Option Investor
Newsletter

Daily Newsletter, Sunday, 11/30/2014

Table of Contents

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

Leaps Trader Commentary

Black Friday Versus OPEC

by James Brown

Click here to email James Brown

Last week the market was focused on two things: Black Friday retail sales and the OPEC meeting. Initial reports about Black Friday results were mixed. On Friday the tone of the conversation about holiday spending was bullish. As of tonight the latest estimates suggest consumer traffic and spending didn't quite meet estimates. Retail and consumer-related names traded higher on Friday in anticipation of a strong start to the holiday shopping season. We'll know more come Monday as analysts decipher Black Friday details.

The other big story was crude oil and if the Organization of Petroleum Exporting Countries (OPEC) would announce a cut in production. We noted last week that Bloomberg's poll on the issue was split 50/50 that OPEC would announce a cut. They did not cut production and crude oil prices plunged on Friday but more on that in a moment.

The U.S. market has continued to climb during the Thanksgiving-holiday week. Yet momentum definitely slowed for a good portion of the market. The Dow Jones Industrial Average only gained +0.1% for the week. The big cap S&P 500 index eked out a +0.2% gain for the week. The small cap Russell 2000 was almost negative with a +0.07% gain. Meanwhile the NASDAQ composite soared +1.6% in the last three and a half sessions thanks to strong performances in semiconductors and biotechs. The SOX semiconductor index rallied +3.4% last week while the biotech index advanced +2.8%. Year to date the SOX is up +28% while the biotech index is up +47.5%.

Any stock related to oil or energy was hammered on the OPEC news. The OIX oil index lost -10% for the week and is down -11% for the year. The oil services index (OSX) crashed -13.4% and is now down -23% in 2014. This was thanks to a -13.4% plunge in crude oil, which closed the week at $64.47 a barrel. Crude oil is now down almost 33% for the year. Brent crude oil closed at $68.47 a barrel. Most of the transportation stocks rallied on oil's weakness. The Dow Jones Transportation Average gained +1.1% last week, which boosted its 2014 gains to +24%.

The U.S. dollar rallied on Friday and is now up five out of the last six weeks. The euro bounced for the week but was down on Friday. Meanwhile the Japanese yen continues to sink and ended at new multi-year lows. This dollar strength weighed on precious metals. Gold lost -2.8% to end the week at $1,151 an ounce. Silver slipped -5.8% and closed at $14.73 an ounce. The bond market has been in rally mode the last few days and the yield on the U.S. 10-year note is down to 2.16%.

OPEC's Oil Decision

The oil price cartel OPEC may be dying. Individual countries within the group are now at odds with one another. The shale-oil revolution inside the United States has hurt the group significantly. Booming U.S. oil production has slashed America's oil imports. Now there appears to be an oversupply situation in the oil market which has produced a major drop in crude oil prices this year.

OPEC countries are losing billions of dollars from the dramatic plunge in oil prices. OPEC met on Thursday in Vienna and instead of cutting production to boost prices they decided to leave production rates unchanged. This yanked the rug out from under already weak crude oil and oil plunged on Thursday and Friday, down almost -12% for the week.

Why would OPEC refuse to cut production when they knew it would send oil prices lower? It's all about the cost of oil. First you have to realize that half of OPEC's members do not abide by the production or quota rules set by the cartel anyway. They are notorious for pumping as much oil as they can to support their individual country's need for cash. Unfortunately for other OPEC members Saudi Arabia has the lowest cost per barrel, which is around $10. Other OPEC nations have a breakeven cost in the $30 to $40 range while a few are significantly higher. Venezuela's breakeven price is about $97.50 a barrel. Several analysts believe Iran, Saudi's political enemy, also needs oil near $100 a barrel. One Russian analyst said Iran actually needs $140 a barrel to balance its budget.

Russia, who is not a member of OPEC, is going to be stung by this OPEC decision as well. Russia needs oil near $100 a barrel. Reuters noted back in August that Russia's budget is based on Brent crude at $114. The combination of Western sanctions against the Russian economy and plunging crude oil prices is extremely painful for Russia. The main target by Saudi's decision, I mean OPEC's decision, to not cut production seems to be the U.S. shale industry.

The different shale formations in the U.S. have different expenses based on the drilling industry's ability to access the oil there. Some shale formations have a breakeven cost above $80. Other formations have a breakeven cost closer to $42. A large chunk of U.S. shale needs crude oil above $70-80 a barrel. Below that and producers would be losing money. The Saudi's know this and they clearly want to slow U.S. production.

The market reacted to the OPEC decision with huge declines across the energy sector and just about anything energy related. Even the railroads were hurt on Friday because they transport a huge amount of shale oil across the U.S. Plus lower oil and natural gas prices will decrease demand for coal (to burn for electricity) and less demand for coal will also hurt the railroads who do big business moving coal. The rest of the transportation industry rallied as lower oil prices mean lower fuel costs for truckers and airlines. The airline stocks are up +17% in November thanks to falling crude oil.

Another winner from OPEC's decision is the consumer. We've been noting the falling price of gasoline for months. On Friday the national average was down to $2.79 a gallon. That's the lowest price since 2009 and we are seeing forecast for gas to drop to $2.55-2.60 by Christmas. This is a godsend for most of Americans who are living paycheck to paycheck and spend most of their money on gas and food. Wal-mart (WMT) is the biggest retailer on the planet and their stock soared on Friday thanks to Black Friday headlines and the big drop in oil prices. Paying less at the pump for fuel means consumers can spend more inside Wal-mart.

There could be more unintended consequences by lower oil prices. The oil and gas industry is a big part of the global economy. Lower prices will mean less investment in drilling and production. We could see global GDP fall -0.5% or more as the energy industry adjusts for lower oil prices. Of course all the oil producing countries are receiving a lot less money for their exports so they'll have less money to spend as well.

Another potential consequence could be a dovish Federal Reserve. Falling energy prices will help keep inflation low in the U.S. That will allow the Fed to remain on the sidelines longer than we might expect. Citigroup has already moved their estimate for the first rate hike out to December 2015. We are seeing a few more analysts move their estimate for the first hike into 2016. That's good news for stocks. The stock market tends to go down in the first few months of a Fed rate hike cycle.

Economic Data

It was a busy week for economic data in the U.S. The Chicago PMI for October declined from 66.2 down to 60.8 but still in positive territory. Durable goods orders rose +0.4%. That followed an upwardly revised +0.9% the prior month. If you exclude the volatile transportation component then durable goods orders actually fell -0.9% in October following the prior month's +0.2% gain.

New home sales improved from +0.4% in September to +0.7% in October. Yet pending home sales came in worse than expected with a -1.1% drop in October. The Case-Shiller 20-city home price index rose almost +5% in September.

Plunging oil and gasoline prices appear to be boosting morale. The final Consumer Confidence number was revised down from 94.1 to 88.7 in November but this remains a very healthy reading. The University of Michigan Consumer Sentiment survey also dipped with a pullback from 89.4 to 88.8 but still near seven-year highs. Meanwhile the U.S. Q3 GDP estimate was expected to decline from +3.5% growth to +3.3% growth. Yet the last week's release said GDP actually increased +3.9%.

Overseas Economic Data

It was a quiet week for economic data overseas. Germany said its Q3 GDP estimate was unchanged at +0.1% quarter over quarter. Italy saw its retail sales come in worse than expected with a -0.1% decline. In Asia investors were still reacting to the surprise rate cut by China the prior week. Meanwhile Japan continues to sink closer and closer toward deflation. Japan's latest consumer price index (CPI) reading dropped -0.9%. Household spending in Japan plunged -4%. The country is seeing a rash of bankruptcies as their currency plummets.




Major Indices:

The S&P 500 almost broke its trend of weekly gains but the +0.2% advance for the week means the index is up six weeks in a row. That's the longest winning streak this year. Thus far the S&P 500 is up +11.8% in 2014. That's on top of last year's +30% gains.

There has been some talk about the S&P 500 rising above its simple 5 day moving average. Currently the index has closed above its 5-dma 29 days in a row. That's an all-time record since they began keeping track this sort of data back in the 1920s. All that really tells us is that the S&P 500 is very, very short-term overbought and way overdue for a dip.

How overbought is the S&P 500? This chart shows that 84% of its 500 components are above their 50-dma. You'll notice that the market's rally tends to run out of steam when this number rises into the 84-88% range. We may not be at a top but we are definitely close to one.

50-dma percent chart of the S&P 500 index:

Technically we could look for support at the 10-dma but that's not deep enough. Prior resistance at 2040 could be short-term support. Yet a simple -2% pullback would mean a decline to 2025. A normal -5% pullback would mean a dip to 1963.

The S&P 500 is currently up +13.5% from its October lows near 1820. I've put a Fibonacci retracement tool on the daily chart. You can see a 23.6% correction is about 2015. Additional levels to watch would be 1980 and 1950. At the moment I would actually be surprised if the S&P 500 were to trade under the 2,000 mark before the year ends. We have less than five weeks left in 2014. There are too many investors praying to buy a dip.

chart of the S&P 500 index:

The NASDAQ composite has been the relative strength leader. Last week's gain puts the winning streak at six weeks in a row and the NASDAQ is now up +14.7% for the year. This index is also very short-term overbought. As expected the NASDAQ is leaping from round-number resistance markers every 100 points. It's currently testing the 4800 area. On a pullback we can look for short-term support at 4700 and then 4600. A simple -2% dip would mean a drop toward 4700. While we should not be surprised to see a big pullback in the NASDAQ I'm not expecting one in December.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index is probably the most troubling among the major indices. The $RUT has been churning sideways the last four weeks in a row. The index displayed relative weakness on Friday with a -1.4% decline and now it's only up +0.8% for the year.

The big cap stocks have been leading the market so it's hard to put too much emphasis on the $RUT but we could use it as something of a sentiment indicator and a potential warning signal if the $RUT really accelerates lower.

I warned readers last week that the 1185-1190 zone was new resistance. The old highs near 1210-1215 are likely an obstacle as well. I'd watch the 200-dma near 1150 as support.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's a new month and that means lots of new economic headlines. This week will see plenty of reports in the U.S. The ISM on Monday is expected to dip less than a point to 56.0. The big report for the week will be Friday's non-farm payrolls jobs report. Economists are expecting +235,000 new jobs while the unemployment rate is expected to be unchanged at 5.9%.

The bigger story could be the ECB meeting on Thursday. The ECB has been telling the markets they will boost their QE program but they have been short on details.

Economic and Event Calendar

- Monday, December 01 -
Cyber Monday
ISM index for November
Eurozone manufacturing PMI

- Tuesday, December 02 -
Construction spending
Auto & Truck sales

- Wednesday, December 03 -
Eurozone Services PMI
ADP Employment Change Report
ISM Services index
Federal Reserve Beige Book report

- Thursday, December 04 -
Weekly initial jobless claims
European Central Bank (ECB) decision on rates
ECB President Mario Draghi press conference
Bank of England decision on rates

- Friday, December 05 -
Unemployment Rate for November
Non-farm Payrolls (jobs) Report for November
Factory Orders

Additional Events to be aware of:

December 17: FOMC meeting

Looking Ahead:

The U.S. market could see a little Thanksgiving hangover on Monday. On Sunday night Bloomberg reported that Black Friday sales did not meet expectations. The National Retail Federation (NRF) issued a statement saying that traffic was expected to dip from 140.3 million last year to 140.1 million this year but their estimates suggest only 133.7 million people hit the stores. The NRF also warned that consumer spending over the four-day holiday shopping spree dipped from $57.4 billion in 2013 to only $50.9 billion this year. That could definitely spark some profit taking in the consumer-related stocks.

It's also going to put a lot of focus on Cyber Monday sales. Cyber Monday sales will be the main story tomorrow. Analysts expect a significant jump from last year. However, after the NRF estimates above, one has to wonder if the Cyber Monday headlines might disappoint. I suspect that this story about retail sales and cyber Monday sales could be suffering from retailers extending their sales. Instead of a Black Friday event many retailers had deals all week long. That could extend toward online deals as well. So instead of one big crush of traffic on Friday or Monday the real impact may have been spread out over several days.

I mentioned the ECB meeting earlier. Europe is sinking into an economic morass and it may not escape. The region seems to be slipping closer and closer to deflation (just like Japan). The Eurozone's unemployment is stuck at 11.5%. Big chunks of the regions are in recession or showing zero growth. Inflation for the Eurozone is at five-year lows. Everyone expects ECB President Mario Draghi to announce new stimulus measures on December fourth. If he does not it could be a huge disappointment for the markets. One analysts at BNP Paribas suggested that Draghi will use the falling inflation numbers as an excuse to justify the ECB boosting its asset purchase program. Credit Suisse is expecting the ECB to announce they will start buying sovereign bonds. Whatever Draghi announces it could move the market on Thursday.

The U.S. market at new highs has not deterred fund manager Jeremy Grantham. He is the co-founder and chief investment strategist at Grantham Mayo van Otterloo (GMO) management firm. They have over $120 billion under management. Grantham's latest quarterly letter to clients said he expects the S&P 500 could rally another +10% from 2,040. He expects the market will run "deep into bubble territory" and then it will crash "as it always does".

Bullish momentum certainly favors Grantham but the bull market is getting old. The average bull market lasts 165 weeks. Our current bull market is 298 weeks old and the second longest bull market in the last 85 years.

I don't see any big changes from last week's commentary on the market. The trend is up but we're significantly overbought and due for a dip. However, any pullback will likely be shallow. Keep in mind that even a -2% drop from current levels will feel painful. Fortunately, there is a crowd of investors just waiting to buy the dip. The average fund manager is underperforming the market (yet again) and will be chasing performance. December could see some tax-loss selling before year end. That means losers will likely get worse and winners could see more money chasing performance. There are no guarantees in the market and while we are overbought now we could stay overbought the rest of the year.

~ James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The S&P 500 index kept its string of weekly gains alive and is now up six weeks in a row. This is the best run all year. Not surprisingly the index looks overbought and due for a pullback.

RTN has graduated to our active play list.

I have updated the stop loss on FDX.

Our plan was to exit the DVA trade on November 24th.

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

Bullish Breakout

by James Brown

Click here to email James Brown


- New Trades -


The Walt Disney Company - DIS - close: $92.51

Comments:
11/30/14: DIS is already graduating from our watch list. We wanted to see shares breakout past resistance near $92.00 and close above $92.25. The stock met our entry point requirement with Friday's display of relative strength (+0.6%) and close at $92.51.

The plan is to buy calls on Monday morning.

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) current ask $5.00

12/01/14 trade begins
11/28/14 DIS closes at $92.51, above our suggested trigger, above $92.25
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: DIS @ TBD
Current Stop loss: 87.25
Play Entered on: 12/01/14
Originally listed on the Watch List: 11/09/14



Play Updates

Consumer-Related Stocks Rally Ahead of Black Friday

by James Brown

Click here to email James Brown


Closed Plays


Our plan was to close the DVA trade on Monday, Nov. 24t.



Play Updates


Checkpoint Software Tech. - CHKP - close: 77.31

Comments:
11/30/14: CHKP has extended its rally to seven up weeks in a row. Shares saw some volatility on Friday's shortened session but the stock bounced near $76.00.

We are running into a time issue with our 2015 January calls, which expire in about seven weeks. Tonight I am suggesting exit our 2015 calls if CHKP trades at $79.50. We'll also set a stop loss to exit the 2015 calls at $74.40.

We will keep the stop loss at $69.45 if you are trading the 2016 calls. I'm not suggesting new positions at this time.

NOTE: The 2015 January calls only have about eight weeks 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 $3.10/3.40
Exit target for 2015 calls is CHKP @ 79.50, stop loss $74.40

- or -

OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 4.80*
symbol: CHKP160115C80 2016 JAN $80 call - current bid/ask $6.20/6.40
Stop loss @ 69.45 if you're trading the 2016s.

11/30/14 2015 January call exit target CHKP @ 79.50, stop $74.40
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: see above
Current Stop loss: see above
Play Entered on: 10/27/14
Originally listed on the Watch List: 09/14/14


China Mobile Limited - CHL - close: $61.72

Comments:
11/30/14: It was a quiet week for shares of CHL. The stock slowly faded lower. CHL might be in a new $60-63 trading range. Investors may want to wait for a close above $63.25 before considering new bullish positions.

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 $2.65/2.95

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

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



FedEx Corp. - FDX - close: 178.18

Comments:
11/30/14: The continued plunge in crude oil prices has been bullish for most of the transportation stocks. Shares of FDX gapped open higher on Friday and ended the week at another new record high thanks to crude oil's weakness.

The stock is short-term overbought and likely due for a dip. We will raise our stop loss from $158.00 to $164.00.

Keep in mind that FDX could be volatile after they report earnings on December 17th.

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 $20.70/21.15

11/30/14 new stop @ 164.00
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: 164.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Humana Inc. - HUM - close: 137.97

Comments:
11/30/14: HUM managed another weekly gain. The stock is now up three weeks in a row. Yet HUM continues to struggle with resistance in the $140-141.00 area.

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 $12.40/16.80

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


Restoration Hardware - RH - close: 84.47

Comments:
11/30/14: RH is virtually unchanged for the week, down less than 30 cents. The latest headlines on Black Friday suggest that retail traffic was lower than expected and consumer spending was lower than estimated. That could send consumer-related stocks down on Monday. If RH dips toward round-number support near $80.00 then I would use a bounce from the $80 region as a new bullish entry point. Wait for the bounce!

Earlier Comments: November 16, 2014:
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.

- Suggested Positions -
NOV 22, 2014 - entry price on RH @ 88.93, option @ 15.70*
symbol: RH160115C90 2016 JAN $90 call - current bid/ask $10.20/14.30

11/21/14 trade begins. RH gaps higher at $88.93
11/20/14 triggered with a close at $87.48, above our trigger at $84.25
*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: RH @ TBD
Current Stop loss: 76.40
Play Entered on: 11/21/14
Originally listed on the Watch List: 11/16/14


Raytheon Co. - RTN - close: $106.70

Comments:
11/30/14: RTN is a new watch list candidate that has graduated to our active play list. The plan was to wait for shares to close above $106.50 and then buy calls the next morning. The stock soared on Monday, Nov. 24th, and closed at $106.59. Our trade opened the next morning at $106.52. RTH has continued to drift higher. I would still consider new positions now at current levels.

Earlier Comments: November 23, 2014:
RTN is in the industrial goods sector. They are part of the aerospace and defense industry. The company has four main businesses: integrated defense systems; intelligence, information and services; missile systems; and space and airborne systems.

A company press release describes RTN as "Raytheon Company, with 2013 sales of $24 billion and 63,000 employees worldwide, is a technology and innovation leader specializing in defense, security and civil markets throughout the world. With a history of innovation spanning 92 years, Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as cyber security and a broad range of mission support services."

The defense stocks have managed to perform exceptionally well last year and still outperform the major market indices this year in spite of reduced defense budgets from Washington. Revenues have been down from year ago levels but these companies are leaner and more profitable.

RTN's most recent earnings report was October 23rd. Wall Street was expecting a profit of $1.60 a share. RTN delivered $1.65, which was up from $1.51 a year ago. RTN's backlog hit $33.2 billion, up $1 billion from a year ago. The company narrowed their prior 2014 guidance. While not inspiring the stock rallied anyway.

A couple of weeks later RTN announced they had acquired privately held Blackbird Technologies for $420 million. Blackbird provides cybersecurity, surveillance, and secure communications to America's spy agencies. According to RTN, "Blackbird Technologies also provides key synergies with Raytheon's existing cybersecurity, sensor, communications and command and control capabilities. With this transaction, Raytheon becomes one of the top industry partners to SOCOM."

Shares of RTN have spent the last three weeks digesting its gains in a $102-106 trading range. The stock displayed relative strength on Friday and looks poised to breakout past resistance. These are new all-time highs for the stock.

We want to be ready to catch the breakout. I am suggesting we wait for RTN to close above $106.50 and then buy calls the next morning with a stop loss at $99.00. Our target is the $135-140 zone.

- Suggested Positions -
NOV 25, 2014 - entry price on RTN @ 106.52, option @ 4.85
symbol: RTN160115C115 2016 JAN $115 call - current bid/ask $ 4.55/ 4.80

11/25/14 trade begins. RTN opens at $106.52
11/24/14 RTN closes at $106.59, above our trigger of $106.50
Option Format: symbol-year-month-day-call-strike

Chart of RTN:

Current Target: RTN @ 135.00-140.00 zone
Current Stop loss: 99.00
Play Entered on: 11/25/14
Originally listed on the Watch List: 11/23/14


Under Armour, Inc. - UA - close: 72.49

Comments:
11/30/14: Stocks with exposure to the consumer performed well last week as investors bid them up ahead of Black Friday. Shares of UA rallied every day last week and closed just below resistance at its 2014 highs in the $72.50 area.

I mentioned in the RH update above that Black Friday's headline numbers turned out to be disappointing. This could spark some profit taking in consumer-related stocks. I would not be surprised to see UA dip back toward $70.00.

Earlier Comments: November 16, 2014:
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.

- Suggested Positions -
NOV 20, 2014 - entry price on UA @ 70.20, option @ 6.95
symbol: UA160115C80 2016 JAN $80 call - current bid/ask $ 7.40/ 7.80

11/20/14 trade begins. UA opens at $70.20
11/19/14 UA closes at $70.48, above our trigger at $70.25
Option Format: symbol-year-month-day-call-strike

Current Target: UA @ TBD
Current Stop loss: 64.85
Play Entered on: 11/20/14
Originally listed on the Watch List: 11/16/14



CLOSED Plays


DaVita Healthcare Partners - DVA - close: 76.53

Comments:
11/30/14: DVA has not been performing as expected. Last weekend we decided to close this trade and exit on Monday morning, November 24th. Naturally the stock decided to bounce and is up three days in a row. I pointed out last week that DVA still has a longer-term trend of higher lows and higher highs but the volatility and relative weakness in November made the stock unattractive.

DVA opened Nov. 24th at $74.54.

- 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 - exit $4.10 (-12.7%)

11/24/14 planned exit
11/23/14 prepare to exit on Monday, November 24th
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

Chart

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



Watch

Semiconductors & Automobiles

by James Brown

Click here to email James Brown



New Watch List Entries

MU - Micron Technology

TM - Toyota Motor Corp


Active Watch List Candidates

AAPL - Apple Inc.

BAC - Bank of America

CELG - Celgene Corp.

GD - General Dynamics

GS - Goldman Sachs

IP - International Paper


Dropped Watch List Entries

RTN has graduated to our active play list.

DIS has been moved to new plays.



New Watch List Candidates:

Micron Technology - MU - close: 35.95

Company Info

MU is in the technology sector. The company is part of the semiconductor industry. They make memory chips. According to a company press release, "Micron Technology, Inc., is a global leader in advanced semiconductor systems. Micron's broad portfolio of high-performance memory technologies—including DRAM, NAND and NOR Flash—is the basis for solid state drives, modules, multichip packages and other system solutions. Backed by more than 35 years of technology leadership, Micron's memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications."

The semiconductor space has been a strong performer this year with the SOX semiconductor index up +20% in 2014. That outperforms the NASDAQ's +14.7% and the S&P 500's +11.8% gain. MU is beating all of them with a +65.2% rally in 2014.

The company has been beating Wall Street's earnings and revenue estimates all year long. Their most recent report was MU's Q4 results that came out in September. Analysts expected a profit of $0.81 on revenues of $4.15 billion. MU delivered $0.82 as revenues soared +48.7% to $4.23 billion.

Management then raised their Q1 revenue guidance into the $4.45-4.70 billion range, which was above analysts' estimates. They also announced at $1 billion stock buy back program. Following its results and the buy back news the stock has seen several price target upgrades. Many brokers have price targets in the low to mid $40s. One firm has a $60 target.

Technically shares look very bullish with a breakout past major resistance in the $35.00 area. More aggressive investors may want to buy calls now. After a sharp two-week rally I am hoping for a little pullback. Broken resistance at $35.00 should be new support. We will set a buy-the-dip trigger at $35.10.

Buy-the-dip trigger at $35.10, stop loss @ 29.40

BUY the 2016 Jan $40 call (MU160115c40) current ask $4.10

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

Chart of MU:

Originally listed on the Watch List: 11/30/14


Toyota Motor Corp. - TM - close: 123.13

Company Info

TM is considered part of the consumer goods sector. The company is a major automotive manufacturer. Headquartered in Japan, TM was founded back in the 1930s. The company now has sales around the globe.

The company led the industry in greener cars with their Prius model of electric-gasoline hybrids. Now they're leading the industry again with a hydrogen fuel cell vehicle. TM unveiled the Mirai, which means "future" in Japanese, as is the first zero-emission vehicle for consumers. The vehicle will go from 0 to 60 MPH in 9 seconds. It has a range of 400-430 miles. The only emission is water vapor.

The Mirai will not be a big seller to start. TM only expects to sell a few hundred units next year. The challenge is the infrastructure so consumers can refuel the hydrogen fuelcell. It will take a few years to really catch on but they're going to get help from various government agencies. The state of California is one example. California hopes to have 1.5 million zero-emission cars on the road by 2025.

I'm not suggesting bullish positions on TM for the Mirai. Hydrogen fuelcell vehicles are not even a drop in the bucket for the global auto market. What should capture investor attentions is the combination of TM's strong sales combined with a central bank stimulus efforts.

TM has already seen strong sales this year. They reported their first half results on November 5th. TM beat estimates and raised their revenue guidance. Falling gas prices boosted sales of SUVs. TM is also seeing sharp growth in China. This past October TM saw their sales in China soar +27% from a year ago. That is on top of a +26% increase in September and a +9% jump in August. New estimates suggest TM is poised to outsell most of its rivals in the U.S. in November too, including big competitors like General Motors, Ford, and Nissan.

TM's secret weapon could be the currency devaluation by the Bank of Japan. The Japanese government is desperate to jump start their economy and avoid deflation. They have launched a massive QE program that is crushing the value of their currency. The yen ended the week at multi-year lows. This is an advantage for a company like TM who exports a lot of their product.

I do have to mention the risk of recall headlines. It seems that the big automakers are being super careful after seeing the Ford fiasco in the last couple of years. Now companies are recalling vehicles all the time. Right now the entire industry is dealing with a defective Takata airbag recall. The top ten automakers all use Takata airbags so it's something that will affect everyone. There is always the risk of another company-specific recall that could hurt TM.

Technically shares of TM have been showing strength and outperforming many of its peers. Shares have actually broken out past resistance near its 2014 July and early November highs. I would be tempted to buy calls now. However, I'd like to see a little more follow through. Tonight I am suggesting we wait for TM to close above $124.00 and then buy calls the next day.

I will warn investors that the prior highs near $135 and $138 could be potential resistance but the point & figure chart is very bullish and forecasting a long-term target of $160.00.

Breakout trigger: Wait for a close above $124.00
Then buy calls the next morning with a stop at $114.75.

BUY the 2016 Jan $130 call (TM160115c130) current ask $6.55

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

Chart of TM:

Originally listed on the Watch List: 11/30/14


Active Watch List Candidates:



Apple Inc. - AAPL - close: 118.93

Comments:
11/30/14: It may be wishful thinking that we might buy a dip in shares of AAPL. The stock has been exceptionally strong from the October low. AAPL is now up six weeks in a row and up about $25.00.

We didn't want to chase AAPL at $108 and we definitely do not want to chase it at $119. Tonight we will raise our buy-the-dip entry trigger from $108.00 to $111.00. I'm leaving the stop loss at $98.90.

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 @ $111.00, stop loss @ 98.90

BUY the 2016 Jan. $120 call (AAPL160115c120)

11/30/14 raise the buy-the-dip entry trigger to $111.00
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: $17.04

Comments:
11/30/14: It was a quiet week for shares of BAC. That's actually two weeks in a row that BAC hasn't moved much. The big picture hasn't changed. We are still on the sidelines and want to see BAC close above $17.55.

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: 113.69

Comments:
11/30/14: Biotech stocks have been back in rally mode the last couple of weeks. CELG's bullish breakout past the $110.00 level could be used as an entry point for more aggressive investors. I'd rather not chase it here. We will raise our buy-the-dip entry point from $97.50 to $102.50. However, we are willing to adjust it if we see CELG pullback and find support near $109-110.

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 @ $102.50, stop loss @ 89.00

BUY the 2016 Jan. $120 call (CELG160115c120)

11/30/14 raise the buy-the-dip trigger from $97.50 to $102.50
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


General Dynamics - GD - close: 145.36

Comments:
11/30/14: GD is little changed on the week. Shares spent the last few days churning sideways in the $144-146 zone. GD is now up six weeks in a row but upward momentum might be stalling. We are waiting for a correction with a buy-the-dip at $132.00 but I'm open to raising that trigger if we see GD pullback and then bounce.

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: $188.41

Comments:
11/30/14: The momentum in GS has definitely stalled with the stock drifting flat to down over the last three weeks. We have been looking for a dip to $185.00. Yet given GS' relative weakness we may want to aim lower. Tonight we'll move the buy-the-dip trigger to $182.00.

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 $182.00 with a stop at $174.50

BUY the 2016 Jan $200 call (GS160115c200)

11/30/14 move the buy-the-dip trigger to $182.00
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


International Paper - IP - close: $53.82

Comments:
11/30/14: IP is relatively unchanged for the week. The stock has found new overhead resistance at its simple 10-dma, which is short-term bearish. That's okay for us since we want to see a pullback into the $50-51 area.

Earlier Comments: November 16, 2014:
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)

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

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