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Daily Newsletter, Saturday, 12/20/2014

Table of Contents

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

Market Wrap

Bunge Bounce

by Jim Brown

Click here to email Jim Brown

The Dow declined -924 points in 7 days only to rebound +740 points in 3 days. That was a major bounce for the Jekyll & Hyde market. After trading at 1,972 at Tuesday's close the S&P rallied +106 points to trade in new high territory near 2,078 before fading slightly at the close. Nobody was thinking about new highs at the close on Tuesday.

Market Statistics

The pace of the decline was heartbreaking as many traders had good positions stopped out. Market sentiment was so negative at Tuesday's close that nobody wanted to own stocks. The market was heavily shorted and that is the key point. The Fed threaded the needle on the statement and Yellen's press conference by suggesting that even though the first rate hike may be in mid-2015 they were not going to be "unreasonable" in their pace of hikes and they would be "patient" in determining when those hikes were needed. Yellen essentially convinced investors that the pace of hikes would be slow and the Fed wanted to err on the side of caution and not start them too soon. Yellen lived up to her "Empress of the Doves" label and the market cheered.

Shorts were squeezed hard as a result of the Fed comments and news from China and Europe. There was no place for shorts to hide with energy stocks rebounding 10-20% despite oil prices hovering in the $55 level. There appears to be a bottom forming at that level and energy stocks are surging. The $60 level also appeared as support for Brent crude.


The news out of China helped to spike the market on Thursday. China does an economic census every 4 years. The result of the current census showed that China's economy was $308.8 billion larger than previously thought. The 2004 census provided a +16.8% boost to GDP and the 2008 census added +4.4%. The current census is expected to raise the 2013 GDP by 3-4%. This implies that the 2014 GDP will also rise by 3-5%. These are huge numbers and suggests China's economy may not be as weak as previously thought. Because the revision also showed a greater portion of the economic growth was coming from services instead of manufacturing it suggests the government might feel more comfortable about adding further stimulus. China is trying to move away from a manufacturing economy dependent on world consumption.

The economic news on Friday was uneventful. The Kansas Fed Manufacturing Survey rose one point from 7 to 8 for December. That is the highest reading since July and the 12th consecutive month of expansion for the Kansas district. Any number over zero denotes expansion. The best news was a surge in the new orders component from 1 to 12, also the highest level since July. Backorders rose from 4 to 7 after four months in contraction from July through October. Employment at 9 was the highest level since May.

This was a decent report but it was ignored by the market. The activity in the Kansas district is muddling along in the single digits compared to the teens and 20s in the period after the recession. There is no real economic surge, just slow growth and business as usual.


State personal income in Q3 rose +1.0% and slightly slower than the +1.2% growth in both Q1 and Q2. Weaker rents and slower growth in wages accounted for the decline. The plains region had the slowest growth at +0.6% with the Southwest the highest growth at +1.3%. This report was ignored.

The economic calendar for next week will be highlighted by home sales, GDP and the Richmond surveys. There will be very few traders around to pay attention but probably enough to move the market if some report appears with abnormal numbers.

The Q3 GDP revision is expected to decline slightly from the previously reported 3.9% down to 3.3%. However there are estimates out there as high as 4.9%. This number could be a real surprise if it comes in too hot. That would upset the slow growth assumptions of the Fed and potentially accelerate rate hikes.

The existing home sales and new home sales are expected to be relatively in line with the prior readings. Nobody is likely to get excited over these "winter" sales numbers, which are normally lackluster.

The Richmond Manufacturing survey has the potential to be a disappointment after posting a sharp decline from 20 to 4 in November. New orders fell from 22 to 1 and backorders from 9 to -2. If that kind of decline continued it is going to be a rough report. However, quite often we see snapbacks in the numbers indicating there were timing problems in the collection of data rather than an actual slump in manufacturing.


Split Calendar - No new splits.


We are moving into the Q4 earnings warning cycle and the strong dollar is going to be a challenge for international companies. S&P companies derive about 50% of their earnings from overseas and the dollar is going to be a serious headwind. The Dollar Index soared to an eight year high last week.


The strong dollar is even more troubling given the crash in the ruble and the falling yen. Shinzo Abe's reelection probably means even more stimulus for Japan and a further devaluation of the Yen. With Europe getting closer to real QE and Switzerland moving to negative interest on deposits we are going to see a race to the bottom on foreign currencies. The euro is expected to fall another 6% in the coming months. Those with the cheapest currencies will export more goods but they will import less. This means any dollar based goods are going to be a tough sell.

Switzerland imposed a -0.25% negative interest rate on deposits to halt a surge in inflows as a result of Russia's financial crisis. The negative rates will begin on January 22nd, which is coincidentally the same date as the ECB meeting where they are likely to announce a major increase in the QE program. The central bank also lowered its target range for the three-month Libor in an attempt to push it below zero as well. They were successful with the rate falling to -0.046%.

In stock news Google shares (GOOGL) recovered from their $489 low on Tuesday to close back above $516. Analysts believe this is temporary short covering. Google is expected to miss on Q4 earnings and shares are likely to move lower in the weeks ahead. Google is suffering from too many projects and loss of market share in search. Apparently the right brain does not know what the left brain is doing. In recent days Google has even started flagging its own email as spam and routing it into the spam folder. Email from the Google Play Store was first noticed as starting the spam trend. That should make Google managers take a long hard look at their business and decide if they really want to be investing in classified projects on clandestine barges, sponsoring moon shots and driverless cars. Maybe they should stick to the simple stuff and just do it better than anyone else.


CarMax (KMX) reported Q3 earnings that rose +27.7% to 60 cents compared to analyst estimates for 54 cents. Revenue rose +16% to $3.4 billion also above estimates for $3.2 billion. Used vehicle sales rose +14% to 139,158 units with same store sales up +7.4%. Visitors to the CarMax website rose +17% to 14 million. This was a very good report and Q1 should even be better because of low gasoline prices stimulating the purchase of more trucks and SUVs. Shares rallied +11% to a new high.


Isis Pharmaceuticals (ISIS) spiked after a report on a mid-stage drug trial on FXIRx, an anti-coagulant. Patients in the trial with a 300mg treatment had a 700% less chance of a venous thromboembolic events or VTE. The positive results means ISIS could more easily secure a partnership for the drug. Johnson & Johnson (JNJ) and Bayer (BAYRY) already partner on the established drug for treatment of VTE. Several analysts jumped on the stock and shares spiked +9%. ISIS ranked number one at Fidelity on Friday with 84% buy orders. Several of the high profile biotechs jumped as well. Puma (PBYI) rose +6%, Biogen (BIIB) rose +3%, Intercept Pharma (ICPT) gained +4%, Receptos (RCPT) +4%, Five Prime (FPRX) +7% and Gilead (GILD) +3%.


Corporate uniform provider Cintas (CTAS) reported adjusted earnings of 86 cents compared to estimates of 78 cents and year ago earnings of 69 cents. Revenue of $1.12 billion also beat estimates slightly. The company said faster sales growth let them upgrade 2015 guidance to a range of $3.49-$3.54 per share. Analysts were expecting $3.15 per share. CTAs shares spiked +6% on the news.


FireEye (FEYE) spiked +7% after a similar +8% gain on Thursday because Sony (SNE) hired the firm to clean up after the $200 million cyberhack. Unless you live in a cave you have heard about North Korea hacking into Sony and stealing multiple terabytes of information and posting it on the web in an effort to stop the distribution of the "Interview" comedy about an assassination attempt of a Korean dictator. The event caused a national uproar on Wednesday when Sony cancelled the movie debut and plans for it to open on Christmas Day.

Sony gave in to the cyber terrorists in what is going to be a very bad precedent. Even President Obama criticized Sony for caving into terrorists in what he called foreign censorship. The cyberhack has already caused about $100 million in damages to Sony computers and there are multiple class action suits for allowing private and personal information to be stolen and posted on the Internet. The cost of the movie was another $75 million including marketing costs they have already spent. Some say the total costs for the attack could reach as much as $200 million.

With the pace of cyber attacks growing the stocks like FireEye (FEYE), Palo Alto Networks (PANW), Checkpoint (CHKP) and even consumer stocks like Symantec (SYMC) should see continued buying in the months ahead. Having Sony pick FEYE to clean up the leftovers from the recent attack is a big vote of confidence for the firm. Sony still has thousands of computers they cannot reconnect to the network because of lingering hacker code that has not been removed. Thousands of computers and servers were simply erased and rendered useless.


After the close on Friday Staples (SPLS) disclosed another cyber attack where credit card information was stolen from 1.2 million customers. Staples is going to offer some compensation in the form of credit protection services to customers who were exposed. Malware was installed on card terminals at 115 of its 1,400 stores. The stolen info contained the customer name, card number, expiration date and card verification code. Staples said it has also received reports of fraudulent charges connected with the breach.


Picking stocks to buy next week is going to be tough. I looked at hundreds of charts this weekend and most of them look like the one below or even worse. The October rebound is clearly visible, the rebound into the December highs and then the fade into Tuesday's lows. All of that is normal. The hard part is the three days of rallies of 10% or more in quite a few stocks. I would not buy the chart below on Monday. That short squeeze spike to a new high needs a consolidation period before I would invest my money. In theory new highs are buy signals but not when they come on a 10% gain in 3 days. The market has gone from oversold to overbought in a very short period of time.


I am afraid we are setting up for a decent correction in January. If the market continues higher over the next 7 trading days we could see some serious profit taking sometime in January.

However, with the strong gains it calls into question the potential for a Santa Rally. That is the last five trading days of the year plus the first two of the New Year. Since 1950 those seven days have averaged a gain of +1.5% on the S&P. It is also seen as an omen for the next trading year. "If Santa Claus should fail to call, bears may come to Broad and Wall."

Stock historians claim the Santa Rally is actually a prelude to the January Effect. The January Effect was first observed by Sidney Wachtel in 1942. He noted that since 1925 small cap stocks outperformed the broader market in January with the biggest divergence coming in the first half of the month. The common explanation for the trend is that income tax sensitive investors, who disproportionally hold small stocks, sell stocks for tax reasons at year end and reinvest after the first of the year. Also powering the trend is the yearend bonus cycle. Employees getting large bonuses at the end of December tend to invest those funds in early January.

In recent years funds tended to front run these historical trends by loading up on small cap stocks in mid December and then dumping them in late January.

The two recent dips and rebounds may have complicated their strategy this year. Individual investors may have been forced to sell earlier than normal and put that money back to work already. Of course the rebound last week was led by the small cap Russell 2000 index so this could have been helped by the funds setting up their positions for the trends mentioned above. I am sure there was a lot of window dressing in progress as well. Funds want to show they were smart and own all the winners at the end of December.

Oil prices may have bottomed at $54 but we can't count out some short term tests to see if there is real support. Gasoline has declined from $3.80 on average in June to $2.45 on Friday. I paid $2.21 in Denver on Saturday. Prices have fallen for 85 consecutive days and the second longest streak on record.

The low prices in October fueled the fastest rise in miles driven since 2006 and November is probably even higher. In October drivers logged 264.2 million miles and the most ever for October and a 2.6% increase over October 2013. AAA said 4.2% more Americans would drive over the holidays compared to a 1% increase in air travel.

Gasoline demand was 9.373 million barrels per day last week compared to 9.016 bpd for the same week in 2013. That is 393.67 million gallons of gasoline per day. At the current national average that is $964.5 million a day in fuel spending, down from $1.496 billion a day in early June. That is a whopping $531 million per day in savings. That is a heck of a stimulus boost for the economy.

I believe this is going to continue to increase demand for gasoline and oil and put a floor under prices. These price changes in fuel are not confined to the U.S. but exist the world over. Demand for fuel is going to surge and that will relieve some of the surplus in the oil market.

Add in the sharp drop in active rigs over the last two weeks and we can see what is coming. The prior week active oil rigs fell -29 to 1,546. Last week the active onshore rig count declined -18 with an additional 2 rig decline in offshore and a huge -40 rig drop in Canada. These are the first of what could be a long decline in rig counts and it should be enough to paint a clear picture of what to expect. A drop of 89 total rigs in only two weeks is unprecedented since the crash back in 1998. Since most rigs are contracted for months to years in advance this trend has a long way to go before it is over. Production growth is going to slow in the months ahead.

The market for energy stocks has firmed as well with 10% to 20% gains in various individual stocks. While I appreciate the rebound there will be some potholes in the road ahead. When these stocks begin reporting earnings and guidance in January there are going to be some significant declines. Some analysts are predicting earnings declined of 9% to 23% for Q4 and even more for Q1 if oil prices stay this low. We may be able to buy some of these stocks cheaper after Q4 earnings unless oil prices spike back to the $70s.

Analysts have calculated the potential impact of low oil prices. Over the last six years with the Fed funds rate near zero these oil companies have accumulated more than $3 trillion in debt in order to fund their land acquisitions and drilling programs. That is up from $300 billion in 2006. Some of that debt will end in default. It is simply a matter of adding up the numbers. Profits at $105 oil were strong and profits at $60 oil will be minimal with many small exploration companies burning cash as the price declines.

We are starting to find out that many companies that hedged their oil prices did it with a "three way collar" rather than a straight hedge. Normally a company buys a put at say $85 and sells a call at $105 to offset the cost of the put. They can do this a variety of ways but I am going to keep it simple here. In that example their profits are capped at $105 and they are protected with $85 as their low price. Many banks require oil hedges in order to loan companies money. However, analysts have found that a lot of companies were adding an extra step of selling a lower put, say a $70 put to generate some extra premium. They never expected oil prices to go below $70 so that extra premium received offset the cost of their overall hedging program. Unfortunately that meant they were no longer hedged below $70. As long as oil prices stayed over $70 everything worked as planned. Under $70 and they are at risk. Their hedge only protected them for the $15 spread between $70 and $85. Everything under $70 is a loss of revenue.

This means the companies that used a straight hedging strategy are going to come out of this okay. Those that tried to game the system are going to lose a lot of money. This will force them to further cut back on drilling programs simply because they are hemorrhaging cash.

I see no scenario where oil is not significantly higher a year from now. Boone Pickens said he expects $75-$85 oil 18 months from now. I don't think it will take that long with demand rising sharply and production growth set to slow dramatically over the next 12 months.

Markets

Did you see the Volatility Index spike over 25 on Tuesday morning? Better yet did you see it fluctuating 10% to 20% minute by minute? The VIX is calculated by comparing the bid/ask spreads on the S&P-500 options. The market was dropping so fast on Tuesday morning that spreads went from 50 cents to $2.50 from one minute to the next as the volume of trades increased significantly. This caused the VIX to spike in unison with the volatility on the bid/ask spreads. The CBOE noticed the extreme volatility in the VIX and implemented a software patch to fix the problem. However, they did not cancel any trades in the VIX on Tuesday. If you got a bad fill you are out of luck.


The S&P traded in new high territory late afternoon. If the S&P had closed over 2,075 it would have been the 50th record close for the year. At this point it seems to be a foregone conclusion that we will set a new high before the year is over. Nobody would have expected it on October 15th or at last Tuesday's close. It really shows you the power of a short squeeze and the impact of news headlines.

Sometimes these squeezes take on a life of their own and can run for days as investors in denial wait to close short positions while hoping for a failure. Other investors are chasing prices higher because they did not have the confidence to buy the dip. This time of year there is the normal window dressing and bonus chasing by fund managers.

I do expect higher highs before the end of December but we could have some stutter steps in the process as traders take profits from the rebound. Resistance is now the prior closing high at 2,075 and initial support at 2,040.


Despite a huge rebound the Dow chart is not as bullish as the S&P. The closed about 200 points below its historic high of 17,991. The index would have been higher had it not been for a -2.24 drop in Nike after they disclosed weak future orders when they reported earnings on Thursday. Visa was also a drag on dollar strength and continued worries over Russia.

I am surprised we did not see a bigger gain on the Dow with the +3.90 gain by Chevron and +2.48 gain by Exxon.

Resistance is 17,850 and then 18,000 with support at 17,600.



The Nasdaq closed within 26 points of a new high but this is an area of strong resistance. After a +218 point rebound in only 3 days you would expect the index to weaken at resistance. This is exactly what happened when it reached the 4,750 level. The next 40 points are going to be a challenge. The 4,780 level is now resistance followed by 4,800.

The biotechs were instrumental in Friday's gain but Google helped for a change as did Netflix and Priceline. Nasdaq market breadth over the prior two days was very wide but Friday it was almost dead even at 1,328 advancers to 1,297 decliners.

We are back at the level where 4,725 has returned as support.




Don't look now but the Russell 2000 closed at a five-month high. The Russell is within 12 points of a new high at 1,208. I did not think we would see this level again when we were bouncing off 1,050 in October. The Russell gained +3.8% for the week to break above strong resistance at 1,190. If the Santa Claus Rally and the January Effect are going to appear this year the Russell should make new highs in the days ahead. This will be bullish for the market but the keyword there was "IF." It is hard for me to comprehend the sudden reversal of fortune but I am not going to ignore it.


Volume was off the charts on Friday. This was a quadruple witching plus some indexes were rebalanced. Volume of 11 billion shares was weighted to 6.7 billion advancing and 4.2 billion declining. This entire week had high volume with the first four days averaging about 9.0 billion shares per day. This was easily the highest volume week of the year. That suggests a capitulation event. On Wednesday there were 8.4 billion shares of advancing volume compared to only 894 million shares of declining volume. We normally claim a capitulation event when the volume is reversed at 10:1 declining but that also works on the upside with 10:1 advancing so this rally may have legs. Thursday had roughly 7:1 advancing to declining but Friday faded to 3:2 advancing to declining as the weekend prompted some traders to take profits and resistance levels were reached.

I am neutral for next week. The seasonal trend is for a gain but I am expecting some choppy trading on low volume. That means anything is possible. I do expect the bulls to come back after Christmas to finish out the year.


(Be sure to check the bottom of this commentary for a special offer.)


Random Thoughts

Apple is slowly going private. Actually it would take it about 16 years to go private at the current pace but it did buy back nearly $60 billion in shares in the 12 months ending September 30th. Given their authorization for $90 billion that suggests they probably bought back another $15 billion in Q4 if not more. They bought $17 billion in shares in Q3 and the largest in any one quarter by a S&P company since 2005. Apples $56 billion buy dwarfs IBM as the number two repurchaser with $19.2 billion. Buying back shares not only returns money to shareholders but it reduces the number of outstanding shares and raises the earnings per share. Given the pace of their buybacks the Q4 earnings could beat by an even larger margin.

Suburban home prices are going higher in the spring. If gasoline prices remain low the price of a suburban house will go up. Realtors are already reporting higher buyer traffic as a result of gas prices. People that commute to work try to move close when gas prices are high and that forces them to pay more for a home. When gas prices are low they look farther out from the city in hopes of getting more home for the money. While this is silly it is a fact of life. Since oil prices are always volatile and will eventually rise again these new suburban home buyers will end up paying more for gas in the long run. In the short term it makes sense but in the long run that commute will cost them more. The short term demand for suburban homes will escalate prices so the early birds here will get the best home.

Defectors claim North Korea recruits hackers from outstanding young talent they recruit out of school. They send them to a five year course at a special school in Pyongyang and then send them to study in either Russia, China or both. Each nation has extensive cyberwar divisions. The hackers are rewarded with special status, privileges and housing. They have to shower these hackers with special benefits because they have access to the Internet and realize that the outside world is very different from what is portrayed inside North Korea. There are numerous reports that the hacking division is actually based in China where they have reliable Internet access. There are also rumors of a secretive division called Bureau 121 that operates out of Pyongyang over a subterranean T1 cable connected to Chinese internet infrastructure.

North Korea is investing heavily in the cyberwar division because they can always attack anyone over the Internet while they can't attack them with bombs or missiles. For instance they could attack and disable the American electrical grid without ever launching a missile of sending submarines to U.S. shores. Cyberwar attacks are always deniable and extremely hard to prove. Training hackers is much cheaper than building fighter jets or missiles. Welcome to the 21st century.

President Obama is reportedly planning on putting North Korea back on the state sponsor of terrorism list as punishment for the Sony attack. You can imagine what the Kim regime is thinking about that. "Please Br-er Fox, don't throw me into that briar patch." I am sure Kim could care less about being on the list but it would complicate future negotiations with North Korea.

The problem with the Sony hack is not the hundreds of millions of dollars in damage to Sony. It is in the precedent that was set. Now any hacking group with any guts can break into a U.S. company's computers, steal their secrets and then blackmail them by making a threat of some kind if the company does not bow to the hackers wishes. The U.S. needs to make an example out of North Korea to make state supported hackers the world over think twice before trying to blackmail another U.S. corporation. Unfortunately I don't think the administration is going to take that step. It would be even better if the U.S .could simply explode an EMP over North Korea and knock out their electronic infrastructure. Unfortunately North Korea does not have any infrastructure. They have barely made it into the 20th century and it will be decades before they progress to 21st century technology levels.

Goldman Sachs looked at the cost basis for the top 400 new oil fields and found that less than a third are still profitable with oil at $70. With oil closing at $57 on Friday there are even more projects in the unprofitable status. If the unprofitable projects were halted it would shut down more than 7.25 mbpd by 2025. That equates to 8% of current production. In 2015 alone companies are making final investment decisions on 800 projects worth more than $500 billion. If prices remain around $70 more than $150 billion of those commitments won't be made. At $65 more than 50% of those projects will not be funded. These are projects that won't begin producing until 2020 or even 2025. Energy producers have to take a very long term view because of the upfront expense and the long lead times to complete.

It is all America's fault. That was what Putin told Russian citizens in his news conference last week. It was America's fault he had to invade Crimea and rescue Russian citizens from the clutches of the west. It was America's fault the ruble has dropped 50% in value and everything Russian are trying to buy now costs double. It is America's fault oil prices are so low. There is a political conspiracy between America and OPEC to bankrupt Russia. It is America's fault the Russian economy will likely decline -5% in 2015 because America forced other countries to levy sanctions on Russia. It is always nice to have somebody else to blame for your troubles. It incites nationalism in the population and they more readily endure the economic hardships because they have a common enemy. Hugo Chavez was a master at blaming the USA and his successor Maduro is following in his footsteps. The prior Iranian president blamed his country's economic woes on the U.S. in every speech. Thousands of Iranians would show up in the main plaza in Tehran every Friday to hold anti-American rallies.

Putin may be even more dangerous today. He is wounded. His pride and country are suffering. When you back a wounded animal into a corner it is likely to become even more dangerous. He may need to start another conflict he can blame on NATO in order to take the population's eyes off the economic crisis. He is running almost daily incursions by aircraft into sovereign airspace somewhere in Europe just to provoke a response and remind everyone Russia has a nuclear military and he is not afraid to use it.

Have you ever lost your phone or had it stolen and you wished you could cause it to self destruct? BlackBerry is working with Boeing on an Android phone that does self destruct if it is tampered with. The phone called the Boeing Black device encrypts calls in order to provide a secure communications solution. It will use the latest BlackBerry BES 12 platform. The phone will use dual SIM cards to allow it to access multiple cell networks and can be configured with biometric sensors and connect with satellites. Welcome to the world of James Bond.

The market exists to confuse the most people as much as possible. At the beginning of 2014 72 out of 72 economists were predicting higher interest rates and lower bond prices. That did not work out too well for everyone that shorted bonds. Rates were at 3% on the ten-year on January 2nd and they hit 2.05% on Tuesday. Ask anyone today and they will tell you the same thing about 2015. Rates will be higher and bonds are going to decline.

Nobody predicted a major correction in oil prices in 2014. Of those 72 analysts nobody predicted a crash. Everybody looks at the expert analysts for guidance but in reality they are just guessing. Their expected reality is biased based on what everyone else is predicting. If 45 analysts are predicting a bull market for the coming year then they must be right and the next 45 analysts reading those forecasts become bullish as well. At least this way there will be safety in numbers. If the market goes down they can blame it on unexpected events and point to the rest of the analysts that got it wrong as well.

There were three dissenters to the FOMC statement on Wednesday. Charles Plosser, Richard Fisher and Narayana Kocherlakota all dissented for various reasons. It should also be noted that all three are leaving the Fed and the December vote will be their last vote. That puts a little doubt on their actions. It would appear to me they see trouble coming and they wanted to make sure they were on the record as having disagreed with Fed policy as they walked out the door. That way they can always point back to that dissention if something goes wrong with the FOMC plan.

Bloomberg put together what they are calling a "Pessimist's Guide to the World in 2015." This is a list of all the global flash points that can cause trouble in the coming year. This is a well thought out presentation and worth a look. Pessimist's Guide

Researchers say Dr. Oz's medical advice is usually wrong. Syndicated talk-show host Mehmet Oz, known by some as "America's doctor," has been criticized recently by members of Congress who say his reports on "miracles" and medical breakthroughs have given millions of viewers false hopes. Researchers published a study in the British Medical Journal saying that medical research either didn't support or directly contradicted more than half of Dr. Oz's recommendations. "The public should be skeptical about recommendations made on medical talk shows," the article said. Half of Advice Wrong

Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2015. You will not be disappointed!

Only 4 shopping days until Christmas. It is almost time for procrastinators to shop!

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The pessimist complains about the wind.
The optimist expects it to change.
The realist adjusts the sails."

William Ward

 


New Plays

The Internet of Things Will Be Big

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Sierra Wireless Inc. - SWIR - close: 42.18 change: +0.16

Stop Loss: 39.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 861 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
The Internet of Things (IoT) is going to be huge. Depending on who is making the forecast the size of just how huge it can become is staggering. Last year (2013) there were an estimated 300 million embedded connected devices in the IoT. IDC is estimating that could reach 15 billion connected devices by 2015. Cisco Systems (CSCO) is forecasting 25 billion devices connected to the Internet of Things by 2015 and 50 billion by 2020. Intel is forecasting up to 200 billion connected devices by 2020.

The backbone of the IoT is M2M communication. That's machine-to-machine communication. SWIR is the market leader with 34% of the market for cellular M2M embedded module market. According to the company marketing material, " Sierra Wireless is the global leader in machine-to-machine (M2M) devices and cloud services, delivering intelligent wireless solutions that simplify the connected world. We offer the industry's most comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, seamlessly integrated with our secure M2M cloud services. Customers worldwide, including OEMs, enterprises, and mobile network operators, trust our innovative solutions to get their connected products and services to market faster. Sierra Wireless has more than 900 employees globally and has R&D centers in North America, Europe and Asia." They make products for a wide array of industries including: automotive, transportation, industrial and infrastructure, security, field service, healthcare, consumer, energy, sales and payments, and networking.

Earnings have been improving. Back in July they reported their Q2 results that beat Wall Street's estimates on both the top and bottom line and management guided higher. SWIR announced their Q3 results on November 5th. Even after guiding higher the prior quarter they still beat estimates. Analysts were expecting a profit of $0.13 per share on revenues of $138.7 million. SWIR delivered $0.24 with revenues up +27.6% from a year ago to $143.3 million. That's a record quarter for revenue and up +6% from the prior quarter. Organic revenue growth was up +18.8%. Looking at the details of the quarter SWIR said their non-GAAP earnings were up +249% from a year ago.

SWIR raised their guidance again for the fourth quarter of 2014. They now expect EPS in the $0.25-0.28 range with revenues in the $145-148 million area. That's about +23% growth from a year ago. Analysts were only forecasting $0.17 per share on revenues of $142 million.

With this big surge in earnings and revenue growth it's not a surprise to see the stock outperforming. SWIR is up +74.5% in 2014 versus the NASDAQ's +14% gain. The point & figure chart for SWIR is forecasting a target near $53.

With a market cap around $1 billion I wouldn't be surprised if someone acquires SWIR, but that's pure speculation on my part. They have about $200 million in cash and no debt.

This past week saw shares of SWIR rally past resistance near $42.00 and close at multi-year highs. Tonight we are suggesting a trigger to open bullish positions at $42.85.

Trigger @ $42.85

- Suggested Positions -

Buy SWIR stock @ (trigger)

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

Buy the MAR $45 CALL (SWIR150320C45) current ask $3.20

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

The Rebound Continues

by James Brown

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Editor's Note:
The stock market's rebound continued on Friday with the major indices posting their third day of gains.

The huge three-day surge has been tough on our bearish plays and NCR hit our stop loss Friday.

We want to exit our CYNO trade on Monday morning.


Current Portfolio:


BULLISH Play Updates

Barracuda Networks - CUDA - close: 37.38 change: +0.10

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: + 4.9%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: Exit PRIOR to earnings on January 8th
Average Daily Volume = 247 thousand
New Positions: see below

Comments:
12/20/14: The rally continues for CUDA. Shares bounced off short-term technical support at its rising 10-dma on Friday. This is a new multi-month closing high for the stock. CUDA looks poised to make a run towards $40.00.

I would be tempted to launch new bullish positions on a rally past $37.75 but if you do I suggest a higher stop loss.

Earlier Comments: November 15, 2014:
CUDA is part of the technology sector. This is a small cap company in the cloud computing space. According to the website, "Barracuda provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda's customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security."

CUDA has only been a public company for little more than a year. Lately they have been on a roll with their earnings reports. CUDA has beaten Wall Street's estimates on both the top and bottom line four quarters in a row. The last two reports also included bullish guidance.

CUDA's most recent report was October 9th when they reported their Q2 results. Analysts were expecting a profit of $0.04 a share on revenues of $66.7 million. CUDA delivered a big beat with a profit of $0.8 on revenue growth of +18.9% to $68.7 million.

Management said their active subscribers grew +18% and their renewal rate was 96.5%. Their Next Generation Firewall solutions saw sales up +50% in the quarter. CUDA said sales were up across all geographically regions. Plus their gross margins were strong with an improvement to 81.7%. That's above the prior quarter's 80.4% and the year ago period 79.8%.

CUDA's guidance was bullish. Their Q3 estimates are for revenues in the $69-70 million range versus Wall Street's $69 million estimate. They expect a profit in the $0.04-0.05 zone compared to estimates of only $0.03. They raised their 2015 revenue guidance above their prior estimates but this was slightly below Wall Street's estimate. They also raised their 2015 earnings growth into the $0.22-0.24 range compared to analysts' consensus estimates of only $0.17.

Technically the stock has been soaring from its double bottom in the $24.00 area. The point & figure chart is bullish and forecasting a long-term target of $56.00. Right now CUDA is testing resistance in the $35.00 area. A breakout here could spark some short covering. The most recent data listed short interest at 9.7% of the very, very small 9.9 million share float.

We are suggesting a trigger to open bullish positions at $35.65.

- Suggested Positions -

Long CUDA stock @ $35.65

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

Long 2015 Jan $35 call (CUDA150117c35) entry $3.15

12/11/14 new stop @ 34.85
12/06/14 new stop @ 33.85
11/22/14 new stop @ 33.65
11/18/14 triggered @ $35.65
Option Format: symbol-year-month-day-call-strike

chart:


Cynosure, Inc. - CYNO - close: 28.72 change: -0.61

Stop Loss: 27.75
Target(s): To Be Determined
Current Option Gain/Loss: + 9.4%
Entry on November 12 at $26.25
Listed on November 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 201 thousand
New Positions: see below

Comments:
12/20/14: It's time to exit our CYNO trade.

The U.S. market just delivered one of its best three-day rallies in years. Yet CYNO has been underperforming the last couple of sessions. More aggressive traders could keep the play alive. CYNO still has a bullish trend of higher lows and should see short-term support at $28.00. However, we are choosing to lock in potential gains now.

Plan on exiting positions Monday morning at the opening bell.

*small positions* - Suggested Positions -

Long CYNO stock @ $26.25

12/20/14 prepare to exit on Monday morning, Dec. 22nd.
12/18/14 new stop @ 27.75
12/13/14 new stop @ 26.75
11/19/14 new stop @ 25.90
11/18/14 caution: potential bearish reversal today
11/15/14 new stop @ $25.35
11/12/14 triggered @ 26.25

chart:


INSYS Therapeutics - INSY - close: 45.34 change: -1.35

Stop Loss: 41.15
Target(s): To Be Determined
Current Option Gain/Loss: + 3.0%
Entry on December 18 at $44.00
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 479 thousand
New Positions: see below

Comments:
12/20/14: After huge gains on Thursday shares of INSY hit some profit taking on Friday with a -2.89% decline. Broken resistance in the $43.50-44.00 zone should be new support. Traders could watch for a dip or wait for a bounce in this area as our next entry point.

Earlier Comments: December 17, 2014:
INSY is in the healthcare sector. They are part of the biotech industry. The company website describes Insys Therapeutics as "a specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve the quality of life of patients. Using our proprietary sublingual spray technology and our capability to develop pharmaceutical cannabinoids, Insys addresses the clinical shortcomings of existing commercial products. Insys currently markets two products, Subsys, which is sublingual Fentanyl spray for breakthrough cancer pain, and a generic version of Dronabinol (THC) capsules. Our lead product candidate is Dronabinol Oral Solution, a proprietary orally administered liquid formulation of dronabinol. Insys is also developing a pipeline of sublingual sprays, as well as pharmaceutical cannabidiol."

Biotech stocks can be tough to trade. Normally they are volatile with lots of headline risk. The right headline about a successful test or clinical trial or FDA approval can send shares soaring. The wrong headline could see a biotech stock crash or even gap down several points. Due to the nature of biotech work and how many companies get paid with milestone payments as they develop treatments their earnings are very lumpy.

INSY has managed to consistently beat Wall Street's bottom line estimates this year. The last four quarters in a row they have beaten the EPS estimates and three out of the four quarters they have beaten the revenue estimate as well. Their most recent quarterly results came out on November 11th.

INSY delivered a profit of $0.63 a share versus estimates of only $0.35. Revenues soared +99.7% to $58.3 million, above estimates. Since their report the stock has garnered some bullish analyst comments and multiple firms have price targets in the $51-57 zone.

INSY management is very optimistic and expects to complete four Phase III clinical trials in 2015. If successful it will significantly broaden their product line.

It is important to note that not all the news is good for INSY. A few weeks ago the Wall Street Journal (WSJ) ran a story about some shady marketing practices for INSY's Subsys painkiller. This is an under-the-tongue spray version of the painkiller fentanyl. Subsys has a very high risk of dependency and is currently only approved for cancer patients. Yet strangely enough only 1% of prescriptions were written by oncologists. Several doctors with the biggest number of Subsys prescriptions have also been under review or disciplined. The WSJ noted that the Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Attorneys in the Central District of California and Massachusetts are all looking into the matter. This is significant because Subsys accounts for the vast majority of INSY's revenues. Thus far the stock does not seem to be worried about this story.

Shares have been building on the bullish trend of higher lows. The stock looks poised to breakout past resistance in the $43-44 area. The point & figure chart is already bullish and forecasting at $68 target.

If INSY can breakout it could see a short squeeze. The most recent data listed short interest at 65% of the very small 10.34 million share float.

Tonight we are suggesting a trigger to open bullish positions at $43.60. More conservative traders may want to wait for a breakout past the recent high at $44.00 instead.

I do consider this a higher-risk, more aggressive trade. Use small positions to limit your risk.

*small positions* - Suggested Positions -

Long INSY stock @ $44.00

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

Long FEB $45 CALL (INSY150220C45) entry $4.10

12/18/14 new stop @ 41.15
12/18/14 triggered on gap open at $44.00, suggested entry was $43.60
Option Format: symbol-year-month-day-call-strike

chart:


Sealed Air Corp. - SEE - close: 42.20 change: -0.08

Stop Loss: 39.95
Target(s): To Be Determined
Current Option Gain/Loss: +2.8%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
12/20/14: SEE inched lower on Friday but shares did post another gain for the week. This stock is now up nine out of the last ten weeks. A dip near its 10-dma (currently $41.50) could be used as a new bullish entry point.

Earlier Comments: December 8, 2014:
SEE is part of the consumer goods sector. They're in the packaging and containers industry. The company describes itself as "Sealed Air is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, Sealed Air offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, Sealed Air generated revenue of $8.1 billion in 2011 and has approximately 26,300 employees who serve customers in 175 countries."

The U.S. economy is improving and that should mean a strong tailwind for SEE. The company has seen earnings growth improve. The last two quarters in a row SEE has beaten Wall Street's estimates on both the top and bottom. If that wasn't good enough they also raised their guidance two quarters in a row.

SEE's most recent earnings report was October 29th. Analysts were expecting a profit of $0.45 a share on revenues of $1.94 billion. SEE said earnings were up +24% from a year ago to $0.52 a share. Revenues rose +3.3% to $1.98 billion.

Jerome A. Peribere, President and Chief Executive Officer of SEE commented on their quarterly performance. He said, "Our financial and operational performance in the third quarter exceeded our expectations across all key metrics. Net sales increased 3.6% on a constant dollar basis, Adjusted EBITDA margin surpassed 15%, and Adjusted EPS increased 24%. Adjusted gross profit margin increased 120 basis points as a result of our continued disciplines and value-added selling approach across all regions and divisions. Despite macro-economic uncertainties, currency headwinds and volume declines in the North American protein market, we are increasing our 2014 outlook for Adjusted EBITDA and Adjusted EPS and expect to generate approximately $540 million in free cash flow."

SEE's new 2014 guidance is $1.70-1.75 a share versus Wall Street's $1.65-1.70 estimate. The stock has been strong following this report. Instead of correcting lower in mid November SEE merely consolidated sideways. Now it's rested and ready to run. Shares are up five days in a row and ignored the market-wide weakness today.

Today's intraday high was $40.87. I am suggesting a trigger at $41.05 to open bullish positions. We're not setting a target tonight but I will note the point & figure chart is forecasting a long-term target of $61.00.

- Suggested Positions -

Long SEE stock @ $41.05

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

Long Jan $40 CALL (SEE150117C40) entry $1.90

12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

Guess' Inc. - GES - close: 20.43 change: +0.11

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: - 3.7%
Entry on December 17 at $19.70
Listed on December 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
12/20/14: The stock market just produced its biggest three-day rally in years and yet GES continues to struggle with short-term resistance near $20.50. That's good news if you're bearish on this stock. However, I'm not suggesting new positions at this time. We need to see GES resume the down trend.

Earlier Comments: December 16, 2014:
Retail can be a tough business. Fashion is even worse. Customer tastes and shopping habits have been changing. It looks like GES has not done a very good job navigating the fashion-retail landscape.

The company is part of the services sector. The Guess? Brand covers apparel and accessories for men, women, and children. The company runs 494 retail stores in North America and 346 stores in Europe, Asia, and Latin America.

GES' performance for 2014 can be summed up with two words: guiding lower. When GES reported earnings in March, May, August, and in December the company has lowered guidance every single time. Their most recent report in December (its Q3 results) managed to beat Wall Street's earning estimate and yet diluted earnings per share were down 43% from a year ago. Revenues were also down -3.9%. Margins are contracting as well.

Management lowered their Q4 2014 and 2015 guidance on for earnings, revenues, and margins. Wall Street is starting to turn more cautious with lowered price targets or telling clients to avoid the stock altogether. As usual Wall Street is late to the game with shares of GES trading at five-year lows.

The last few days have seen GES consistently fail at its 10-dma. Today's close below significant round-number support at $20.00 looks like an entry point for bearish positions. We are suggesting a trigger to open bearish trades at $19.70.

- Suggested Positions -

Short GES stock @ $19.70

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

Long MAR $20 PUT (GES150320P20) entry $1.70

12/17/14 triggered @ $19.70
Option Format: symbol-year-month-day-call-strike

chart:


Voxeljet AG - VJET - close: 7.57 change: +0.00

Stop Loss: 8.15
Target(s): To Be Determined
Current Gain/Loss: +23.5%
Entry on December 04 at $ 9.90
Listed on December 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 372 thousand
New Positions: see below

Comments:
12/20/14: Bears have to be encouraged by the action in VJET this past week. The U.S. market generated one of its biggest rallies in years over the last three sessions and shares of VJET have essentially churned sideways. Not participating in the rally is a win for the bears. However, VJET remains oversold and due for a bounce.

I am not suggesting new positions at the moment.

Earlier Comments: December 2, 2014:
VJET is in the technology sector. The company is part of the 3D printer industry. A company press release describes VJET as "a leading provider of high-speed, large-format 3D printers and on-demand parts services to industrial and commercial customers. The Company's 3D printers employ a powder binding, additive manufacturing technology to produce parts using various material sets, which consist of particulate materials and proprietary chemical binding agents. The Company provides its 3D printers and on-demand parts services to industrial and commercial customers serving the automotive, aerospace, film and entertainment, art and architecture, engineering and consumer product end markets."

Unfortunately this industry has been struggling. Q3 earnings results were disappointing almost across the board with 3D printing companies either posting earnings misses, lowering guidance, or both. VJET happens to fall in the both category.

VJET reported its Q3 results on November 13th. Analysts were expecting a loss of €0.03 for the quarter. The actual results were significantly worse with VJET reporting a loss of €0.41. That compares to a profit of €0.11 in Q3 2013. Management lowered their guidance following the Q3 earnings report.

The industry is facing a new competition in printer giant Hewlett-Packard (HPQ). Everyone knew that HPQ would eventually jump into the 3D printer market and HPQ has finally announced they will next year. HPQ recently gave a presentation saying their 3D printer technology will use "multi-jet fusion" which will generate speeds 10 times faster than current 3D printers.

Shares of VJET have been underperforming the market with a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $6.00 target.

Today VJET is setting at all-time lows and poised to break what should be round-number, psychological support at the $10.00 mark. Tonight we are suggesting a trigger to open bearish positions at $9.90.

Please note I do consider this a more aggressive, higher-risk trade. There is already a lot of short interest in this name. The most recent data listed short interest at 22% of the very small 12.4 million share float. That poses the risk of a short squeeze should VJET ever bounce. You may want to use put options to limit your risk to the cost of the option.

*higher-risk, more aggressive trade* - Suggested Positions -

Short VJET stock @ $9.90

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

Long 2015 Jan $10 PUT (VJET150117P10) entry $1.05

12/18/14 new stop @ 8.15
12/11/14 new stop @ 8.65
12/08/14 new stop @ 9.65
12/04/14 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike

chart:


58.com Inc. - WUBA - close: 42.12 change: +2.40

Stop Loss: 41.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: Yes, see below

Comments:
12/20/14: Wow! WUBA's performance on Friday was definitely a surprise. After Thursday's intraday reversal the stock looked poised to move lower. Instead WUBA soared on Friday morning and closed up +6.0% for the session. If this rally continues on Monday we will likely drop it as a candidate. Currently our suggested entry point for bearish positions is at $38.85.

Earlier Comments: December 18, 2014:
WUBA is part of the technology sector. They are one of several Chinese Internet stocks that see a lot of action in the market with big moves both directions. If you can catch one of WUBA's big moves it can be profitable.

The company has been compared to a Chinese version of Craiglist. They operate an online market for merchants and consumers in China. Growth has been significant. Their most recent earnings report was November 12th. WUBA reported their Q3 results with a profit of $0.09 per share when Wall Street was actually expecting a loss of 0.04 per share. Revenues in the third quarter soared +73% to $72 million. Gross margins improved +0.8% to 95.3%. WUBA management then raised their Q4 guidance.

It was a bullish earnings report and the stock soared. You can see the big move in mid November. Yet something happened a couple of weeks ago. Nearly all of the Chinese Internet stocks were crushed on December 8th. WUBA has struggled to recover. The recent bounce stalled at the 200-dma. Today's rebound attempt failed at the 50-dma. Shares have not participated with the big two-day rally in the U.S. market.

I consider this a technical trade. The company's sales growth and earnings results look bullish. Yet the stock is clearly not acting bullish. Plus, the bears do have some ammunition to build a case. If you tried to build a bearish story you could easily argue the stock is expensive with a P/E of 107. In their latest earnings report nearly all of WUBA's major expenses, including research and development, sales and marketing, and their operating expenses, all more than doubled from a year ago. While growth has been huge their growth is slowing. This year revenues are up +77% but they're expected to slow down to +54% in 2015.

WUBA has found recent support in the $38.90-39.00 area. Tonight I'm suggesting small bearish positions if WUBA can trade at $38.85. We want to limit our position size because the stock can be so volatile. You may want to use the options instead to help limit your risk. I would aim for the September and October lows in the $34.65-34.75 zone.

NOTE: I'm listing the April options only because the February or March options are not available yet. We should see new options available soon.

Trigger @ $38.85 *small positions to limit risk*

- Suggested Positions -

Short WUBA @ (trigger)

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

Buy the APR $35 PUT (WUBA150417P35)

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

chart:


Zulily, Inc. - ZU - close: 25.51 change: +0.99

Stop Loss: 26.05
Target(s): To Be Determined
Current Option Gain/Loss: + 1.5%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/20/14: Ouch! The stock market's huge three-day rally has had a big impact on ZU. This stock has almost erased all of our potential gains with a big three-day bounce from $23.00 to $25.73 (Friday's high). The $25.75-26.00 zone should be overhead resistance so it's not surprising to see where the oversold bounce stalled on Friday. However, I am not suggesting new bearish positions at this time. If there is any follow through higher we could easily see ZU hit our stop at $26.05.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

12/18/14 new stop @ 26.05
12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike

chart:


CLOSED BEARISH PLAYS

NCR Corp. - NCR - close: 28.65 change: +0.56

Stop Loss: 28.20
Target(s): To Be Determined
Current Option Gain/Loss: -4.6%
Entry on December 16 at $26.95
Listed on December 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.25 million
New Positions: see below

Comments:
12/20/14: The stock market's huge rally sparked some short covering in NCR. Shares added another +2% on Friday and hit our stop loss at $28.20 pretty early.

- Suggested Positions -

Short NCR stock @ $26.95 exit $28.20 (-4.6%)

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

Jan $27 PUT (NCR150117P27) entry $1.35 exit $0.50 (-63.0%)

12/19/14 stopped out
12/18/14 new stop @ 28.20
12/16/14 triggered @ 26.95
Option Format: symbol-year-month-day-call-strike

chart: