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Daily Newsletter, Saturday, 2/1/2014

Table of Contents

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

Market Wrap

Not a Super January

by Jim Brown

Click here to email Jim Brown

For the markets to close on the lows for the year on the last day of January there is little for the bulls to be happy about.

Market Statistics

The Dow closed exactly at 15,700 and the last major support level before a potential decline to 14,750. This came after a -760 point decline over the last two weeks. Friday is normally a short covering day as traders close winning positions rather than face a potential gap open on Monday because of some unexpected news event. Nobody was covering at Friday's close.

The Dow opened lower at -231 but the first dip below 15,700 was immediately bought. When the midday rally began to fail the decline was sharp and unexpected. The Nasdaq had recovered to positive territory but also rolled over to close down -19 points. Given the -44 point drop in Amazon the -19 point loss in the Nasdaq was not unreasonable.

The S&P traded down to support at 1,775 once again but nearly returned to positive territory before the closing slide. The S&P has held in the same range for a week so no harm, no foul there. As long as it remains over 1,775 we should be ok but that is looking less likely on every rebound failure.

The challenge for the market on Friday was the continuing emerging market currency crisis, which spilled over into the Russian Ruble, weaker inflation data from Europe, a sharp drop in Dow component Chevron and a profit warning from Walmart.

There were minimal economic reports but still enough to add to the market confusion. The Personal Income report for December showed income growth was flat after rising +0.2% in November and falling -0.1% in October. Personal income is down -0.8% since December 2012. The Nonfarm Payroll reports may show unemployment declining and new jobs growing at a steady pace but those new jobs are mostly part time. Even the few full time jobs are being filled at lower salaries simply because of the thousands of applicants. Ikea advertised to fill 400 jobs at a new store last month and got over 20,000 applicants. There is no reason for employers to pay higher wages since there are so many unemployed.

Headline disposable income growth was flat at zero for December but consumption rose +0.4%. Consumers are earning less but spending more. Since December 2012 spending has risen +3.6%. We know from experience this does not end well. Spending on durable goods declined -1.8% while nondurable goods spending rose +1.5%. Spending on services rose +0.4%. The disposable income component is about to take a steeper plunge as consumers are faced with paying significantly more for their medical insurance in 2014.

Real disposable income declined -2.7% since December 2012. That is the biggest drop since 1974 and suggests the consumer is in trouble. With an average of 150,000 people leaving the labor force every month and nearly 50 million on food stamps it is hard to believe the U.S. recovery is going to succeed. The economy has to create 150,000 new jobs every month just to cover new people coming into the workforce from graduation and immigration. The average over the last six months has been 170,000 new jobs per month. That means we are reducing the unemployed by only 20,000 a month and there are officially 10.3 million unemployed with the U6 unemployment 7.2 million higher. If we are only reducing that amount by 20,000 a month those 17.5 million workers will continue to scrape by on unemployment, food stamps and part time jobs. Wage growth will be nonexistent.

Chart from Zero Hedge

The key core PCE deflator that is the Fed's favored indicator for inflation rose only +0.1%, which is the same monthly rate since June. For the last 12 months the Core PCE has risen only +1.2%. There is no material inflation in the US unless you count food and energy, which is up +2.2%.

Strangely the Employment Cost Index also out on Friday showed employer's personnel costs rose +0.5% in Q4. Most of that was due to a rise in benefit costs but wages were shown to have risen +0.6%. This was for the entire Q4 period where the report above was only December. On a 12 month basis compensation costs have risen +1.9% and benefits +2.2%.

The final Consumer Sentiment report for January came in at 81.2 compared to estimates for 83.5 and 82.5 in December. Sentiment typically declines in January as the credit card bills come due for the holiday purchases. However, both components declined. The present conditions component fell from 98.6 to 96.8 and the expectations component declined from 72.1 to 71.2. Did you note the interesting transposition in both those numbers? That is no typo and surely this is just a coincidence.

The declining stock market was also a factor in sentiment as did the polar vortex and soaring heating oil, natural gas and propane prices. January is on track to go down as the coldest in decades. Also, 1.6 million people lost unemployment benefits and that impacted cash flow and their outlook. Add in falling home prices and slowing sales and I am surprised sentiment did not decline further.


The "official" Chinese PMI came in at 50.5 for January and a six-month low. This differs from the HSBC Markit PMI that fell to 49.5 in January. The official government produced PMI has a larger survey sample than the HSBC version but it also has a lot more exposure to state owned companies that may or may not report accurately. There have been numerous anecdotal reports over the years from company managers claiming they were told to never report negative numbers. That suggests the official PMI may not be accurate. The HSBC version also covers more small to medium companies and should reflect more of the real economy.

Upsetting the market on Friday was news that Europe's inflation rate sank to +0.7%. This suggests the ECB could take action soon.

The calendar for next week has the 800 pound gorilla of reports in the Nonfarm Payrolls on Friday. Last month there was a huge miss with only 74,000 jobs created instead of the 200,000+ analysts expected. Those expectations are somewhat reserved for January with consensus expectations of +175,000 but a lot of whisper numbers in the 125-150,000 range. Almost all analysts expect the December number to be revised significantly higher so a failure there would also be a big disappointment.

We have to remember that jobs numbers around the holidays tend to be very volatile because of the hundreds of thousands of temporary workers hired in Q4 and then terminated in January. The BLS tries to eliminate this seasonal volatility by adding and subtracting a large number of workers to offset the seasonal hires. Unfortunately they are not very good at it and the target is constantly moving. The low jobs in December could have been simply a factor of too much adjustment by the BLS. The January number will also be adjusted to remove the impact of a quarter million layoffs at UPS, FDX and the various retail chains.

The ADP Employment report last month showed an addition of +238,000 jobs and that was what most expected from the Nonfarm report. The ADP data comes from actual hiring and firing at firms that use ADP for their payroll processing. If I had to believe in only one number I think it would be the ADP report. The Nonfarm report is as much guesswork as actual data collection. Having the BLS call 60,000 homes and businesses a month and ask them if they have jobs allows a lot of room for error. Those numbers are then revised over the two months following to account for late data and auditing of the results. Counting the number of new employees added to ADP payrolls seems a lot more practical. ADP monitors data from 406,000 U.S. companies that have roughly 22 million employees. This accounts for more than 20% of U.S. private sector employees. ADP does seasonally adjust the data to eliminate the huge swings in the holiday period.

Over the long term the real time ADP numbers track very closely to the constantly revised Nonfarm numbers. You almost have to wonder if the BLS is not going back to the ADP report for input on the Nonfarm revisions.


The ISM Manufacturing report on Monday is the first full look at the nationwide manufacturing activity for January. Expectations are for a minor decline to 56.0 from 57.0. The ISM Services on Wednesday is expected to rise slightly from 53.0 to 53.7. Neither should have much impact on the market unless they deviate from expectations.


We will see the debt ceiling fight begin to take over the headlines by the end of next week. The democrats still swear they will not negotiate and not accept anything but a clean debt limit increase not tied to any budget cuts. The republicans are moving closer to the possibility of trying to tie a "no bailout for insurance companies" provision to the ceiling. This would have no impact on spending today but could have a significant impact in 2015-2016.

The Affordable Care Act has a provision for the government to compensate insurance companies if the people who sign up for health care are older or sicker than the plan creators expected. Basically if the insurance companies lose money over the next three years the government has to cover that loss of profits. Over the next three years this could run in the hundreds of billions.

Multiple insurance companies have already warned that the patient profile of the 3.3 million people that have applied for coverage is worse than expected. The number of young healthy applicants is about a third lower than expected so the risk pool is turning sour. By attempting to prevent the loss compensation by the government the republicans are trying to cut off the billions in compensation payments in future years. This would force the insurance companies to raise premiums for the plans sold on the Healthcare.gov website and cause fewer people to sign up.

More than 74% of applicants are receiving subsidies from the government and accounting for those subsidy payments to the insurers is 6-9 months away from being completed in the government's flawed website. Accenture (ACN) has been hired to fix this problem but it won't happen overnight.

Obviously you can see where the republicans are going with this effort but I don't think it has a chance. The democrats can just keep saying no to any proposal until the clock runs out and the government shuts down. Since the republicans have finally escaped the shutdown cloud from the last fiasco and sentiment seems to be in their favor for the November elections they would be stupid to force another showdown and lose that momentum. Unfortunately they at least have to appear to try to cut some form of spending to keep the conservatives in their camp.

This week may be the start of the debt ceiling battle but I suspect it will be a very muted conflict.

The earnings cycle is about half over and the results are mixed. So far about 72% of companies have beaten on earnings with an average earnings growth rate of +6.6%. That exceeds the historical average of 63% beating estimates. However, revenue growth is only running about +2%. The majority of companies are still beating thanks to share buybacks reducing the number of outstanding shares and on cost cutting. Even worse 59% of the companies reporting have warned on Q1 and beyond. When 72% beat but 59% warn this is not a good sign for Q1.

One of the earnings misses hitting the Dow early Friday was Walmart (WMT). The company cut estimates for its fourth quarter ending January 31st to "slightly below the low end of its prior forecast of $1.60-$1.70 per share." The company said same store sales were expected to be negative. Previously they have predicted flat sales for Walmart and a +2% increase at Sam's.

Walmart said it was hurt by the loss of welfare benefits for 1.6 million people in the December-January period as well as reduced food stamp benefits for millions of others. Since Walmart caters to the low dollar consumer they were hit by the decline in benefits for those shoppers. With nearly 50 million U.S. consumers on food stamps, 1 in every 5 homes, any changes to those programs will impact not only Walmart but Dollar Tree (DLTR), Dollar General (DG) and to some extent nearly every grocery retailer. Additional cuts to food stamps are expected in 2014. Cowan analyst Tal Lev said 20% of Walmart shoppers are food stamp recipients.

Walmart also said store closings in Brazil and China cut into profits. They said they were closing 25 stores in Brazil where it operates 560 locations and employs 80,000 workers. They are adding 22 new stores there and renovating 44 others. In China consumers shop for food every day because of lack of storage space in the postage stamp size apartments. Walmart is accustomed to people buying in bulk and stocking up 2-3 times a month. The company said it was going to take some charges for its aborted efforts to move into India. The government rules there require a local partner with 49% interest. Walmart had entered into agreements with several entities but none have been successful.

Walmart finished the day down only .07 cents after a sharp drop at the open. This suggests investors already factored in the potential for a negative report given the running disaster in the retail sector over the last month.


Another retailer having Q4 problems was Amazon (AMZN). The company reported earnings Thursday night and they were disappointing. Amazon reported earnings of 51 cents, up from 21 cents, on revenue of $25.59 billion compared to estimates of 66 cents and $26.06 billion. Amazon blamed shipping expenses for the majority of the loss. The company also reported its first $1 billion quarter for Amazon Web Services with a growth rate of 58%. Operating cash flow increased +31% to $5.47 billion. Trailing 12 month free cash flow increased from $1.4 billion to $2.03 billion. Sales increased +20%. Q1 sales are expected to grow by +18% on average. They lost -$258 million from currency fluctuations in Q4 and -$1.28 billion for the year. They delivered more than 2 billion digital music downloads.

One way Amazon is working to offset the higher shipping charges is by raising the membership rates for its Prime members. They said they were considering a $20 to $40 increase to offset the higher shipping costs and fuel prices since they instituted the program in 2005. Currently Prime members get free two day shipping and access to more than 40,000 streaming movies and TV shows. Prime members can "borrow" more than 475,000 popular Kindle books at no charge. Amazon has never said how many Prime members they have but we do know they added more than one million in just the third week of December. Amazon disclosed this when they said they were limiting new members so that existing members could still get their products shipped before Christmas. We also know that Prime members grew by 25-30% in 2013.

A Berstein analyst believes Amazon has roughly 25 million Prime members. Amazon claims it has "tens of millions" Prime customers. Amazon is taking a risk by raising the membership price but they are counting on Prime members remaining their most loyal customers. A Prime member buys four times that of a typical non-Prime member. I am a Prime member and I am betting that a $20 hike will not scare many members away. I buy 25-30 items a year from Amazon not counting e-books. Free express shipping on those items is worth a lot of money to me and far more than $20 bucks.

Amazon may not be making a lot of profit each quarter but they are investing in capex spending at the rate of $4.5 billion a year. When they eventually end the capex spending they will be instantly profitable. Just adding $20 to a Prime subscription could generate $500-$800 million a year in additional revenue. With web services growing at 58% a year this could grow to more revenue than product sales by 2020. This is the goal for that Amazon division and it is a highly profitable division.

Amazon shares fell -11% or -$44 on the earnings news to close at $358. That is probably not the bottom but I will be watching for a bottom to form because I think Amazon is going higher. I just wish they would do a 4:1 stock split so option prices were more reasonable.


Google offset Amazon's impact on the Nasdaq with a +$45 gain. Google reported earnings of $12.01 compared to estimates of $12.26. Revenue was $16.86 billion and beat the estimates of $16.75 billion. Click volume jumped +31% for the quarter. However, the cost of the click fell by -11%. Revenue from the Google search segment rose +22% while revenue from "other" endeavors rose +99% to $1.5 billion. That came from higher sales of apps in the Play Store. Analysts were quick to upgrade their price targets. FBN Securities bumped their target from $1300 to $1400. Deutsche Bank raised their target from $1220 to $1310.

Google announced a 2:1 stock split in early 2012. However, they are issuing a new class of C shares for the announced split. The C shares have no voting rights. This prompted a shareholder lawsuit when the split was announced. That suit has run its course and the split will occur as promised on April 2nd. Google has the normal A shares that everyone owns with full rights. They also have class B shares that are held by founders Larry Page and Sergey Brin, which have ten times the voting rights as Class A shares. By distributing the nonvoting C shares in the split the founders will never be at risk of losing control.

So, a miss on earnings and small beat on revenue was worth $45. The jump in click volume was the key.


Dow component Chevron (CVX) reported earnings that declined -32% to $4.93 billion on revenue of $53.95 billion. Earnings were $2.75 per share. Refining earnings declined -58% because of falling prices for refined fuels and chemicals. Normally producers like Chevron want oil prices to rise but in this case they could not recover their higher costs in the refined products. Chevron had warned several weeks ago so investors were not expecting much but Chevron still under delivered. Production is expected to grow less that 1% in 2014 due to declines in older fields and long lead time projects. However, 2015 and 2016 should be banner years as multiple projects come online. Domestic production declined -4% and international production fell -3%.

The company spent a record $41.9 billion on projects around the world including two monster LNG projects in Australia. That was up from $34.2 billion in 2012. Shares of CVX fell -$4.82 to $111.62.


Chipotle Mexican Grill (CMG) did not disappoint. The company reported earnings of $2.53 or +30% increase. This compares to estimates at $2.52. Sales rose +21%. Same store sales rose +9.3% and ahead of estimates for a +6.7% gain. Compared to the other restaurant chains this was an outstanding performance. They projected further same store sales gains of "low to mid single digits" for Q1. The CFO said higher food costs would likely prompt a price increase in Q3 of this year. They currently operate 1,500 stores and plan to open 195 in 2014. Shares rallied +12% or $58 to $552.


MasterCard (MA) reported earnings of 57 cents compared to estimates of 60 cents. Revenue rose +12% to $2.13 billion thanks to a +13% increase in card transactions. The earnings miss was blamed on higher rebates and a higher tax rate. Visa is outperforming MasterCard. JPM recently signed a ten year agreement to commit more card transactions to Visa instead of MasterCard and they are not the only bank to switch emphasis to Visa. MasterCard recently completed a 10:1 split from $800 to $80. While I want to buy MasterCard as a long term play I am skeptical until a positive post split trend develops. That touch of the 100-day on Friday is very tempting. Normally on a big split like that there is a lot of post split selling. Some funds are limited to the number of shares they can hold and in a split labeled as a dividend they can sell the new shares at a lower tax rate. Watch for a positive trend before making a long entry.


Barbie needs a makeover. Mattel's best known doll saw sales fall -13% in Q4 and that caused a miss for the toy maker. Barbie was not alone. Mattel's Fischer Price brand for infants declined -14% and hot wheels fell -8%. Earnings were $1.07 an analysts were expecting $1.19. Revenues of $2.11 billion missed projections of $2.37 billion. Mattel may be the victim of shrinking consumer incomes and discretionary spending. Shares fell -12% on the news.


The earnings calendar for next week is very busy but most of the companies you have never heard of. I scanned the nearly 400 companies reporting and these are the highlights. Probably the most anticipated earnings report will be Twitter on Wednesday. Nobody has a clue what they will report so the after earnings action could be extremely volatile.


Microsoft was the biggest gainer on the Dow after news broke that the company is planning to make Satya Nadella the new CEO to replace Ballmer. Nadella is currently the EVP of enterprise services and cloud. Analysts believe Nadella is a good choice and will bring Microsoft out of the PC world and into the cloud on a grand scale.

Also the board may be looking to replace Bill Gates as chairman with lead independent director John Thompson. Gates would still remain a board member but not the chairman. They believe this will also distance Microsoft from the past and put them on a path to the future.

Yahoo (YHOO) reported on Friday that their email system had been hacked. The attack captured a list of usernames and passwords and also tried to get a list of addresses that had been emailed from those accounts. Yahoo is being rather secret about this attack and the details are sketchy.

Where is Mel Gibson and his tin hat when you need him. Conspiracy theorists are starting to wonder what is going on behind the scenes when three bankers committed suicide in the same week. A JP Morgan senior manager killed himself on Tuesday and a Deutsche Bank executive on Sunday. Late in the week Russell Investments Chief Economist, Mike Dueker, jumped off a cliff in Washington State. Dueker was formerly a Fed economist and was ranked in the top 5% of economists by the Fed. With the market only down -5% why the rash of suicides? It is highly coincidental and even a mediocre conspiracy theorist could create a plausible story out of it. After the 1929 crash with 1,616 banks failing there were 20 banker suicides directly related to the crash and as many as 100 who were connected to the financial industry. Surely we are not heading in that direction today.

There is a growing mindset that the emerging market currency problem could be long lasting. There are three causes. One reason is the crash of commodity prices as a result of China's economic slowdown. Emerging markets that rely on commodity exports to support their currency are suddenly seeing their currency deflate because of the drop in commodity prices.

Another reason is the political weakness in numerous countries that are making them unsafe for foreign investment. Venezuela, Argentina, Turkey, etc, are imploding and that is forcing their currencies lower. Lastly, the Fed is tapering and the dollar is rising. When the Fed was forcing the dollar lower with QE this artificially supported emerging market currencies. Investors fleeing dollar denominated investments looked for higher yields in the emerging markets. Now the Fed is ending QE and the dollar is rising and that attracts investors who cash out their emerging market investments.

If China continues to sink and there is ample reason to suggest it will continue to slide then commodities are going to continue lower and that will push commodity related currencies lower. China is trying to convert its economy from an export economy to a consumption economy. They are slowing investment in hard assets that require concrete and steel. The building boom of the last decade is over and the new leadership is trying to burst the bubbles that were created during the boom. China will continue to grow over 7% per year but the building blocks are changing.

The new mindset is focused on the potential for this currency crisis to evolve into a longer term problem. When the Thai Baht crashed in 1997 it caused an emerging market currency crisis that eventually hit the Russian Ruble and forced Russia to default on its debts. This brought down Long Term Capital Management and nearly wrecked the U.S. financial system. When the Thai Baht crashed everyone said "so what?" Within weeks that tiny spark caused a global panic. Are we approaching the same point today? Nobody knows but we should pay attention. I have heard numerous reporters and analysts say "It is only Turkey, who cares if their currency collapses?" We should.

Turkey is the 17th largest global economy. Thailand is 33rd. The European debt crisis started in Dubai and then spread to the entire euro zone and nearly wrecked the European Union. Last week the Russian Ruble fell to a five-year low. More than 50% of Russia's revenues come from oil and gas. The proportion of non-commodity exports relative to GDP has fallen from 15% 10 years ago to 8.3% today. Russia is at risk in a global currency crisis. Worry about Turkey, Argentina, Venezuela, Brazil, Indonesia, South Africa, Greece, etc. Expect to hear the word contagion a lot in the coming weeks.

While on the topic of eurozone debt crisis, there are reports that top Eurozone financial officials held a secret meeting last Monday to discuss mounting concerns over the Greek bailout. High level officials from the IMF, EU Commission and the ECB attended along with German and French finance ministers. They were trying to come up with a way to force Greece to follow through on unpopular structural reforms and trying to find up to $8 billion to cover funding shortfalls later this year.

I reported on the absurdity of the Greek bailout several weeks ago. Nearly 100% of the bailout funds from the Troika are going to make payments on earlier loans from the Troika. In other words Greece is going deeper into debt every month but they are not getting any money. The funds come in as agreed but are then routed right back to make interest payments on prior bailouts. If the Troika were to halt future payments Greece would immediately default. Even with the round trip funds Greece will be $8 billion short when it is time to make payments in July. The Troika is scrambling to find another $8 billion to loan them so their elaborately constructed house of cards does not collapse.

If an election were held today the opposition SYRIZA party would win in a landslide. The SYRIZA leader, Alexis Tsipras, has said he would not repay the $325 billion in Troika loans. Greece is going to default on its loans either because the house of cards collapses or the SYRIZA party comes into power in the next election.

When Greece originally asked for a bailout it was a $50 billion problem. After two years of constantly growing loan balances to keep the payments flowing, it is now a $325 billion problem. There is no way Greece will ever be able to repay the loan and default is inevitable. Be prepared.

The table below shows how much an individual taxpayer in each country is liable for if Greece defaults. German taxpayers are on the hook for 211,045 euros each. Merkel's pledge that German taxpayers won't be impacted by a default is the equivalent of "If you like your plan you can keep it."

Table from Mike Shedlock

Equity funds had the largest weekly outflow in over two years. According to Bank of America investors pulled out $12 billion from U.S. funds and $9.4 billion from emerging market funds and ETFs.

The Fed removed another $10 billion from QE and rates should have gone higher. However, weak economics and the growing emerging markets currency crisis drove investors to treasuries and the yield on the ten-year fell to 2.668%. That is a three month low. Suddenly treasuries are a flight to quality again.


Janet Yellen took over as Fed Chairman or Chairwoman on Saturday. She will be officially sworn in next week. She has inherited the biggest monetary policy experiment in history and her actions over the next 90 days could set the tone for her term.

Investors should note that whenever a new Fed Chairman takes the helm the market volatility spikes significantly. Specifically the first 90 days of their term sees an abnormal spike. It is almost like the market (traders) are testing the new chairman to see what they will do when stressed.

Chart source - The Short Side of Long

Volatility is already spiking and it has little to do with Yellen taking office and more to do with the markets closing at their lows on Friday and worry over Turkey turning into Thailand in 2014.


January is in the record books with a -4.14% loss on the S&P. You have heard about the January barometer. As the first week goes, so goes January. As January goes, so goes the year. In reality since 1950 if January is down there is a 58% record of the year finishing with a +1.65% gain. If January is up the average annual gain is +8.5%. However, January does set the sentiment tone for the market. Investors become skittish and quicker to pull the exit trigger on any weakness.

The AAII Investor Sentiment survey peaked on December 26th with 55.06% of respondents bullish. Last week's sentiment declined from 38.13% to 32.18% and it was the fourth drop in five weeks. Bearish sentiment rose from 23.76% to 32.76%. This is the first time bearish sentiment has been higher than bullish sentiment since last August. That was when we were about to attack Syria.

As of Friday it has been 836 days since we had a 10% correction on the S&P. There have only been four rallies in the history of the S&P with longer streaks. The longest one was 2,553 days and started in October 1990. Starting in March 2003 a streak of 1,673 days occurred. Clearly those are the exception rather than the rule.

Bull markets tend to have a maximum life span around 5 years and can include multiple 10% corrections. This bull market started in March 2009 so March 2014 would be 5 years.

With the bull market nearing retirement and it has been more than two years since the last 10% correction in October 2011 the odds of a future correction are increasing. Add in the 59% of companies warning on 2014 earnings and it would seem a correction is a foregone conclusion. However, when all indicators seem to point in one direction the opposite usually occurs. Not every time but quite often. With the number of people exiting the market and moving to the sidelines the risk of an explosive rebound is also strong.

Market breadth was 2:1 negative on Friday with 4582 decliners to 2256 advancers. Volume was nearly 8 billion shares so it was definitely a day for the bulls to worry about. They can't say it was low volume so the decline is worth noting.

The number of S&P 500 stocks currently above their 50 day average has declined to 40%. That is the lowest number since September. The number of S&P stocks above their 200 day average has declined to 71% and the lowest since January 1st 2013. Looking at the health of the S&P in this way shows us that it is not just a subset of stocks pushing the averages down. The decline is broad based and persistent.



The S&P has held solidly above strong support at 1,775. It has penetrated slightly on more than one occasion but there was an immediate rebound. The rebound failed to hold in every case and the index returned to that 1,775 level. If this level does break the next support is the 100-day at 1,769. Granted that is not much lower and I would expect another rebound from the 100-day. If that support breaks we are in for a drop to 1,700 if not lower. The 200-day is 1,706 but the 200-day did not stop the decline back in November 2012. I believe it is support but once a market selloff gains momentum it can easily overrun normal support levels. When moves to the upside are exaggerated the following downside move is normally exaggerated as well.



The Dow closed right on what should be decent support at 15,700. Any further breakdown from here targets 14,750 or somewhere in that vicinity for a 10% decline. The Dow is down -5.3% for the year. The Dow has lost -876 points since the 16,576 close on New Year's Eve.

The Dow was hurt badly by the -5 point drop in Visa and Chevron but there were seven other stocks that lost more than one point. Microsoft was the winner on the expectations the CEO hunt was over.



The Nasdaq is trying to cling to 4,100 but it may be a losing battle. The 4,060 level has become support and a failure there should find stronger support at 4,000. The Nasdaq has been very volatile as a result of the $30-$50 gains in losses in high profile stocks like Amazon, Google, Priceline, Netflix, etc. Once earnings are behind us we could see a return to normalcy.



The Russell 2000 chart looks like the Nasdaq so no leadership here. The 1,120 level is support and 1,145 is resistance. I would be afraid of going long the market until the Russell is back over 1,145 or dips to 1,100.


This should be a pivotal week in the markets. They closed near their lows for the day and for the year. This was probably worry over an unexpected currency event over the weekend. However, last Friday was also negative and Monday continued the decline.

Sentiment has been damaged and it might take several days to several weeks to repair once the market finds a bottom. The anticipation of a full 10% correction is growing but that is a contrarian indicator. Once everyone expects it the opposite is likely to happen.

Super Bowl Facts

Did you know?

11.2 million pounds of potato chips will be consumed. That is huge when you think about how much a potato chip weighs. Viewers will also consume 3.8 million pounds of popcorn and 8.2 million pounds of tortilla chips.

700,000 U.S. employees will not show up for work on Monday because of party hangovers.

Papa John's Pizza stocked up on 2,000,000 pounds of cheese and 350,000 pounds of pepperoni.

Domino's Pizza will deliver 11 million pizzas.

The National Chicken Council said 1.23 billion chicken wings will be consumed on Sunday.

The California Avocado Commission said 8 million pounds of avocados will be turned into guacamole.

51.7 million cases of beer will be consumed.

The average number of people at a Super Bowl party is 17.

Only 5% of viewers will watch the entire game. One out of 12 are watching just for the commercials.

111 million people will watch in the U.S. and 180 million around the world.

Forty-three advertisers will pay up to $4.5 million for commercials lasting 30 seconds to two minutes. In 1967 a 30 second commercial cost $40,000.

The Pittsburgh Steelers have won 6 Super Bowls. Minnesota, Denver and Buffalo all tie for the most losses at 4.

Players on the winning team get $92,000 each and the losing players get $46,000. Since the average NFL player gets paid $145,000 per game during the season they are actually playing this game for a bargain rate.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

Bob Farrell's 10 Market Rules to Remember

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras – excesses are never permanent.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5. The public buys the most at the top and the least at the bottom.

6. Fear and greed are stronger than long-term resolve.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.

9. When all the experts and forecasts agree – the opposite is going to happen.

10. Bull markets are more fun than bear markets.

 


New Plays

Biotech & Grocery

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Isis Pharmaceuticals - ISIS - close: 51.06 change: +1.10

Stop Loss: 48.65
Target(s): 58.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 01, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
ISIS is in the healthcare sector. The company is considered part of the biotech industry. The bullish momentum from 2013 has accelerated in 2014. The stock has garnered positive analyst comments in recent weeks and shares have rallied to new all-time highs. ISIS displayed relative strength on Friday and is poised to breakout past short-term resistance near the $52.00 level.

We are suggesting a trigger to open bullish positions at $52.15. If triggered our target is $58.50. However, we will plan to exit prior to ISIS earnings report, which is expected at the very end of February but no date has been confirmed yet.


FYI: The Point & Figure chart for ISIS is currently bearish but a move over $52.00 would produce a new buy signal.

Trigger @ $52.15

Suggested Position: buy ISIS stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the MAR $55 call (ISIS1422C55) current ask $4.50

Annotated chart:



NEW BEARISH Plays

The Fresh Market, Inc. - TFM - close: 34.96 change: -0.20

Stop Loss: 36.05
Target(s): 30.25
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 01, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
TFM is in the services sector. The company runs a specialty grocery store with almost 150 locations. Last year was a rough one for shares of TFM. The stock crashed on November 22nd following a disappointing earnings report where TFM missed on both the top and bottom line estimate. Management also guided lower in that report. TFM spent the rest of 2013 drifting sideways.

Now it's 2014 and there are growing concerns about the health of the U.S. consumer and worries that consumer spending in the fourth quarter were a lot worse than expected. This has helped push TFM to new two-year lows. This past week has seen TFM consolidate sideways with a bearish trend of lower highs that should blossom into a breakout to new relative lows.

I am listing this as a more aggressive, higher-risk trade due to the amount of short interest. The latest data listed short interest at about 25% of the 40 million share float. The bears have a pretty good story for the stock to trend lower but that much short interest does pose a danger of short-term spikes higher.

I'm suggesting small bearish positions if TFM can trade at $34.60 or lower. Our target is $30.25. More aggressive traders could aim lower since the Point & Figure chart for TFM is bullish with an $18 target.

Trigger @ 34.60

Suggested Position: short TFM stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the MAR $35 PUT (TFM1422o35) current ask $2.75

Annotated chart:




In Play Updates and Reviews

Stocks End January On Down Note

by James Brown

Click here to email James Brown

Editor's Note:
The market spiked lower on Friday morning but managed to pare its losses by the closing bell.

We have removed MU and MYL as active candidates.


Current Portfolio:


BULLISH Play Updates

Autodesk, Inc. - ADSK - close: 51.25 change: -0.27

Stop Loss: 49.25
Target(s): 56.50
Current Gain/Loss: + 0.3%

Entry on January 28 at $51.10
Listed on January 27, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.6 million
New Positions: see below

Comments:
02/01/14: The market's weakness on Friday morning helped push ADSK to gap down at $50.77. Fortunately the stock quickly bounced. Unfortunately the rebound stalled at short-term resistance near its simple 10-dma. Investors might want to wait for a close above the 10-dma or a rally past $52.00 as alternative entry points to start bullish positions.

current Position: Long ADSK stock @ $51.10

- (or for more adventurous traders, try this option) -

Long MAR $55 call (ADSK1422C55) entry $1.44

01/30/14 ADSK rallies on an upgrade
01/28/14 triggered @ 51.10

chart:



Hewlett-Packard Co. - HPQ - close: 29.00 change: -0.25

Stop Loss: 27.70
Target(s): TBD
Current Gain/Loss: + 1.6%

Entry on January 27 at $28.53
Listed on January 18, 2014
Time Frame: exit PRIOR to earnings on Feb. 20th
Average Daily Volume = 13.2 million
New Positions: see below

Comments:
02/01/14: HPQ managed a bounce off its simple 20-dma on Friday morning but shares still posted a -0.8% decline. That underperformed the major indices. The simple 50-dma has risen to $27.74. I am raising our stop loss up to $27.70. More conservative investors might want to raise their stop closer to the simple 30-dma near $28.50.

current Position: long HPQ stock @ $28.53

- (or for more adventurous traders, try this option) -

Long Mar $30 call (HPQ1422C30) entry $0.96

02/01/14 new stop loss @ 27.70
01/27/14 trade opens at $28.53
01/25/14 adjust entry strategy and open positions on Monday morning (Jan 27th)
01/25/14 new stop loss @ 26.95
01/23/14 new stop @ 28.95
Nimble traders may want to look for support near $28.70 as an alternative entry point.

chart:



JPMorgan Chase & Co - JPM - close: 55.36 change: -0.64

Stop Loss: 53.90
Target(s): 59.75
Current Gain/Loss: - 1.6%

Entry on January 30 at $56.25
Listed on January 25, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 18 million
New Positions: see below

Comments:
02/01/14: Hmm... the financial sector underperformed on Friday with the XLF down -1.1%. Shares of JPM helped lead the group lower with its own -1.1% decline. This stock should find support near its 100-dma and 150-dma in the $54.60-55.00 zone. If those levels fail then the $54.00 level could offer support especially since it's underpinned by the simple 200-dma. Investors may want to wait for a bounce from these levels before considering new bullish positions.

current Position: Long JPM stock @ $56.25

- (or for more adventurous traders, try this option) -

Long MAR $55 call (JPM1422C55) entry $2.53

01/30/14 triggered @ 56.25. Use stop loss at $53.90
01/28/14 add a secondary entry trigger at $56.25
adjust the exit target to $59.75

chart:

Weekly chart:



Penn Virginia Corp. - PVA - close: 11.99 change: +0.07

Stop Loss: 11.15
Target(s): 17.00
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 28, 2014
Time Frame: exit PRIOR to earnings on Feb.19th
Average Daily Volume = 3.2 million
New Positions: Yes, see below

Comments:
02/01/14: We're not giving up on PVA just yet. Shares gapped down like so much of the market on Friday morning. Yet the stock quickly recovered and managed to outperform the major indices with a +0.5% gain by the closing bell. The stock is consolidating sideways in a neutral pattern of higher lows and lower highs (a pennant shaped consolidation). We are waiting on a breakout higher.

Earlier Comments:
Driving the stock higher has been some very bullish analyst comments on the stock. One analyst listed PVA as a likely takeover target. All this bullish talk on PVA has got to make the shorts nervous and there are a lot of shorts. The most recent data listed short interest at 32% of the 49.9 million share float. New highs from here could spark more short covering.

So far the January high for PVA has been $12.49. We are suggesting a trigger to open bullish positions at $12.55. If triggered our target is $17.00 but that is very, very optimistic goal. Odds are more likely we won't capture that big of a move because PVA is due to report earnings on February 19th and we do not want to hold over the announcement.

Investors may want to consider PVA as a longer-term trade. The Point & Figure chart for PVA is bullish with a long-term $25.00 target.

Trigger @ 12.55

Suggested Position: buy PVA stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the Mar $12.50 call (PVA1422C12.5)

chart:



BEARISH Play Updates

Best Buy Co. - BBY - close: 23.54 change: +0.82

Stop Loss: 24.75
Target(s): 20.25
Current Gain/Loss: + 3.1%

Entry on January 30 at $24.29
Listed on January 29, 2014
Time Frame: Exit PRIOR to earnings on Feb. 27th
Average Daily Volume = 17.6 million
New Positions: see below

Comments:
02/01/14: BBY spiked down to new ten-month lows on Friday morning and hit $22.15 before surging in a big oversold bounce. The stock ended another down week with a +3.6% gain. More conservative investors might want to lower their stop loss just in case this bounce continues on Monday. I am not suggesting new positions at this time. The overall trend for BBY remains bearish.

Earlier Comments:
The plan is to use small positions to limit our risk.

*Small Positions*

current Position: short BBY stock @ $24.29

- (or for more adventurous traders, try this option) -

Long MAR $20 PUT (BBY1422o20) entry $0.45

01/30/14 new stop loss @ 24.75
01/30/14 trade opens with BBY gapping open higher at $24.29

chart:



Ecopetrol SA - EC - close: 34.26 change: -0.56

Stop Loss: 35.25
Target(s): 31.00
Current Gain/Loss: + 8.3%

Entry on January 06 at $37.35
Listed on December 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 716 thousand
New Positions: see below

Comments:
02/01/14: EC spent much of the week churning sideways inside the $34-35 zone. The stock should be ready for the next step lower. A drop under $34.00 could be used as another entry point for bearish positions.

current Position: short EC stock @ $37.35

01/29/14 new stop loss @ 35.25
01/28/14 investors may want to start taking some money off the table
01/27/14 new stop loss @ 35.65
01/14/14 new stop loss @ 36.25
01/08/14 new stop loss @ 38.25
01/06/14 triggered @ 37.35

chart:



GameStop Corp. - GME - close: 35.07 change: -0.24

Stop Loss: 37.75
Target(s): 31.00
Current Gain/Loss: + 1.5%

Entry on January 29 at $35.60
Listed on January 28, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 6.2 million
New Positions: see below

Comments:
02/01/14: Friday was a relatively quiet session for GME with the stock keeping pace with the broader market's decline (-0.6%). Friday also capped its fourth weekly loss in a row. The simple 10-dma has declined to $36.87 and should be the first line of defense for the bears (a.k.a. short-term resistance). We're lowering the stop loss to $37.10.

Earlier Comments:
We should probably consider this a more aggressive, higher-risk trade because there is so much short interest. The most recent data listed short interest at 25% of the 113 million share float. That could make GME volatile and we run the risk of the stock seeing short-term spikes. However, long-term GME could be in trouble as the video industry moves more and more to an online, download purchase system instead of consumers going to their local game story to buy games.

More conservative traders may want to wait for a drop below $35.00 before initiating positions. Our target is $31.00. More aggressive traders could aim lower. The Point & Figure chart for GME is bearish with a $20.00 target.

current Position: short GME stock @ $35.60

- (or for more adventurous traders, try this option) -

Long MAR $35 PUT (GME1422o35) entry $1.65

02/01/14 new stop loss @ 37.10
01/29/14 trigger @ 35.60

chart:



Vitamin Shoppe, Inc. - VSI - close: 44.82 change: -0.18

Stop Loss: 46.55
Target(s): 41.00
Current Gain/Loss: + 2.2%

Entry on January 24 at $45.85
Listed on January 23, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 535 thousand
New Positions: see below

Comments:
02/01/14: The action in VSI on Friday looked a lot like the major indices. Shares gapped down at the open, quickly bounce but failed to close in positive territory. I see the $46.00 level as overhead resistance. A new failed rally near $46 could be used as another entry point for bearish positions.

Earlier Comments:
I do consider this a slightly more aggressive trade. The most recent data listed short interest at almost 15% of the 27.5 million share float. Therefore I'm suggesting small positions to limit our risk.

*small positions*

current Position: short VSI stock @ $45.85

- (or for more adventurous traders, try this option) -

Long Feb $45 PUT (VSI1422N45) entry $1.62

01/29/14 new stop loss @ 46.55
01/24/14 triggered @ $45.85

chart:




CLOSED BULLISH PLAYS

Micron Tech. - MU - close: 23.04 change: -0.41

Stop Loss: 21.95
Target(s): 28.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 30, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 37 million
New Positions: see below

Comments:
02/01/14: MU did not perform well on Friday. Granted the market produced a widespread decline but MU underperformed with a -1.74% decline. Our trade has not opened yet and after Friday's weakness we're removing MU as an active candidate. The long-term trend is still higher so I would keep MU on your watch list. A dip and bounce from its rising 50-dma (near $22.00) might be a better entry point.

Trade did not open.

02/01/14 removed from the newsletter. suggested trigger was $23.85

chart:



Mylan, Inc. - MYL - close: 45.41 change: -0.14

Stop Loss: 41.90
Target(s): 48.00
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 25, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.0 million
New Positions: see below

Comments:
02/01/14: We are removing MYL as a candidate. Our trade has not opened yet. The long-term trend for this stock is still bullish so I would keep it on your watch list. Another dip and bounce from its simple 50-dma might be the next entry point.

Trade did not open.

02/01/14 removed from the newsletter. suggested trigger was $43.55

chart: