Option Investor
Newsletter

Daily Newsletter, Sunday, 11/16/2014

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Stocks Hit New Highs But Momentum Slows

by James Brown

Click here to email James Brown

The stock market's rally seemed to stall a bit last week. The big cap S&P 500 index still hit new record highs but for the most part equities churned sideways. The question traders want to answer is if this sideways consolidation is merely a rest that recharges the rally or if it's a top before the market corrects lower?

Crude oil remained in focus as the commodity continued to sink. Oil's drop was a surprise for some who expected oil to hold $80 a barrel. WTI crude oil slipped to $73.50 a barrel on Thursday night before ending the week near $76. Brent crude also closed the week below $80 at $79.60 a barrel. The U.S. dollar spent the week consolidating sideways but the Japanese yen continued to hit new lows.

Meanwhile precious metals spiked late in the week as investors expect central banks to buy more gold and there was a story that Russia was buying huge amounts of gold as it prepares for more economic challenges ahead. Gold closed at $1,191 an ounce and silver ended at $16.33 an ounce on Friday.

The drop in oil helped fuel more gains for the transportation stocks and the Dow Jones Transportation average add +1.26% for the week. The semiconductor stocks were also showing strength with a +1.27% gain in the SOX index. Financials and biotechs underperformed with the banking stocks down -0.5% and biotechs down -0.7%. Many individual biotech names experienced much sharper declines. There has been some suggestion to watch the biotech stocks as a sentiment indicator and the weakness last week could be a warning signal.

Economic Data

Economic data in the U.S. was light but what we did see was generally positive. The NFIB small business optimism index improved from 95.3 in September to 96.1 in October. The labor market continues to slowly improve and new data showed people were quitting their jobs at the highest levels since 2008, which suggest they are finding it easier to get better jobs.

Consumer sentiment continues to improvement and the November reading rose +3 points to 89.4, which is a seven-year high. The current conditions number surged five points to 103.0. Analysts believe that plunging gasoline prices have played a big role in consumer sentiment, which suggest a happier, more active shopper.

We did see improvement in the latest retail sales numbers. The U.S. Commerce Department said the nation's retail sales rose +0.3% in October compared to a -0.3% drop in September. Falling gasoline prices negatively impacted the overall headline number. If you back out the impact of gas and automobile sales on retail sales then October saw +0.6% improvement.

Overseas Economic Data

Economic data overseas remains mixed. We did not get a lot of news out of Asia. Although a falling yen, which makes Japanese exports cheaper, helped push the Japanese NIKKEI to a seven-year high. It did not hurt that we are hearing speculation Japanese Prime Minister Shinzo Abe might delay the next proposed sales tax increase planned in 2015.

There is also speculation that the European Central Bank (ECB) will start buying asset-backed securities as early as this week. Most of the focus on Europe revolved around the latest GDP numbers. As a whole the Eurozone GDP grew at an annualized pace of +0.6%. Quarter over quarter the Eurozone only grew at +0.2%. Smaller, still struggling countries like Greece saw improvement with the Greek economy growing +0.7%. Spain saw improvement as well with +0.5% growth. Yet Italy came in at -0.1%, marking its third negative quarter in a row (Italy is in a recession).

France came in better than expected with +0.7% growth in the third quarter, up from -0.1% in the second quarter and better than the +0.1% estimate. Unfortunately, the Eurozone's biggest economy is Germany and Germany narrowly escaped another recession. Last quarter Germany's economy fell -0.1%. According to last week's report Germany grew +0.1% in the third quarter. That means technically Germany has avoided a recession, which is two quarters in a row of negative growth but we are assuming this number isn't revised lower.

Low growth isn't Europe's only problem. They're still facing the looming threat of deflation. The latest numbers showed Eurozone's annualized inflation at +0.4%, which is significantly below the ECB's target of 2%. Influential analyst Mohamed A. El-Erian warned that Europe is facing a number of challenges and is the world's biggest economic threat. El-Erian pointed out that Europe depends on exports and the current geopolitical tensions with Russia and all the sanctions between Russia and the West have significantly hampered Europe's export growth.

El-Erian acknowledges that the ECB is trying to help but the central bank cannot create "genuine growth creation". He cautioned investors saying, "The world's growth engines aren't powerful enough to pull the caboose of Europe with a quasi-permanent growth deficit. The danger is that, especially with slowing activity in emerging economies, Europe could end up dragging down the most robust countries (particularly the U.S., which the rest of the world is looking to as a global growth locomotive)."




Major Indices:

The S&P 500 eked out +0.5% gain last week. That means the index is up four weeks in a row. It also means the S&P 500 is up +12.0% from its October 15th low of 1820, just 22 trading days ago. This index is very short-term overbought. A pullback would be healthy.

If we do see a pullback the 2,000 mark is a good spot to look for support. A normal 38.2% Fibonacci retracement of the rally from its October low would mean a dip to 1955 but I do not expect the index to decline that much. There are too many investors itching at the chance to jump in and buy stocks on a pullback.

Year to date the S&P 500 is up +10.3%.

chart of the S&P 500 index:

The NASDAQ displayed some relative strength last week +1.2% gain. These are new 14-year highs. The NASDAQ is also short-term overbought with a 572-point bounce from its October 15th low (+13.8%). Yet the NASDAQ doesn't seem to be slowing down. It paused the first week of November but posted gains every day last week.

If the NASDAQ composite can breakout past round-number resistance near 4700 then the next resistance level could be 4750. Alternatively, if stocks see a pullback the 4600 level should be support. Below that I'd look for support near 4500. Year to date the NASDAQ is up +12.3%.

chart of the NASDAQ Composite index:

It was a very different story for the small cap Russell 2000 index. Thursday's decline in the $RUT looks like a bearish reversal. Friday saw further weakness and a breakdown under the $RUT's simple 10-dma. The index hasn't closed below the 10-dma since mid October. The two-day pullback erased the $RUT's gains to just +0.04%. If we do see stocks retreat the 1150 area should be support as the level is underpinned by the simple 200-dma.

Unfortunately, weakness in the Russell could be a bearish sentiment indicator. The small caps tend to outperform the market on the way up and underperform the market on the way down. The $RUT's performance could be another sentiment, early-warning indicator.

chart of the Russell 2000 index



Economic Data & Event Calendar

This week we will see a couple of regional Federal Reserve surveys with New York and Philadelphia reporting. We'll also get a look at inflation on both the wholesale (PPI) and retail level (CPI). The big event could be the FOMC minutes from the last meeting.

Economic and Event Calendar

- Monday, November 17 -
New York Empire State manufacturing survey
U.S. Industrial Production

- Tuesday, November 18 -
Producer Price Index (PPI)
NAHB housing market index

- Wednesday, November 19 -
U.S. Housing starts and building permits
FOMC minutes from the last meeting

- Thursday, November 20 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI)
Existing Home Sales (for October)
Philadelphia Fed survey

- Friday, November 21 -
(nothing significant)

Additional Events to be aware of:

November 24: Iran nuclear deadline
November 27: U.S. market closed for Thanksgiving
December 17: FOMC meeting

Looking Ahead:

As we look ahead I don't see any changes from last week's commentary. We are in a very bullish season for stocks. While the rest of the world seems to be slowing down the U.S. is still looking good or at least better than its competition. Europe remains a major complication for the world stage but that's a slow-motion train wreck that is taking years to play out and won't be done any time soon. A recent Bloomberg Global Poll of international investors supports this outlook. Results said the world is in its worst shape in the last two years. International investors are concerned about slowing growth in Europe and emerging markets and the growing threat of deflation.

Bloomberg posted a short overview of deflation and why governments and central bankers are worried about it. You can read the article here: Deflation - The Trouble With Falling Prices.

I remain optimistic for retail sales and the holiday shopping season. We've been harping on the drop in gasoline prices as bullish for consumers. Gasoline and oil both hit new four-year lows this past week. The trend continues with gasoline futures falling to new relative lows and trading at $1.99 intraday on Friday. We might see the average price of gasoline hit $2.75 a gallon by the end of December.

There is some concern that retail sales could be very hit or miss. Many of the apparel retailers said they saw a strong back-to-school business in August and September but October was soft. Most retail analysts are expecting stronger holiday sales than last year but it will remain a promotional environment. Brick and mortar stores are tired of losing business to online rivals.

Wal-mart, the biggest retailer on the planet, has already told its managers they can price match any offer by Amazon.com. Instead of having a big "Black Friday" promotion a lot of retailers are having a week-long Black Friday event. Meanwhile in the you can't make this stuff up category, some consumers have already started camping out in front of their favorite store to be the first in line on Black Friday.

Currently the S&P 500 is near all-time highs. This is the second longest bull market in the last 85 years. The average bull market only lasts about 165 weeks. The current bull run is 296 weeks old. Odds are it will keep going but we're very short-term overbought and due for a pullback. A simple -2% pullback in the S&P 500 would mean a dip back toward the 2,000 level. Don't be surprised when it shows up. I suspect such a move would be a new entry point for the bulls.

We have about 38 shopping days left until Christmas and only 31 trading days left in 2014.

~ James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market continues to post gains but we're starting to see a few cracks in the rally's armor. A minor pullback now would be healthy for stocks.

I have updated stop losses on DVA

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Stocks Remain Overbought

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(November 16, 2014)

Stocks are little changed for the week. The S&P 500 managed another record high but the small cap Russell 2000 barely closed positive for the week. Transports remain strong thanks to weakness in oil but financials and biotechs were underperforming. We could see the rally start to unravel a little bit.

The U.S. market remains very overbought with a nearly non-stop rally from its October 15th low. There are plenty of reasons to be bullish but stocks need to see a pullback. We don't want to chase the four-week rally so I'm not adding any new trades tonight. However, there is no guarantee the market does see a pullback. Therefore I'm adding three new candidates to the watch list IP, RH, UA .

Radar Screen:
Here is a list of stocks on my radar screen. These have potential to be LEAPS trades down the road if the right entry point presents itself. In no particular order:

WSM, TRLA, PSMT, HPQ, MSFT, CSCO, RAX, HBI, ELLI, DLPH, PANW, DECK, SNDK, ITW, GBX,



Play Updates

Rallies Across The Board

by James Brown

Click here to email James Brown


Closed Plays



None. No closed plays this week.




Play Updates


Checkpoint Software Tech. - CHKP - close: 76.39

Comments:
11/16/14: CHKP continues to rally. The stock displayed relative strength last week with a string of new highs. Shares are now up five weeks in a row. CHKP might be considered short-term overbought here. I'm not suggesting new positions at this time.

If you're holding the 2015 calls you might want to consider an early exit if CHKP nears $80.

NOTE: The 2015 January calls only have about two months left.

Earlier Comments: September 14, 2014:
CHKP is another technology stock and it is similar to AKAM in that both have beaten earnings estimates every quarter this year and both are trading near 14-year highs. While AKAM facilitates Internet traffic, CHKP seeks to guard its clients against Internet hazards.

The company describes itself as, "the worldwide leader in securing the Internet, provides customers with uncompromised protection against all types of threats, reduces security complexity and lowers total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology."

"Today, Check Point continues to develop new innovations based on the Software Blade Architecture, providing customers with flexible and simple solutions that can be fully customized to meet the exact security needs of any organization. Check Point is the only vendor to go beyond technology and define security as a business process. Check Point 3D Security uniquely combines policy, people and enforcement for greater protection of information assets and helps organizations implement a blueprint for security that aligns with business needs. Customers include tens of thousands of organizations of all sizes, including all Fortune and Global 100 companies. Check Point's award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft."

It feels like a week doesn't go by that we don't hear about another major hacking scandal in the business world. It's not going away and corporations have to constantly update their cyber defense. CHKP has been working cyber security since 1993.

Shares of CHKP spent much of this year consolidating gains from 2013. However, the last week of August produced a crucial breakout past resistance near $70.00. Tonight I am suggesting a trigger to buy calls if CHKP can close above $72.50. We'll start with a stop at $69.45. The point & figure chart is bullish and currently forecasting an $89.00 target. We'll start with a long-term target in the $95-100 zone (our target to exit the 2015 calls will be lower).

- Suggested Positions -
OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 1.35*
symbol: CHKP150117C75 2015 JAN $75 call - current bid/ask $2.75/2.95

- or -

OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 4.80*
symbol: CHKP160115C80 2016 JAN $80 call - current bid/ask $5.90/6.20

10/27/14 trade begins. CHKP opens at $72.56
10/24/14 CHKP meets our entry point requirement with a close at $72.70. Trigger was a close above $72.50
10/05/14 Friday's move might signal the end of the pullback.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Current Target: CHKP @ 95.00-100.00 zone
Current Stop loss: 69.45
Play Entered on: 10/27/14
Originally listed on the Watch List: 09/14/14


China Mobile Limited - CHL - close: $63.17

Comments:
11/16/14: CHL is a new watch list candidate that has already graduated to our active play list. The plan was to wait for shares to close above $62.65 and then buy calls the next day.

CHL met our entry requirement on November 10th with a close at $62.68. The very next day our trade opened with CHL gapping down at $61.39. This is a foreign company and I have warned readers that CHL will gap open, up or down, almost every day in reaction to trading overseas.

Fortunately, CHL found support at its simple 50-dma and has since rebounded back to relative highs. I would consider new positions at current levels.

Earlier Comments: November 9, 2014:
China Mobile (CHL) is the boasts both the largest mobile network on the planet and the biggest mobile customer base. At the end of the third quarter they had 799.1 million customers. Of that 244.4 million are 3G users and 40.9 million are new 4G users. That last number is significant since the Chinese government just approved 4G licenses this year. CHL had zero 4G customers at the start of 2014 and only 13.9 million at the end of the second quarter.

CHL reported earnings on October 20th and the results were worse than expected. Q3 revenues were down -2% from a year ago to 156.6 billion yuan. That was below analysts' estimates. Yet profits managed to beat expectations at 24.9 billion yuan. The company said that the big drop was due to a sharp decline in SMS (text message) usage. This is due to strong competition in the SMS market from other companies like Tencent's WeChat application. A new VAT tax that started in June also hurt results.

Investors seem to be ignoring CHL's recent earnings miss and focusing on their 4G growth. The company has been investing heavily in its 4G networking and it seems to be paying off. The shocking growth of CHL's 4G customer basis has analysts raising estimates. One firm was estimating 50 million 4G customers this year but have since raised that to 70 million. They also expect CHL will add another 130 million next year to end 2015 at 200 million new 4G customers. This should boost the company's profitability since 4G customers use more data.

The stock bounced near $56.60-57.00 last month, which was a 50% retracement of the July-September rally. The lows in October look like a bullish double bottom and the point & figure chart is bullish and forecasting a long-term target of $108.

Tonight I am suggesting we wait for CHL to close above $62.65 and buy calls the next morning with a stop loss at $56.40. However, I am suggesting we keep our position size small. CHL is a foreign company and its stock will gap open, up or down, every morning as it adjusts for trading in the Chinese markets.

- Suggested Positions -
NOV 11, 2014 - entry price on CHL @ 61.39, option @ 2.80
symbol: CHL160115C70 2016 JAN $70 call - current bid/ask $3.40/3.70

11/11/14 trade begins. CHL gaps down at $61.39
11/10/14 CHL closes at $62.68, above our trigger of $62.65
Option Format: symbol-year-month-day-call-strike

Chart of CHL:

Current Target: To Be Determined (likely the $75-85 range)
Current Stop loss: 56.40
Play Entered on: 11/11/14
Originally listed on the Watch List: 11/09/14


DaVita Healthcare Partners - DVA - close: 75.66

Comments:
11/16/14: Warning! DVA's oversold bounce following its post-earnings gap down is encouraging. Yet seeing DVA fill the gap and immediately roll over is bearish.

More conservative investors may want to exit early now. I am raising our stop loss to $72.40.

I am not suggesting new positions at this time.

Earlier Comments: June 1, 2014:
DVA is in the healthcare sector. The company provides kidney dialysis services and related lab services. The most recent earnings report was lackluster but DVA did report revenue growth above Wall Street estimates. Management has been buying up smaller domestic rivals and expanding overseas into countries like China, Columbia, Germany, India, Malaysia, Portugal, Saudi Arabia, and Taiwan. In the U.S. DVA has about 35% of the outpatient dialysis market.

Bears on this stock would argue the company is at risk for pricing pressures from Medicare. About 90% of its total U.S. dialysis patients are on some form of government-assisted program. Nearly 80% of are part of Medicare. The latest rules from Medicare said there would be no price changes in 2014 and 2015 but there could be reimbursement reductions in 2016 and 2017.

This pressure from Medicare has not stopped Warren Buffet's Berkshire Hathaway from raising its stake in DVA. Berkshire started investing in DVA back in Q4 2011. They have been slowly building a position and this past quarter (Q1 2014) Berkshire added another 1.1 million shares. Their total position is now 37.6 million shares worth about $2.6 billion. Berkshire tends to be a long-term investors, longer than our timeframe but it is still a vote of confidence for DVA.

- Suggested Positions -
(Closed on October 16, 2014)
JUN 04, 2014 - entry price on DVA @ 71.44, option @ 2.65*
symbol: DVA150117C75 2015 JAN $75 call - exit $1.65** (-37.7%)

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $4.80/7.20

11/16/14 new stop @ 72.40, seeing DVA fill the gap and roll over is bearish.
11/07/14 DVA gapped down following earnings the night before
11/02/14 new stop @ 71.40
10/16/14 DVA hit our stop at $71.75 to close our 2015 calls.
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 adjusting stop loss strategy:
Use a stop at $71.75 for the 2015 calls.
Use a stop at $69.85 for the 2016 calls.
08/24/14 new stop at $69.85
07/31/14 DVA reports better than expected bottom and top line results
07/20/14 new stop @ 69.00
06/04/14 trade begins. DVA opens at $71.44
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/03/14 DVA closed at $71.47, above our trigger of $71.25
Option Format: symbol-year-month-day-call-strike

Current Target: DVA @ 85.00
Current Stop loss: 71.40 for the 2016 calls,
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14



FedEx Corp. - FDX - close: 171.56

Comments:
11/16/14: The price of crude oil and gasoline continues to plunge. Yet the rally in FDX stalled last week. It did not help that FDX's closet rival, UPS, issued bearish guidance a few days ago.

Currently FDX is trading in the $170-173 zone. If the market does see a pullback I would expect FDX to dip toward $165.00.

I am not suggesting new positions at this time.

Earlier Comments: October 19, 2014:
FDX is one of the largest package delivery companies in the world. The company's most recent earnings report showed improvement. FDX beat Wall Street's estimates on both the top and bottom line. Profits were up +24% from a year ago and it was the second quarter in a row that FDX beat estimates.

Management said their 2015 fiscal year was off to a great start. The company has enough demand they have recently raised prices on some services.

The plunge in crude oil and fuel prices is a huge tailwind for FDX. As a transportation company the cost of fuel is a major expense. With oil at four-year lows it should be a boost to FDX margins.

FDX should also benefit from the growth in online shopping. Last year there was a huge last minute surge in Christmas sales that needed to be delivered quickly by companies like UPS and FDX. This year online shopping is expected to grow +17%. That's another bonus for FDX.

The stock has been volatile thanks to the market's big swings but FDX is still respecting its long-term bullish trend of higher lows.

Tonight I am suggesting we wait for a close above $158.00 and buy calls the next morning with a stop loss at $148.50.

- Suggested Positions -
OCT 22, 2014 - entry price on FDX @ 160.74, option @ 12.65*
symbol: FDX160115C170 2016 JAN $170 call - current bid/ask $16.95/17.50

11/09/14 new stop @ $158.00
11/02/14 new stop @ $154.00
10/22/14 trade begins. FDX opens at $160.74
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered with a close at $159.88, above our trigger of $158.00
Option Format: symbol-year-month-day-call-strike

Current Target: FDX @ TBD
Current Stop loss: 158.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Humana Inc. - HUM - close: 135.77

Comments:
11/16/14: I am urging caution on our HUM trade. The action last week was very similar to DVA's performance. HUM gapped down following its earnings report. Since then shares have delivered a strong bounce. Yet almost immediately upon filling the gap HUM began to roll over. That action is bearish. Now one day doesn't make a trend but the performance should put traders a bit on the defensive.

I am not suggesting new positions at this time.

Earlier Comments: October 19, 2014:
HUM is in the healthcare sector. The company offer health insurance. Right now that's a good spot to be as the system irons out the kinks in the Affordable Care Act (a.k.a. Obamacare). Thus far Obamacare has been a boon to insurers as more and more Americans sign up for health insurance.

Shares of HUM did see a pullback from its recent highs near $136 down to $121 (a -11% correction) but now HUM is on the rebound. Even with the pullback HUM still has a long-term bullish trend of higher lows. The point & figure chart is bullish and suggesting a long-term target of $173.00.

Tonight I am suggesting we wait for HUM to close above $130.25 and then buy calls the next morning with a stop loss at $119.75. I do want to warn you that HUM is scheduled to report earnings on November 7th but several of its peers (AET, CI, and WLP) will report earnings in the next two weeks (before the end of October). Their quarterly results and guidance (good or bad) could influence shares of HUM.

- Suggested Positions -
OCT 22, 2014 - entry price on HUM @ 133.75, option @ 13.25*
symbol: HUM160115C140 2016 JAN $140 call - current bid/ask $13.40/16.60

11/09/14 new stop @ 124.00
10/22/14 trade begins. HUM opens at $133.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered. HUM closed @ 133.27, above our suggested entry above $130.25
Option Format: symbol-year-month-day-call-strike

Current Target: HUM @ TBD
Current Stop loss: 124.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Watch

Paper, Home Décor, Athletic Apparel

by James Brown

Click here to email James Brown


New Watch List Entries

IP - International Paper

RH - Restoration Hardware

UA - Under Armour, Inc.


Active Watch List Candidates

AAPL - Apple Inc.

BAC - Bank of America

CELG - Celgene Corp.

DIS - The Walt Disney Company

GD - General Dynamics

GS - Goldman Sachs


Dropped Watch List Entries

CHL graduated to our active play list.



New Watch List Candidates:

International Paper - IP - close: $54.43

Company Info

IP is part of the consumer goods sector. According to a company press release "International Paper (IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging and uncoated papers. Headquartered in Memphis, Tenn., the company employs approximately 65,000 people and is strategically located in more than 24 countries serving customers worldwide. International Paper net sales for 2013 were $29 billion (which included our now divested xpedx business)."

The company has been facing a lot of headwinds this year but they still managed to beat Wall Street's earnings estimates three quarters in a row. Their most recent earnings report was November 4th. Analysts were expecting a profit of $0.89 per share on revenues of $6.0 billion. IP reported a profit of $0.95 with revenues beating estimates at $6.05 billion.

The company saw significant improvements in its operating profits in all three categories: industrial packaging, printing papers, and consumer packaging. Management expects a surge in packaging orders in the fourth quarter.

Wall Street loves the company's focus on delivering value to shareholders. IP is almost done with their $1.5 billion stock buyback program they announced in September 2013. They also raised their dividend 14% from $1.40 to $1.60. This is IP's third consecutive fourth quarter double-digit dividend increase. The stock now sports a 3.0% yield.

IP's CEO said they were looking seriously at converting part of their business into a master-limited partnership (MLP). This would be another shareholder friendly step as MLPs do not pay federal tax if the return most of their cash to shareholders.

The stock's current rally has produced a buy signal on the point & figure chart with a long-term target at $73.00. This month has seen shares of IP break out to new multi-year highs.

IP is currently up five weeks in a row. We do not want to chase it here. Instead we'd like to buy long-term calls on a dip. The prior highs in the $51 area should offer some support. Tonight I'm suggesting a buy-the-dip trigger at $51.00 with a stop loss at $47.90.

Buy-a-dip @ $51.00, start with a stop at $47.90

BUY the 2016 Jan $55 call (IP160115c55) current ask $5.25

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

Chart of IP:

Originally listed on the Watch List: 11/16/14


Restoration Hardware - RH - close: 82.73

Company Info

RH is in the services sector. They operate in the home furnishing industry. The company describes itself as "Restoration Hardware is a luxury brand in the home furnishings marketplace offering furniture, lighting, textiles, bathware, décor, outdoor and garden, as well as baby & child products. RH operates an integrated business with multiple channels of distribution including Galleries, Source Books and websites."

"We believe RH is one of the most innovative and fastest growing luxury brands in the home furnishings marketplace. We believe our brand stands alone and is redefining this highly fragmented and growing market, contributing to our superior sales growth and market share gains over the past several years as compared to industry growth rates. Our ability to innovate, curate and integrate products, categories, services and businesses with a completely authentic and distinctive point of view, then rapidly scale them across our fully integrated multi-channel infrastructure is a powerful platform for continued long-term growth. We evolved our brand to become RH, positioning our Company to curate a lifestyle beyond the four walls of the home. Our unique product development, go-to-market and supply chain capabilities, together with our significant scale, enable us to offer a compelling combination of design, quality and value that we believe is unparalleled in the marketplace."

If you look at a daily chart of RH you'll likely see the big gap higher in June. That was a reaction to the company's earnings report . They beat Wall Street's estimates on both the top and bottom line. Management also guided higher. The post-earnings rally peaked in June and RH has been slowly consolidating lower for the last four months.

Their most recent earnings report was September 10th. Analysts were expecting a profit of $0.64 a share on revenues of $454 million. RH beat estimates with earnings up +37% from a year ago to $0.67 a share. Yet revenues were a miss at $433.8 million. RH blamed the revenue miss on a later than usual catalog mailing. While it was a disappointment RH's Q2 sales still grew +13.5% while margins increased 240 basis points to 11.3%, a record for the company. Investors should also note that the +13% surge in sales followed a +30% jump in sales a year ago. Gary Friedman, RH's Chairman and Chief Executive Officer, commented,

"Our ability to innovate, curate and integrate new products, categories and businesses, then test and rapidly scale them across our multi-channel platform, is at the core of RH becoming a disruptive brand in the home furnishings marketplace. In the second quarter, we achieved a record operating margin of 11.3%, a 240 basis point improvement versus last year, and the driver of our earnings over-performance. Comparable brand revenue for the quarter increased 13% on top of a 30% increase a year ago – representing an industry-best 43% gain over the two-year period."

RH raised their Q3 guidance above Wall Street's estimates on both the top and bottom line. Their 2015 guidance was only in-line with consensus estimates. A couple of weeks later the stock was rising on news that its CEO had purchased almost 26,000 shares around $77.

Technically shares of RH have bounced at a long-term trend of higher lows. It's also breaking out past resistance near $80, past resistance at its 50-dma, and now it's 100-dma. The recent rally has created a buy signal and a $93 price target on the point & figure chart.

Bears will argue that RH is too expensive. They have a point. The stock has a P/E around 49. Yet growth names can sport pretty high valuations. If you have been reading the newsletter commentary then you already know that holiday spending should be stronger than normal this year. Online shopping is expected to be very strong, which should benefit RH, who has a big catalog business.

If this rally continues the stock could see some serious short covering. The most recent data listed short interest at 32.4% of the small 32.4 million share float.

More aggressive investors may want to buy calls now. I am suggesting we wait for RH to close above $84.25 and then buy calls the next morning with a stop at $76.40. I will warn you that RH will likely report earnings in mid December and shares will probably be volatile following this report.

Breakout trigger: Wait for a close above $84.25
Then buy calls the next morning with a stop loss at $76.40

BUY the 2016 Jan $90 call (RH160115c90) current ask $12.30

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

Chart of RH:

Originally listed on the Watch List: 11/16/14


Under Armour, Inc. - UA - close: 69.15

Company Info

UA is in the consumer goods sector. "Under Armour, the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. Under Armour's wholly owned subsidiary, MapMyFitness, powers one of the world's largest Connected Fitness communities. The Under Armour global headquarters is in Baltimore, Maryland." (source: company press release)

Apparel sales can be tricky as fashion fads come and go. Yet right now athletic wear has been gaining traction. As a whole sales of athletic wear are up +9% in the past year. Two giants in this industry, Nike (NKE) and Under Armour (UA), are outperforming the group.

NKE is the giant with annual sales of $28.8 billion. UA is a tenth the size of NKE at $2.87 billion a year in sales. It's not surprising to see UA outgrowing its rival. NKE managed +15% sales growth in the third quarter. UA delivered 30%. NKE reported gross margins of 46.6%. UA has gross margins of 49.6%. Both companies delivered earnings growth of more than 20% year over year.

UA is impressive because its apparel sales have been rising +30% for the last three quarters in a row. Apparel is important because it's 75% of UA's business. Investors were a little concerned when apparel sales only grew +25.6% in the third quarter. However, UA has been consistently beating Wall Street's earnings estimates on both the top and bottom line four quarters in a row. They have also raised guidance four quarters in a row.

Their most recent report was October 23rd. UA reported earnings of $0.41 a share with revenues up +29.7% to $937.9 million. Analysts were only expecting $0.40 on revenues of $925 million.

Management raised their Q4 guidance but they warned that growth would slowdown to only +22% in 2015. It's worth noting that UA has a history of under promising and over delivering. The stock initially sold off on this guidance but investors quickly bought the dip. Shares of UA have broken through the two-month trend line of lower highs and technical resistance at the 50-dma. The point and figure chart is bullish and forecasting an $87 target.

The plunge in gasoline prices is a tailwind for retailers and it should be a strong holiday shopping season. Another bonus for UA could be the weather. Last year winter was colder than normal and UA had strong sales of their coldgear line. This year we could see the coldest winter in decades, which could also bode well for UA.

Currently UA is sitting just below potential round-number resistance at $70.00. I am suggesting we wait for UA to close above $70.25 and then buy calls the next day with a stop loss at $64.85. More conservative investors may want to consider an alternative and wait for UA to close above its September highs near $73.40 before initiating positions.

Breakout trigger: Wait for a close above $70.25
Then buy calls the next morning with a stop loss at $64.85

BUY the 2016 Jan $80 call (UA160115c80) current ask $6.60

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

Chart of UA:

Originally listed on the Watch List: 11/16/14


Active Watch List Candidates:



Apple Inc. - AAPL - close: 114.18

Comments:
11/16/14: AAPL has been showing exceptional relative strength. The stock is racing higher and leading the NASDAQ behind it. The breakout past resistance near $110 is bullish but now AAPL is once again short-term overbought.

Waiting to buy a dip near $103.50 is probably wishful thinking at this point. Tonight we will raise our buy-the-dip entry point from $103.50 to $108.00. Nimble traders may want to consider buying a dip near $110 instead. We will also raise our strike price to the 2016 Jan $120 call.

Earlier Comments: November 2, 2014:
Love it or hate it AAPL always has Wall Street's attention. It has a cult-like following. The company's success has turned AAPL's stock into the biggest big cap in the U.S. markets with a current valuation of more than $633 billion.

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

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

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

The better than expected results and bullish guidance sent the stock to new highs. The rally has created a quadruple top breakout buy signal on its point & figure chart that is currently forecasting at $133 target. Yet we do not want to chase AAPL here. The stock is up $12 from its October low. We do want to be ready if shares see a pullback.

Tonight I am suggesting a buy-the-dip trigger to buy calls at $103.50 with a stop loss at $98.90.

Buy-the-dip trigger @ $108.00, stop loss @ 98.90

BUY the 2016 Jan. $120 call (AAPL160115c120)

11/16/14 raise the buy-the-dip entry trigger to $108.00
Adjust the strike price to the 2016 Jan $120 call.
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/02/14


Bank of America - BAC - close: $17.14

Comments:
11/16/14: Financial stocks underperformed last week. The group saw some profit taking and snapped a three-week winning streak. I don't see any changes from last week's comments.

Earlier Comments: November 09, 2014:
BAC is one of the biggest banks on the planet. They provide banking services to individuals, small business, big business, institutions, and governments. They have over 5,000 locations and over 16,000 ATMs.

The company's most recent earnings report was October 15th. They managed to beat Wall Street's estimates on both the top and bottom line with a loss of only $0.01 per share on revenues of $21.43 billion. The loss was due to a $5.3 billion settlement with the U.S. Department of Justice, part of the larger, record-breaking $16.7 billion settlement over the mortgage scandal dating back to Countrywide and the financial crisis of the last decade. BAC actually made $168 million for the quarter and that's including the huge $5 billion settlement payment but when you account for the $238 million it paid in dividends the final profit number was negative (-$0.01).

Legal issues have been a black cloud for the banking industry for years and a shadow over BAC but following the $16.7 billion settlement with the DoJ the worst is probably behind it for the big bank. While the industry may still see volatile headlines about future fiascos BAC management has been building up their litigation reserves to handle it.

Banking stocks as a group should help lead the market higher as the U.S. economy continues to improve. When the Federal Reserve finally starts raising interest rates next year it should also be another tailwind for the banks.

Tonight I am suggesting we wait for BAC to close above $17.55 and buy calls the next morning with a stop loss at $15.35. More conservative investors may want to wait for BAC to close above previous resistance at $18.00 as an alternative entry point.

trigger: Wait for BAC to close above $17.55 and then buy calls the next morning with a stop at $15.35.

BUY the 2016 Jan $20 call (BAC160115c20)

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

Originally listed on the Watch List: 11/09/14


Celgene Corp. - CELG - close: 104.05

Comments:
11/16/14: Biotech stocks were some of the market's worst performers last week. Shares of CELG followed the group lower with a two-day drop. This group can be a very volatile industry to trade. If CELG and the biotech stocks are underperforming now they might overshoot to the downside.

Tonight we are adjusting our entry point trigger from $100.00 to $97.50. The prior all-time highs and temporary resistance was $96.50. This area should be new support. We'll move the stop loss to $89.00.

Earlier Comments: November 2, 2014:
We previously had CELG on our LEAPStrader newsletter but got stopped out during the market's extreme volatility and correction in the first half of October. The bullish story on CELG has not changed. We'd like to reopen bullish positions again. However, CELG is extremely short-term overbought. The biotechs have been showing major relative strength and soaring to new highs. I'm suggesting a buy-the-dip trigger at $100.00 with a stop loss at $94.90.

I am listing our previous play description below with an update on its most recent earnings report.

(Earlier play description)
If you're looking for opportunity it's hard to beat some of the biotech names. CELG is one of the strongest. According to their press release, "Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation."

What makes CELG so attractive is the company's pipeline. Developing drugs is an expensive business. A lot of older firms are buying other companies for their pipeline. Meanwhile CELG is developing a very strong pipeline. You can view the company's current progress on this webpage.

CELG is also growing earnings. The company's Q2 report was July 24th. Wall Street was looking for a profit of 89 cents a share on revenues of $1.84 billion. CELG beat estimates with a profit of 90 cents and revenues rising +17.1% to $1.87 billion. Earnings per share are up +18% from a year ago. Management raised their guidance for 2014. Wall Street was a little disappointed with the guidance because analysts are more optimistic.

The latest earnings report was October 23rd. Analysts were looking for a profit of $0.94 on revenues of $1.95 billion. CELG beat estimates with $0.97 as revenues grew +18.4% to $1.98 billion. Management then raised their EPS and revenue guidance above Wall Street's estimates.

Multiple firms raised their price target on CELG following the Q3 results and the P&F chart is now forecasting at $157 target. We do not want to buy calls here. Wait for a pullback.

Buy-the-dip trigger @ $97.50, stop loss @ 89.00

BUY the 2016 Jan. $120 call (CELG160115c120)

11/16/14 Adjust the buy-the-dip trigger from $100.00 to $97.50. Move the stop loss from $94.75 to $89.00
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/02/14


The Walt Disney Company - DIS - close: $90.80

Comments:
11/16/14: It was a quiet week for shares of DIS which spent most of their time hovering near the $90.00 level. I don't see any changes from last week's comments.

Earlier Comments: November 9, 2014:
DIS is considered a diversified entertainment company. The company with its subsidiaries is an international family entertainment giant. Their media networks division includes the Disney/ABC Television Group and ESPN Inc. Their Parks and Resorts business runs 11 theme parks and 44 resorts. Their studio business has been making movies for over 90 years. Their acquisition of Marvel Studios was a genius move and they recently purchased Lucasfilm which brought the Star Wars franchise into Disney's stable of intellectual property. DIS' consumer products division makes everything from toys to books to fine art based on their massive library of content and characters.

The company has been a consistent winner in the earnings camp. DIS beat Wall Street's earnings estimates the last four quarters in a row. They've beaten on both the top and bottom line the last three quarters in a row. Their most recent earnings report was November 6th, which was DIS' fourth quarter result for 2014. According to DIS' CEO their fiscal 2014 was another record setting year for profits and marked their fourth year in a row of record performances.

DIS's results last year were driven by the studio division, which saw operating profits more than double. The company has seriously been knocking it out of the park with their movies. 2013 had some pretty big hits but Frozen, which came out n November 2013, is one of the biggest animated movies of all time and helped drive results well into 2014. Other big winners for the studio division were Capitan America: Winter Soldier, Maleficent, and the hit of the summer Guardians of the Galaxy. This weekend DIS' new animated movie Big Hero Six is already beating the competition and outpaced Interstellar in their opening weekend.

Next year should be another banner year for DIS' studio division with blockbusters like the next Avenger's movie, another Pixar film, and the next chapter in the Star Wars saga, episode seven (comes out in December 2015). All of these films help fuel business for Disney's theme parks, consumer products, and video games.

Wall Street was looking for DIS to report their Q4 earnings of $0.88 on revenues of $12.37 billion. The company beat estimates with a profit of $0.89 (+12%) and revenues rising +7.1% to $12.39 billion. Looking back over 2014 DIS said their earnings results were up 26% above 2013.

The stock is only a couple of points from all-time highs and the point & figure chart is bullish with a $119 long-term target. We recently concluded a successful trade on DIS back in October. We would like to hop on board again if shares can breakout past resistance at the $92 level.

Tonight I am suggesting a trigger to buy calls if DIS can close above $92.25. We'll start with a stop loss at $87.25.

Breakout trigger: Wait for DIS to close above $92.25
Then buy calls the next morning with a stop at $87.25

BUY the 2016 Jan $100 call (DIS160115c100)

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

Originally listed on the Watch List: 11/09/14


General Dynamics - GD - close: 142.66

Comments:
11/16/14: Shares of GD continue to levitate and ended the week at another record high. We do not want to chase it here. I'm suggesting we wait for a significant pullback.

Earlier Comments: November 2, 2014:
GD is another really strong stock that we got stopped out of during the sharp market pullback in the first half of October. Since then shares of GD have not only recovered but have sprinted to new highs.

GD is considered part of the industrial goods sector. The company is a huge aerospace and defense company. They have four significant segments: aerospace, combat systems, information systems, and marine systems (ships and submarines). The defense industry in the U.S. has been saddled with significant budget cuts due to the 2011 sequestration deal that will shave $500 billion from U.S. defense spending from 2012 through 2021. The industry has managed to thrive in spite of these budget cuts.

GD has beaten Wall Street's earnings estimates five quarters in a row. The company is also seeing margin improvement. Their Q2 report was on July 23rd and it not only beat analysts' estimates but management raised their EPS and revenue guidance for 2014. Multiple analysts raised their price target on GD following this announcement.

We see a similar trend with the latest earnings report on October 22nd. GD reported their Q3 results with a profit of $2.05 per share. That beat analysts' estimates by 14 cents. Margins continued to improve, up 50 basis points from the same quarter a year ago. GD's backlog of orders soared +56% to $74.4 billion in the quarter. Management then raised their 2014 earnings guidance above Wall Street's estimate (again).

The stock has been in rocket-mode with shares in a non-stop rally from $115 to $140. We do not want to buy calls here. GD is very short-term overbought. Tonight I am suggesting patience and a buy-the-dip trigger at $132.00 with a stop loss at $124.75.

Buy-the-dip trigger @ $132.00, stop loss @ 124.75

BUY the 2016 Jan. $140 call (GD160115c140)

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

Originally listed on the Watch List: 11/02/14


The Goldman Sachs Group, Inc. - GS - close: $189.98

Comments:
11/16/14: The financial stocks struggled to keep the rally alive last week. Shares of GS ended a three-week trend of gains but losses were mild. Momentum has stalled. We'd like to see a pullback. Currently the plan is to buy calls on a dip at $185.00.

Earlier Comments: October 26, 2014:
Goldman is in the financial sector. They are considered part of the national investment brokerage industry. Goldman was founded in the year 1869 and is headquartered in New York. The company provides investment banking and management services to corporations, other financial institutions, governments and high-net-worth individuals. The lion share of their business is institutional client services where GS makes markets in fixed income, equities, currencies, and commodities.

The company's recent earnings report was strong. GS announced its Q3 results on October 16th. As of the first nine months of 2014 their revenues were up $1.4 billion above the same period a year ago. Management has managed to boost profits by reducing costs. A strong mergers and acquisitions market in 2014 has helped drive GS' results as the company is gaining market share.

Looking at their recent results Wall Street expected a profit of $3.21 per share on revenues of $7.8 billion for the quarter. GS delivered $4.57 per shares, a +59% increase from a year ago. Revenues soared +25% to $8.4 billion. GS saw $20 billion in net inflows bumping client assets to $1.15 trillion.

The company does have a habit of crushing analysts' earnings estimates so the market wasn't that surprised. The stock actually sank on these results but the initial weakness is over and GS is rebounding.

The stock experienced a -10% correction from its early October high to the mid October low. The recent breakout past resistance near $180 and all of its key moving averages is encouraging. I would be tempted to buy calls right now. However, I suspect the market might see some mild profit taking after last week's big rally.

Tonight I am suggesting a buy-the-dip entry point at $180.50 with a stop loss at $174.50. Our long-term target is the $220-230 zone.

Buy-a-dip at $185.00 with a stop at $174.50

BUY the 2016 Jan $200 call (GS160115c200)

11/09/14 adjust buy-the-dip trigger from $183.50 to $185.00
11/02/14 adjust buy-the-dip trigger from $180.50 to $183.50
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 10/26/14