might be able to raise prices in the U.S. since their rival, Red Bull, recently raised their prices. There is also the relationship with KO as the company could up its stake in MNST to 25%. Of course they could outright buy MNST too.

The point & figure chart for MNST is bullish and forecasting a long-term $155.00 target. We are not setting a target tonight. The plan will be to exit prior to earnings in late February. The $120.00 level might be round-number resistance so we are suggesting a trigger to buy calls at $120.25.

- Suggested Positions -

Long MAR $125 CALL (MNST150320C125) entry $4.50

01/23/15 triggered @ 120.25
Option Format: symbol-year-month-day-call-strike

chart:


Royal Caribbean Cruises - RCL - close: 84.51 change: -0.62

Stop Loss: 79.65
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:
01/24/15: RCL has earnings coming up on Thursday, January 29th, before the opening bell. That means we don't have much time left. We should tentatively plan on exiting either Tuesday at the close or Wednesday at the closing bell.

I am not suggesting new positions.

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

01/24/15 Earnings are coming up on Thursday, Jan. 29th. Prepare to exit before they report earnings.
01/14/15 new stop @ 79.65
12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike

chart:


Constellation Brands - STZ - close: 110.61 change: -0.79

Stop Loss: 104.85
Target(s): To Be Determined
Current Option Gain/Loss: -0.8%
Average Daily Volume = 1.25 million
Entry on January 15 at $109.36
Listed on January 14, 2015
Time Frame: Exit prior to February expiration
New Positions: see below

Comments:
01/24/15: STZ has spent the last three trading days moving sideways. I would wait for a new rally past $111.50 before considering new bullish positions in STZ. More conservative traders may want to start raising their stop loss.

Earlier Comments: January 15, 2015:
Today the big players in the beer industry like Anheuser-Busch InBev (BUD) and Molson Coors (TAP) are losing market share to smaller craft beer brewers. Yet STZ actually seeing momentum in its beer portfolio.

STZ is part of the consumer goods sector. According to the company's website, "Constellation Brands, Inc. is a leading wine, beer and spirits company with a broad portfolio of premium brands. Constellation is the world leader in premium wine, the leading multi-category beverage alcohol company in the U.S. and the number three beer company in the U.S. Headquartered in Victor, New York, Constellation Brands is an S&P 500 Index and Fortune 1000® company with more than 100 brands in our portfolio, sales in approximately 100 countries and operations in approximately 40 facilities."

Last year the stock was a strong performer. The S&P 500 rallied about +11% in 2014 while STZ surged +39%. Investors have been consistently buying dips. The relative strength from last year has carried into 2015.

The company recently reported earnings on January 8th. Wall Street was expecting a profit of $1.14 per share on revenues of $1.51 billion. STZ said their earnings rose +11.8% to $1.23 a share. Revenues were up +7% to $1.54 billion, beating estimates on both counts. Management then raised their 2015 guidance from $4.10-to-$4.25 to $4.25-to-$4.35. That compares to Wall Street's 2015 estimate of $4.24.

STZ's CEO Rob Sands commented on their latest results saying, "We achieved outstanding results for the third quarter driven by the exceptional ongoing momentum for our beer business." Their beer sales rose +16% and gained market share.

The stock has seen multiple upgrades in January and currently trading at all-time highs. Today traders bought the dip near $105.00. The stock looks poised to breakout past short-term resistance at $108.50. The point & figure chart is bullish and forecasting a long-term target of $127.00.

We are suggesting a trigger to buy calls at $108.65. We'll start this trade with a stop at $104.85.

- Suggested Positions -

Long FEB $110 CALL (STZ150220C110) entry $2.47

01/15/15 triggered on gap open at $109.36, trigger was $108.65
Option Format: symbol-year-month-day-call-strike

chart:


Whole Foods Market, Inc. - WFM - close: 53.18 change: +0.44

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: +76.1%
Average Daily Volume = 4.9 million
Entry on January 08 at $50.35
Listed on January 07, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
01/24/15: It was a good week for WFM. The stock garnered even more bullish analyst commentary on Friday. Share displayed relative strength with a +0.8% gain. I don't see any changes from my recent comments. Readers may want to raise their stop loss closer to the $50.00 level.

I am not suggesting new positions at this time.

Earlier Comments: January 7, 2015:
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.

- Suggested Positions -

Long FEB $50 CALL (WFM150220C50) entry $2.30

01/08/15 triggered on gap open at $50.35, suggested entry was $50.30
Option Format: symbol-year-month-day-call-strike

chart:


Zebra Technology - ZBRA - close: 84.19 change: -0.77

Stop Loss: 78.75
Target(s): To Be Determined
Current Option Gain/Loss: +5.9%
Average Daily Volume = 494 thousand
Entry on January 12 at $80.85
Listed on January 10, 2015
Time Frame: Exit prior to earnings in February
New Positions: see below

Comments:
01/24/15: After big gains on Thursday ZBRA hit some profit taking on Friday. I cautioned readers that the $85.00 level has been resistance in the past and is potential resistance now. However, it was encouraging to see ZBRA finding support near $84.00 several times on Friday. I am not suggesting new positions at the moment.

Earlier Comments: January 10, 2015:
ZBRA is considered part of the industrial goods sector but they sound more like a technology company. The company website describes them as "Zebra Technologies is a global leader in enterprise asset intelligence, designing and marketing specialty printers, mobile computing, data capture, radio frequency identification products and real-time locating systems. Incorporated in 1969, the company has over 7,000 employees worldwide and provides visibility into valued assets, transactions and people."

Their goods are used by 90% of the Fortune 500 companies. They have almost no debt. Last year they spent almost $3.5 billion buying Motorola Solutions (symbol was MSI). ZBRA's CEO believes that the MSI acquisition will help them capitalize on three big trends: mobility, the Internet of things, and cloud computing.

In February 2014 ZBRA raised their earnings guidance. They did it again two months later in April. Their most recent earnings report was above expectations. ZBRA announced record revenues with sales up +19% in Middle East and Africa, +16% in North America, +11% in Latin America, and +9% in Asia Pacific.

Technically the stock has been stair-stepping higher with a bullish trend of higher lows and higher highs. This past week ZBRA displayed relative strength and broke out to new multi-month highs. The point & figure chart is bullish with a $92.00 target.

Tonight we are suggesting a trigger to buy calls at $80.85. We will plan on exiting positions before ZBRA reports earnings in mid February.

- Suggested Positions -

Long FEB $85 CALL (ZBRA150220C85) entry $1.70

01/12/15 triggered @ 80.85
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Starwood Hotels & Resorts - HOT - close: 75.36 change: +1.84

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: -55.6%
Average Daily Volume = 2.3 million
Entry on January 14 at $73.90
Listed on January 12, 2014
Time Frame: Exit prior to earnings in mid February
New Positions: see below

Comments:
01/24/15: Good news! It looks like the oversold bounce in HOT might be over. After a sharp three-day bounce the stock reversed lower on Friday. At this point I'd like to see HOT close below $74.00 before we consider new bearish positions.

Earlier Comments: January 12, 2015:
HOT is in the services sector. According to a company press release, "Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with more than 1,200 properties in 100 countries, and 181,400 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Meridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands."

The company's most recent earnings report was October 28th. The company beat the bottom line estimate by a penny but missed the revenue number. Management then guided lower. Since then at least two analyst firms (UBS and JP Morgan) have downgraded shares of HOT. JPM said their downgrade was on valuation concerns. Other analysts have issued worries about how the strong dollar might hurt HOT's financials.

There are also concerns that Airbnb could be hurting the hotel business. Airbnb's growth has surged since it was founded back in 2008. Just four year later Airbnb announced their 10 millionth night booked. It may not be fair to say all 10 million of those would have gone to the hotel industry but certainly a good chunk of Airbnb's business has been stolen from more traditional lodging services.

Technically shares of HOT look weak. The point & figure chart is bearish and forecasting at $68 target (which could get worse). Today's breakdown under support near $75.00 looks ominous. The intraday low today was $74.06. Tonight I am suggesting a trigger to buy puts at $73.90. We will plan on exiting prior to HOT's earnings report in mid February.

- Suggested Positions -

Long FEB $70 PUT (HOT150220P70) entry $1.60

01/14/15 triggered @ 73.90
Option Format: symbol-year-month-day-call-strike

chart: