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Daily Newsletter, Saturday, 1/3/2015

Table of Contents

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

Market Wrap

Glad that is Behind Us

by Jim Brown

Click here to email Jim Brown

The Dow rallied +127 points at the open then plunged -220 points to -93 before struggling back to a +10 point gain late in the afternoon. The Nasdaq spiked +40 at the open before declining -80 points to -40 with a struggle to creep higher by the close to lose only -9 points. Hopefully the sellers got it out of their system.

Market Statistics

There were multiple reasons for the Friday morning crash but the main one was probably just profit taking. Now that we are in a new tax year investors can take profits and reinvest them without having to pay taxes for another 12 months. This almost always produces some early January volatility and I warned everyone over the last two weeks to expect volatility around New Years. Hopefully everyone that was itching to sell has now accomplished that task and they will be ready to buy next week.

If you look at the stocks that declined on Friday it was the prior winners. The stocks that had a good day were the prior losers. This happens at the beginning of every year. Since we had two sell offs in the last couple months the damage on Friday was minimal.

Problems from overseas were also weighing on the market. Mario Draghi made some comments to a German newspaper suggesting in the strongest words yet that he can't rule out deflation in the euro area and saying "We have to act against such a risk." German Bundesbank President, Jens Weidman has argued that more stimulus is unwarranted claiming low oil prices are already stimulus but others have warned that falling oil prices could tip the euro area into full-fledged deflation. The Euro fell to its lowest level in more than four years.

Draghi said "We are in technical preparations to alter the size, speed and composition of new stimulus measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There is unanimity in the ECB council on that." The 25 member Governing Council will review a QE package at its next meeting on January 22nd. An interim meeting will be held on January 7th, the same day the euro-area inflation data is published.

The dollar soared on the Draghi comments to an 11.5 year high. This will further prevent the Fed from raising interest rates anytime in the near future. A 10% spike in the dollar has long been seen as the equivalent of a 50 basis point hike in rates. A high dollar weakens sales overseas that account for about 50% of revenue from S&P-500 companies. A rise in the dollar pressures commodities and the entire commodity complex declined on Friday.



Secondly, the ISM Manufacturing Index came in much weaker than expected and throwing doubt on the strength of the economy. The headline number fell from 58.7 to 55.5 and a six month low. This was the third decline in the last four months.

The new orders component fell from 66.0 to 57.3 and order backlogs declined from 55.0 to 52.5. Production fell from 64.4 to 58.9 and the inventory component declined from 51.5 to 45.5. While anything over 50 still suggests economic expansion the pace of decline from the high of 59.0 in October is concerning.

As we have seen in various regional reports the manufacturing activity in the U.S. appears to be weakening. Whether this is due to slowing overseas sales as a result of the strong dollar is still unknown. Some respondents noted problems at West coast ports and others said energy related projects are being cancelled because of low oil prices. Overall the falling energy prices will be positive for economic growth but there will be areas of weakness where business depends on the energy sector to buy their goods.


The combination of the deflation risk in Europe and the slowing manufacturing in the U.S. pushed treasuries sharply higher and yields sharply lower. Yields on the 10-year hit 2.1% intraday after hitting 2.3% just a week ago. The Treasury market is not acting like it believes the Fed will hike rates in June. Yields are threatening to dip under 2.0% for an 18 month low. We started 2014 with everyone saying yields would rise but the first week of January was the high for the year at 3.0%.

What is the bond market telling us? Bond investors are typically seen as smarter than stock investors. They have a longer time horizon and they really focus on economic matters rather than short term headlines. The decline in treasury yields suggests the bond market is expecting further declines in Europe, Japan and China and weakness in the USA. The U.S. bond market is benefitting from a flight to quality since even at our low rates we are still higher than the majority of the world plus the default risk is very low.


Even more disturbing is the yield on the 30-year treasury at 2.697% and already at two-year lows. If it falls under 2.50% it will be at a multi-decade low. My charts only go back to 1993 but I researched it online and you have to go back to 1950 to see a yield under 2.5% for more than a few days. That suggests the majority of investors are definitely not expecting any Fed rate hikes for a very long time for a multitude of reasons.



Construction Spending also weighed on the market with a drop of -0.3% in November after a gain of +1.2% the prior month. Private spending for residential construction rose +0.9% but non-residential declined -0.3%. However, the big hit came from public spending, which declined -1.7%. Total spending was still a robust $975 billion in November and +2.4% higher than November 2013. This was the first decline since June and will be a drag on Q4 GDP.

The economic calendar for next week has the biggest reports for the month with the payrolls on Wednesday and Friday. Jobs are expected to decline from their fevered pace in November but still be well over 200,000. The December number is always volatile because of the temporary holiday workers and the huge seasonal adjustments.

If the Nonfarm Payrolls on Friday come in hot again the Fed is going to be having some sleepless nights. They can't raise rates because of the items discussed above but they can't let the economy overheat either. Obviously we are a long way from overheating given the decline in manufacturing but a suddenly hot job market will perplex the Fed heads.

Personally I think we will moderate back to the 200,000 range over the next several months once the holiday workers go back on unemployment and the seasonal adjustments fade. This is what the Fed will be hoping for to match their long term forecasts.

The ISM Nonmanufacturing (services) report is Tuesday and it is also expected to decline by about a point. As long as that is the extent of the decline everyone will be fine. If it drops 2-3 points like the ISM Manufacturing then treasury yields are going lower again. All the rest of the reports for the week will only be filler ahead of the payroll report.

Fortunately we are moving into the earnings cycle and there will be something for traders to focus on other than the economic reports. Earnings are in pink on the calendar.


Split Calendar - Only one split so far for 2015.


In stock news Yahoo (YHOO) was facing double trouble on Friday. Yahoo's search engine went down on Friday afternoon for several hours following a Bing outage earlier in the day. Yahoo's search is powered by Bing. However, Bing was out for only 20 minutes while Yahoo search was out for several hours.

The search outage was not the biggest problem for Yahoo. News broke early Monday that CEO Marissa Myer may be trying to buy a cable business like CNN or Scripps Network Interactive (SNI). Scripps has been for sale for a long time with an asking price of $10 billion or so. The initial talks were to acquire the Scripps Food Network but subsequently expanded to involve all of the parent company as well. Another media industry insider said Marissa also wanted to buy CNN with a price tag of roughly $6 billion.

Scripps has multiple channels that have "super brand friendly content" according to one analyst. Many of the Scripps brands fit the female 25-35 demographic that Yahoo is seeking. Apparently Myer believes that by having some TV networks she can package online and on TV advertising and receive a higher price for the package. Also by having multiple networks available it gives Yahoo an outlet for its original content on cable as well as online. They could come closer to competing with Netflix if Yahoo had its own cable outlets. If the new shows did not work on the web they might work on TV.

Yahoo shares sold off intraday on the rumors but recovered at the close to end down only -34 cents. Most analysts felt that buying a cable network was probably not what Yahoo shareholders wanted the company to do with the money from the Alibaba sale.


Apple shares traded lower after analyst Fred Wilson trashed the Apple Watch saying it will not be a homerun product like the iPad or iPhone. "The focus on wearables will be a bit of a headfake and take up a lot of time, energy and money in 2015 without a lot of results."

Apple shares also took a hit from a new lawsuit trying to get class action status. The suit claims that iOS takes up to 21% of the available memory in an Apple device. The suit claims that Apple is fraudulently advertising when it says it is a 16GB iPhone when nearly 4gb is taken over by the OS. The suit claims Apple profits from this misrepresentation by selling iCloud space to store the pictures and videos that won't fit on the device. Microsoft has also faced suits like this in the past. They were sued over the 32gb Surface tablet because the Windows OS took over 50% of that 32gb of advertised storage. This is a nuisance suit and any eventual judgment would miniscule in the larger scheme of things.

Apple also got its first target price increase for 2015 from Argus with a bump from $120 to $125 and a reiterated buy rating. Argus expects iPhone revenue for Q1 to rise +24% to $40.4 billion on a 32% gain in sales to 67.3 million units. They also expect continued double digit earnings per share growth in 2015.


Linn Energy (LINE) joined the parade of energy companies slashing their dividends and cutting spending for 2015. The company said it could cut spending -53% to $730 million. They will also cut their annual dividend from $2.90 to $1.25. The company said it would finance the spending from internally generated cash. They are being forced to do this because they have $11 billion in debt and a market cap of less than $4 billion.

In addition Linn announced a drilling partnership with GSO Capital Partners, the credit arm of Blackstone Group, for $500 million for five years. GSO will fund the entire cost of new wells in exchange for an 85% working interest in the wells until GSO achieves a 15% rate of return on the money invested. Once that level is reached GSO's interest drops to 5% and Linn's will increase to 95%. Linn's budget for 2015 assumes a $60 price for WTI and $3.50 for natural gas. Linn shares rallied +12% on the news. Consensus estimate for LINN shares is $18.25.


The world's gambling capital in Macau finally ran out of bettors. The government corruption crackdown in China is taking its toll. Revenue for 2014 fell -2.6% for the first decline ever since numbers were first released in 2002. December was especially brutal with a -30.5% decline and the seventh consecutive month of declines. The revenues hit a record of $45 billion in 2013. The "tigers and flies" corruption crackdown in China has scooped up more than 150,000 government workers guilty of corruption. Macau is dependent on the big spending high-ranking officials described as tigers and the government is aggressively curbing lavish spending.

High rollers in China are now afraid to show their wealth by spending in public lest they become the target of a government probe. China is also squeezing the transfers of illicit funds sent from the mainland to the casinos. Analysts said Macau is now undergoing a period of consolidation until the Chinese government ends its anti-corruption drive. Beijing said Macau should diversify from gambling into other areas. Analysts believe it will take until Q2-2016 for the business to recover. There are some new properties coming online in that timeframe and they are expected to rekindle interest in Macau.


In keeping with the casino topic Caesars Entertainment (CZR) is moving closer to bankruptcy. However, it may be a friendly event as much as those can be friendly. The company said 39% of the senior bond holders had backed the reorganization plan. Caesars will put its operating unit into bankruptcy and then split into a casino operator and a property company. The casinos will pay rent to the property company. Caesars Palace Las Vegas will pay $160 million a year for five years. The base rent for the other 43 properties will be $475 million a year for three years. The bankruptcy of the operating unit will reduce the debt from $18.4 billion to $8.6 billion. The operating company will then issue about $1.7 billion in new debt and the property company $3.8 billion in new debt. Caesars Palace Las Vegas will issue $2.6 billion in new debt. Caesars still needs to garner 60% approval of the senior bond holders by January 9th in order for the restructuring plan to become effective.

Last year Caesars Entertainment (CZR) spun off Caesars Acquisition Company (CACQ). As part of the new deal those two companies will merge again.


Freeport McMoran (FCX) was cursed with a strong sell rating by Zacks but shares rallied +19 cents. Zacks warned about the potential impact to Q4 earnings from the global economic slowdown and the lower demand for copper. They also warned that strikes and accidents at the big copper mine in Indonesia would reduce copper and gold production in Q4. I agree all those things may depress Freeport but I believe that is already priced into the stock. FCX declined from $39 to $21 since July due to those headlines above. The bad news is over but the good news is yet to come. Copper prices are struggling at $2.81 and gold prices are stuck in the $1180 level. The strong dollar has crushed the commodity sector and the drop in oil prices has penalized them for their acquisitions in the energy sector last year. All of these issues will eventually turnaround and Freeport is a long term buy at this level. Resistance is $23.85 so a move over $24 would be buyable. Note that the "strong sell" by Zacks had no impact on the stock price.


Tesla (TSLA) shares declined on Friday because of the drop in oil prices to $52.03 intraday and from general profit taking on the first day of 2015. Some analysts claim lower gasoline prices make Tesla automobiles unattractive. I claim they are a luxury car that just happens to be electric and gasoline is not a factor. The new Tesla Model S P85D with dual battery motors, all wheel drive and 691 horsepower is NOT dependent on gasoline prices. The quoted range on a P85D is 253 miles with a maximum of 350 miles under ideal conditions.

I was surfing the Tesla website looking for mileage information and ran across the Driving Range Blog with some very interesting customer comments. For instance:

Morrison: Thanks for the detailed and thoughtful posting of information. I've put 500+ miles on my P85D in the first week and can say it's been nothing short of exhilarating. It's the smoothest, most amazing vehicle on the planet. Thanks for the great work, commitment, and for building the finest machines on the road. The Model S is the smartphone vs. a flip phone. No comparison. I'll never own a gas powered vehicle again.

Spentan: Thanks for the info. Picking up my P85D in 23 hours. Can't wait to own my 3rd Tesla.

In other Tesla news Elon Musk filed for divorce from British actress Talulah Riley for the second time. The couple divorced in 2012 and then remarried a year later. Riley and Musk have been living apart for the last five months while she directed her first feature film, "Scottish Mussel," which she also wrote. The divorce filing says Riley will receive $16 million as payment under a prenuptial agreement. Musk claims they are both still friends. He has five sons from his first marriage. Clearly the prenuptial payment is pocket change and will not impact his lifestyle. On the bright side he is single again and the ladies will be lining up for a chance to be wife number four.

Shares closed at $219 with price targets as high as $400.


GoPro (GPRO) rallied nearly 6% after an analyst predicted the company would announced its own drone with a built in GoPro camera in the CES presentation on Tuesday. The presentation will be at 3:55 ET on Tuesday. A JP Morgan analyst said despite the flood of competitors nobody comes close to the total GoPro platform of Capture, Manage, Share, Enjoy. The GoPro booth at CES will be one of the busiest and will be helped by free beer. The analyst is expecting strong Q4 sales and launches into international markets to drive the stock.


Markets

The Dow gained +7.5% in 2014 or +1,247 points. Since the Dow rebounded +1,962 points from the October lows of 16,141 all of the gains were made in the last two months. At the October lows the Dow was down -435 points for the year.

The majority of the Dow gains were made by only 7 stocks. Those are UNH, HD, DIS, NKE, V, MMM and GS. The biggest drag on the Dow was IBM for the second consecutive year. The table below is sorted by individual gains with Intel the biggest gainer. Coke, Pfizer, United Technologies and Caterpillar barely finished with a gain.

Only slightly more than half of the Dow components actually contributed meaningfully to the Dow's gains for the year. Low dollar stocks like CSCO posted decent percentage gains individually but contributed little to the Dow's gains. As a price weighted index the higher dollar stocks contribute the most. The Dow Points column is not exact but it is as close as I can make it without a lot of extra work. I think everyone will get the general idea of how the Dow is pushed around by half its constituents while the rest are just along for the ride.

Basically the public's view of the stock market is controlled by the actions of about 15 stocks.


The Investor's Business Daily (IBD) pointed out on Friday that the strength in the IBD50 was weakening and a "defensive investing posture is warranted." The IBD50 is a grouping of 50 top-rated growth stocks including tech stocks, healthcare, automotive, retail and biotech names. IBD pointed out that a number of these stocks closed below their 10-week moving average on Friday due to institutional selling.

I believe this is a warning for January but this could have simply been end of year portfolio restructuring. We just need to be cautious until we see what January brings.

The S&P dropped back to the 2,050 level intraday before rebounding to close on prior uptrend resistance at 2,058. Taken by itself I would be really cautious but several of the other indexes hit real support and rebounded so the S&P is just one of the group and not a leader.

We also have to remember that early January typically has some bouts of volatility as investors cash out profits from the prior year and put the money back to work for the coming year. One day does not make a trend.

Resistance is 2,090 and support 2,040-2,050.


The Dow chart is similar with a dip back to 17,730 followed by a +100 point rebound. The prior uptrend support is back in play at 17,800. The dogs of the Dow for 2014 were gainers on Friday. Of the seven Dow stocks that lost ground in 2014, five of them were gainers on Friday (BA, XOM, CVX, IBM, T) with Verizon and Boeing the ones that continued their losing ways. This will probably be the pattern over the next week since a lot of people subscribe to the Dogs of the Dow strategy. It is one of the longest running investment strategies. Those that do poorly one year are expected to outperform in the coming year.

The Dow has finally retraced some of its December rebound gains and should be open to moving higher from here. The keyword there is "should" and there is no sure thing in the market. With Dow forecasts of 20,000 by July 4th and 21,000 by the end of 2015 there is a lot of "hopium" built into those predictions. Personally I will just be happy to exit January with a decent gain and then worry about the rest of the year. "As January goes, so goes the year" is a market expression that makes the rounds every January.

Unfortunately another one is "If Santa Clause should fail to call, bears may come to Broad and Wall." Santa did not show up this year with a -220 point Dow decline last week.

Predicting market direction in early January is a fool's errand. There are so many seasonal factors that contradict each other that anything can and does happen. Fortunately the U.S is still the best house on a bad block and everyone wants to invest here. That "should" support our markets in the weeks to come.

Support is 17,800 but that was breached intraday on Friday making 17,750 the number to watch on the Dow for next week. Resistance is 18,050-18,100. Let's hope we test that again this week.



The Nasdaq retested the 4,700 level on Friday and was rewarded with a minor rebound. The Nasdaq now has a clearly defined trading range from 4,700-4,800 and plenty of room to wander. Unfortunately if it wanders below that 4,700 level we could be in for a decent bout of profit taking that retests the 4,550 level.


A lot of the symbols on the winners/sinners list for Friday are names that most investors would not recognize. This was due to the low volume, which increased the volatility and allowed stocks to bounce around a lot.


The low on Friday at 4,698 was the gap open low from the 18th. This should be decent interim support but will not likely sustain a real bout of profit taking. There are several stair steps down at 4,650, 4,605, 4,545 and 4,500. I really hope we don't have to retest them all. We are not too far away to retest overhead resistance at 4,800 next week if fund managers show up and buy something for 2015.


The Russell 2000 was the leader to the upside with a new high at 1,220 until New Year's Eve. The index took a serious beating on Friday to retest 1,190, which was rock solid as support. The next two weeks are normally small cap heaven as investors load up on small cap stocks for the new year. That seasonal trend has a lot of history but it is not infallible. We need the Russell to hold over that 1,190 support and begin to move higher early in the week. That will support market sentiment and hopefully get all the averages moving higher again.


Oil prices traded down to $52 on Friday and the Dow Transports gave back -41 points. This could be a sign the transports are done moving higher just because of cheap oil. The weak ISM number and disturbing words from Mario Draghi may have put a top on the transport index. There could be a double top forming at 9,230. Cheap oil does not help much if there is nothing to ship.


There is another negative chart. The NYSE Composite failed to reach the November high after the December rebound. The November high was the second lower high since June and the failure to reach make a new high in Nov/Dec when all the other indexes were breaking out is a serious sentiment problem. This suggests market breadth is declining and there may be trouble ahead. However, the NYSE has a lot of energy stocks and they could be the sole reason for the weakness. We need to watch the NYSE to confirm any rallies in the other indexes. If it does not confirm we should remain defensive on any long positions.


Volume was light on Wednesday and Friday averaging 5.28 billion shares but Friday was the heaviest day since Tuesday before Christmas. The sharp spike at the open and sharp drop intraday gave buyers and sellers an opportunity to do their thing in the market. It would be really nice if all the sellers were done but with the low volume we know there is likely to be some more show up next week. Friday was a holiday for most people. Next week business resumes as usual.

There are a lot of predictions for new market highs for 2015. Fundamentally they are sound with employment growing, low gasoline prices stimulating retail spending, low interest rates and a decent growth spurt in the economy. The negatives are of course the strong dollar that is depressing U.S. product sales overseas and the weakness in Europe, Japan and China. All of those countries have various stimulus programs that should begin to lift those economies in 2015.

If the pieces begin to fit together correctly in the months ahead we could have a good year. According to various seasonal patterns I discussed in recent weeks 2015 could be strong. Only one year ending in 5 has been down in the last 130 years. It is also the third year in the presidential cycle and that is normally strong. I could go on but you get the idea. Nothing prevents us from a bad year in the markets but as of today the majority of the factors are all pointing to good times ahead.

I said last week, "I am looking for a choppy market next week as the remaining tax sellers try to capitalize on the bullish end of year trend. However, window dressing should win out with funds adding to their winners for end of year statements. I would remain long into January but then maintain a cautious stance into January option expiration.

Window dressing did not appear and tax sellers were definitely driving the market. I am still advising cautious optimism into the January expiration cycle.

 

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Random Thoughts

It is time for the final wrap up on the 2014 S&P target forecasts. With the S&P closing 2014 at 2,059 the winner in this informal poll was an analyst named Edwards at Bank of America with a 2,060 target. Quite a few analysts missed the mark by a mile with estimates in the 1900s. The forecasters targeting 2,100 were very close since the intraday high last week was 2,093.

I updated the table with the 2015 forecasts when I could find them and every single forecast is above our present location with some quite bullish at 2300 or better.

This is the last time I am going to show the 2014 targets and we will focus on 2015 in the weeks ahead.

The shaded entries were revisions from the number behind their name. The average forecast was 2,030 and the average for 2015 is 2,224. That would represent a +165 point gain from here. The points on the right would be the gain from the 12/31 close at 2,059.


The Polar Vortex is returning. The nation is expected to see the coldest weather of the year this week as a polar cold wave surges down across the U.S. with freezing temperatures down to the Gulf Coast. Colorado broke temperatures records last week that lasted for 116 years with -25 degree days in the northern half of the state. We have already had more sub-zero days this year than we did all last winter. Grab those long johns and get ready to go sledding with the kids.


The average price of gasoline nationwide has now fallen for a record 99 consecutive days. Gas prices fell -9.3 cents over the last week to $2.231 per gallon. Nine southern states now have prices under $2 a gallon in some areas. More analysts are starting to predict the average price falling below $2 because of the glut of gasoline. Gasoline futures set a new five-year low on Wednesday at $1.41 per gallon. Refiners are operating at record levels of utilization at 94.4% as they tried to refine as much oil as possible before Dec-31st or be faced with paying property taxes on the oil in inventory. This pushed gasoline inventories well above the five-year average to 229.0 million barrels. The blue line in the chart below is the current inventory level.

AAA said the rout in oil prices could save consumers as much as $75 billion in 2015. The drop since June has already saved consumers $14 billon. Drivers are now saving $15 to $30 on every fill up compared to a year ago. That is some serious pocket change.



The U.S. government levied additional sanctions against North Korea for the cyberattack against Sony. President Obama issued an executive order in response to "ongoing provocative, destabilizing, and repressive actions and policies, particularly its destructive and coercive cyberattack against Sony." The White House said this was only the first phase of its response to North Korea's actions. Since North Korea is already the most sanctioned nation on earth the impact of the sanctions will be limited.

In the "you have got to be kidding" department a Russian startup announced plans to build a lunar base camp for roughly $9.4 billion to explore mining on the moon. Privately owned Lin Industrial said it was prepared to establish a moon base as soon as it received government approval. From approval to completion is expected to take about 10 years with the initial base installation in 5 years. The company said they would use readily available existing technology and would need 13 launches of heavy rockets to shuttle the required equipment for the initial base plus an additional 37 launches to establish adequate living conditions on the moon. The base would become financially viable by mining for rare earth metals.

The S&P 500 has just finished its sixth year of positive returns and its third straight year of double-digit gains. According to FactSet via the Wall Street Journal, "The S&P 500 index now trades at 16.4 times forecasted earnings over the next 12 months, compared with 15.4 a year ago…the average over the last 10 years is 13.2." Should we be worried?

Saudi Arabia has a labor force of 8.412 million of which about 80% are foreigners. Saudi Arabia spent $67 billion on its military in 2013 to put it in fourth place behind the US, China and Russia. Saudi Arabia has a deal with Pakistan to purchase nuclear weapons and delivery systems if Iran goes nuclear. The unemployment rate for Saudi males is 20.8%, under 25 youth is 30.5%, female unemployment is 54.4%. More than 46% of the Saudi population is under the age of 24 and 25% are under the age of 14. More than 45% of Saudi's GDP comes from oil. More than 95% of Saudi Arabia is desert.

The Kingdom Tower, currently under construction in Saudi Arabia, will be 1 kilometer tall (3,281 ft) and temporarily become the tallest building in the world. Why? The Burj Khalifa tower in Dubai is 2,717 feet tall and currently the tallest building is mostly vacant. Apparently nobody wants to rent an office or condo in a likely terrorist target and pay extremely high prices for the privilege. On Saturday an Indian developer said they were going to build a 1.2 kilometer tower (3,937 ft) as part of the Dream City project. Apparently there are egotistical idiots born every day.

The Hulbert Financial Digest tracked the performance of funds over the last 20 years. If you chased past performance in hopes of future gains you lost money. The top performing fund over each of the last 20 years produced an annualized loss of -17% in the following year. That means putting your money with the top fund the prior year would have been a bad idea. However, if you put your money with the lowest performing fund in hopes of capitalizing on their attempts to correct that under performance it would have cost you even more. The lowest performing funds each year averaged a -52% loss the following year. Hulbert recommends tracking performance of a fund over a 15 year period that will likely include both bull and bear markets. Funds with decent performance over a long term horizon are the ones you want to own.

Allen Greenspan said the economy is doing better than anybody else but it is still not doing well with an expected 2.5% GDP rate in Q4. He said vibrant growth will not return until the housing market bounces back and American companies invest in more productive assets. Today the biggest investment is in buying back stock and that does not help the economy grow.

The economy is shaping up as "too good to be true" for 2015 but the market may not have a banner year. Analysts expect low inflation, low interest rates, low oil prices to benefit the economy but low growth is also expected to continue and the Fed is likely to raise interest rates later in the year. Overseas economies will likely avoid deflation but they will also fail to grow. The indexes are still expected to rise double digits but not like 2013. This could be a repeat of 2014 where solid 10% gains will be the norm with a few stock rockets in the mix. The first six months of 2015 are expected to show the best gains with the markets moderating in the last six months as the divided government goes into gridlock and the presidential primary races heat up.

About half of all Obamacare enrollees for 2014 will end up owing taxes to the federal government. If they made more than they estimated when they applied then they will have to refund a portion of their subsidy payments. Since the enrollment period was in October 2013 they did not know how much they would earn in 2014. Most used their 2012 totals. If they made more in 2014 than 2012 they will owe taxes. Roughly 85% of enrollees received subsidies of roughly $264 per month. The administration said there were 6.7 enrollees at the end of 2014. Those that don't have insurance will have to pay a penalty with their taxes and that penalty more than doubles in 2015. With the employer mandate taking effect in 2015 there will be even more confusion in the months ahead.

2014 was a bad year for GM. They had 84 recalls affecting 26.9 million vehicles in the US and 30.4 million in all of North America. The costs for these recalls have yet to flow to the bottom line so GM profits are going to be under pressure for a long time.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

A woman’s "be ready in 5 minutes" and a man’s "be home in 5 minutes" are about the same.

Joe Fahmy, Zor Capital

 


New Plays

Transportation & Beverages

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Covenant Transportation Group - CVTI - close: 27.80 change: +0.69

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Last year the S&P 500 added +11.3%. The Dow Jones Transportation Average doubled that with a gain of +23%. Yet CVTI's performance is light years ahead of the major indices with a +230% gain in 2014.

According to the company, "Covenant Transportation Group, Inc. is the holding company for several transportation providers that offer premium transportation services for customers throughout the United States. The consolidated group includes operations from Covenant Transport and Covenant Transport Solutions of Chattanooga, Tennessee; Southern Refrigerated Transport of Texarkana, Arkansas; and Star Transportation of Nashville, Tennessee. In addition, Transport Enterprise Leasing, of Chattanooga, Tennessee is an integral affiliated company providing revenue equipment sales and leasing services to the trucking industry."

Why are shares of CVTI surging? The simple answer seems to be business is booming. The company has raised its guidance twice in the last four months. The most recent time was December 11th. Now you might think the stronger profit picture is due to falling gasoline prices. CVTI confessed they hedge some of their fuel costs so the drop in gas prices actually has little impact on its current outlook. They're raising guidance because demand is so strong. Anecdotally this is a pretty optimistic sign on the strength of the U.S. economy.

Technically shares of CVTI have been consistently rising with a bullish trend of higher lows and higher highs. Shares are just starting to bounce from support again. This is our chance to jump on board. Friday's high was $27.80. I'm suggesting a trigger to open bullish positions at $28.05. Earnings are expected in late January or early February. We will most likely exit prior to their announcement. I will note that the point & figure chart is bullish and forecasting at $34.50 target.

Trigger @ $28.05

- Suggested Positions -

Buy CVTI stock @ $28.05

Daily Chart:


NEW BEARISH Plays

SodaStream Intl. - SODA - close: 19.72 change: -0.40

Stop Loss: 21.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
The excitement over shares of SODA has definitely fizzled out over the last couple of years. The stock peaked just below $80 a share back in 2011. Then in early 2013 the stock was soaring and looked like it might reach $80 again. The rally lost its buzz and SODA peaked near $78 in mid 2013. Since then shares have reversed and stuck in a bear market decline.

Who is SODA? According to the company's marketing material "SodaStream is the world's leading manufacturer and distributor of home beverage carbonation systems which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. Soda makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated soft drinks and sparkling water. Our products are environmentally friendly, cost effective, promote health and wellness, and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles home from the supermarket, to store bottles at home or to regularly dispose of empty bottles. Our products are available at more than 65,000 retail stores in 45 countries around the world, including 17,000 retail stores in the United States."

2014 was tough for SODA investors as the stock collapsed from about $50 to $20. The company guided lower when they reported earnings in July 2014. Then SODA shares gapped down sharply on October 7th when they issued another earnings warning. That big spike on October 24th was a story from Bloomberg that SODA was testing some Pepsi products. The rally was probably short covering as investors worried a partnership with Pepsi could turn things around. The rally quickly faded. Pepsi has already partnered with in-home beverage company Bevyz in Europe so any deal with SODA might be limited.

SODA's most recent earnings report was October 29th. Their EPS came in at $0.45, which beat estimates of $0.35. Yet revenues fell -12.9% in the third quarter to $125.9 million, which was significant below Wall Street's estimate. Gross margins are also sinking and fell 380 basis points to 50.5% in the third quarter. Management lowered their guidance again and announced they would stop providing annual guidance in 2015. That's never a good sign.

Like rats jumping off a sinking ship there have been stories that hedge fund managers are bailing out of their SODA positions. Plenty of investors are already bearish on SODA and short interest at about 17% of the small 20.8 million share float.

Friday's drop was significant because it's a bearish breakdown under major psychological support at $20.00. Tonight we are suggesting bearish positions immediately with a stop loss at $21.05. More conservative traders may want to wait for a new relative low under $19.33 before initiating positions.

NOTE: SODA has been rumored to be a takeover target for a long time. That hasn't stopped the stock from crashing over the last 18 months. You may want to limit your position or use the options to limit your risk just in case some M&A news happens to appear out of nowhere and send SODA higher.

No Trigger, Launch Bearish Positions On Monday

- Suggested Positions -

Short SODA stock @ (the opening bell)

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

Buy the FEB $20 PUT (SODA150220P20) current ask $1.80

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Start 2015 With A Decline

by James Brown

Click here to email James Brown

Editor's Note:
The profit taking that began just ahead of New Year's continued on Friday. Fortunately traders were in a buy the dip mood and stocks pared their losses by the closing bell.

SMH hit our stop loss on Friday.


Current Portfolio:


BULLISH Play Updates

Freescale Semiconductor - FSL - close: 25.50 change: +0.27

Stop Loss: 24.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Comments:
01/03/15: FSL bounced near round-number support at the $25.00 level on Friday, which is encouraging. We are still on the sidelines and waiting for a breakout past resistance at $26.00. Our suggested entry point is $26.15. FSL could rally soon as investors turn their attention back to tech stocks this week. The annual Consumer Electronics Show (CES) starts and everyone will be raving about the hot new tech gadgets. Most of those gadgets will be connected to the Internet of Things, which is good news for FSL.

Earlier Comments: December 27, 2014:
Headquartered in Austin, Texas, FSL has operations in more than 20 countries. According to the company, "Freescale Semiconductor (FSL) is a global leader in embedded processing solutions, providing industry-leading products that are advancing the automotive, consumer, industrial and networking markets. From microprocessors and microcontrollers to sensors, analog integrated circuits and connectivity – our technologies are the foundation for the innovations that make our world greener, safer, healthier and more connected. Some of our key applications and end-markets include automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy management, portable medical devices, consumer appliances and smart mobile devices."

FSL has beaten Wall Street's earnings estimates every quarter this year. Back in October they beat estimates by seven cents. FSL's CEO Gregg Lowe said, "Each of our five product groups has grown at double digit rates so far in 2014, and we are well positioned to continue gaining market share." Unfortunately management also lowered their Q4 revenue guidance into the $1.075 billion to $1.13 billion range. That was below Wall Street's estimate of $1.18 billion. The good news is that investors don't seem to care. Shares of FSL have been soaring from their October lows.

A couple of weeks ago Bernstein Research upgraded FSL and raised their price target from $11 to $31 a share. Forbes also ran a bullish article on FSL. According to the Forbes author FSL is extremely well positioned to take advantage of the growing use of semiconductors in automobiles. FSL is the number two player in automotive chips with 22 percent of the market. Right now every car built in the world averages about 29 semiconductor chips and six of them are from FSL. That means FSL averages about $13.75 in sales per car, globally. The Forbes article also noted that automotive semiconductor sales are expected to grow +10.8 percent over the next three years. That's 50 percent more than communication chips, which is the next fastest growing segment.

The relative strength in FSL is impressive. The stock is up significantly from its October lows. Yet after the mid-December consolidation FSL does not look quite so overbought. The point & figure chart is bullish and forecasting a long-term target near $44.00.

Today FSL is hovering just below the $26.00 level. This was resistance back in April 2014. A breakout past $26.00 could spark some serious short covering. The most recent data listed short interest at almost 20% of the 107 million share float.

Tonight we are suggesting a trigger to open bullish positions at $26.15. We will plan on exiting prior to the Q4 earnings report due out around the very end of January or early February.

Trigger @ $26.15

- Suggested Positions -

Buy FSL stock @ (trigger)

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

Buy the MAR $25 CALL (FSL150320C25)

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

chart:


GNC Holdings - GNC - close: 46.42 change: -0.54

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: -1.5%
Entry on December 31 at $47.15
Listed on December 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
01/03/15: Recent winners in the stock market were seeing some profit taking on Friday. Shares of GNC briefly traded below technical support at the 10-dma before paring its losses. Traders may want to wait for a new rise past $47.15 before initiating positions. More conservative traders may want to wait for a new breakout above $47.40 instead.

Earlier Comments: December 30, 2014:
GNC is part of the services sector. According to the company, "GNC Holdings, Inc., headquartered in Pittsburgh, PA, is a leading global specialty retailer of health and wellness products - including vitamins, minerals, and herbal supplement products, sports nutrition products and diet products."

Currently GNC has over 8,800 locations with more than 6,500 of them inside the United States. Overall they have sales in over 50 countries. That is part of the upside. GNC has a lot of opportunity to grow overseas.

It seems like all the bad news is priced in for GNC. The stock is down -20% in 2014. That's after we factor in the $16 bounce from its July-August lows near $30.84 (that's a +52% bounce from its 2014 low). The company has been struggling with too much inventory and slower sales. In February and July this year they missed Wall Street's earnings estimates and GNC management lowered their 2014 guidance. After analysts finally lowered the bar enough GNC beat estimates by a penny when they last reported earnings in October. Analysts at Goldman Sachs believe that GNC's new CEO Mike Archbold will be successful in turning the company around and growing GNC's gross margins.

Someone is buying the bullish case for GNC as shares have developed a bullish trend of higher lows and higher highs. Technically the 50-dma crossed up through its 200-dma a few weeks ago, which is a bullish longer-term signal. GNC has managed to chew through a ton of overhead resistance and the point & figure chart is bullish with a $62 target.

GNC could benefit from a seasonal bias. 2015 begins this week. Millions of people will be making their New Year's resolutions. How many people are vowing to lose weight and be more active this year? That could give GNC a boost in the first quarter.

GNC has been consolidating just below short-term resistance at $47.00 the last few days. Tonight we're suggesting a trigger to launch bullish positions at $47.15. Plan on exiting prior to GNC's next earnings report in mid February.

NOTE: I am suggesting small positions to limit risk.

*small positions* - Suggested Positions -

Long GNC stock @ $47.15

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

Long FEB $50 CALL (GNC150220C50) entry $1.30

12/31/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

chart:


Sealed Air Corp. - SEE - close: 42.70 change: +0.27

Stop Loss: 41.65
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: Exit PRIOR to earnings on Feb. 10th
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
01/03/15: As expected shares of SEE found support near $42.00. The stock bounced from this area on Friday and managed to outperform the broader market with a +0.6% gain. If you're looking for a new entry point this could be it. Keep in mind we want to exit prior to SEE's earnings report on Feb. 10th.

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

12/27/14 new stop @ 41.65
12/22/14 new stop @ 40.85
12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike

chart:


Sprouts Farmers Market - SFM - close: 34.02 change: +0.04

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: + 2.9%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
01/03/15: SFM's extremely small four-cent gain on Friday means the stock rallied every day last week. Shares do look short-term overbought here. I wouldn't be surprised to see a pullback toward $33 or its 10-dma. Investors may want to start raising their stop loss.

Earlier Comments: December 23, 2014:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike

chart:


Sierra Wireless Inc. - SWIR - close: 47.95 change: +0.56

Stop Loss: 45.45
Target(s): To Be Determined
Current Option Gain/Loss: +11.9%
Entry on December 22 at $42.85
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 861 thousand
New Positions: see below

Comments:
01/03/15: The market did see some volatility on Friday and SWIR was no exception. A downgrade before the opening bell did not help. Shares dipped to and briefly traded below the 10-dma before bouncing back. SWIR eventually closed with a +1.1% gain to outperform the broader market.

Tonight we are raising the stop loss to $45.45. I am not suggesting new positions at this time.

Earlier Comments: December 20, 2014:
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.

- Suggested Positions -

Long SWIR stock @ $42.85

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

Long MAR $45 CALL (SWIR150320C45) entry $3.60

01/03/15 new stop @ 45.45
12/27/14 new stop @ 43.90
12/22/14 new stop @ 41.35
12/22/14 triggered on gap higher at $42.85, trigger was $42.85
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

Zulily, Inc. - ZU - close: 23.61 change: +0.38

Stop Loss: 24.10
Target(s): To Be Determined
Current Option Gain/Loss: + 8.8%
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:
01/03/15: The oversold bounce in shares of ZU continued on Friday. Shares traded up toward short-term resistance near $24.00 and its simple 10-dma before paring its gains. The stock should roll over soon. However, just in case it doesn't roll over, we will lower the stop loss down to $24.10 tonight.

I am not suggesting new positions at this time.

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

01/03/15 new stop @ 24.10
12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
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 BULLISH PLAYS

Market Vectors Semiconductor ETF - SMH - close: 54.49 change: -0.13

Stop Loss: 54.45
Target(s): To Be Determined
Current Option Gain/Loss: - 2.3%
Entry on December 23 at $55.75
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.9 million
New Positions: see below

Comments:
01/03/15: The action in shares of the SMH last week had us turning more defensive. The weakness continued on Friday and shares of this semiconductor ETF hit our stop loss at $54.45.

- Suggested Positions -

Long SMH stock (ETF) @ $55.75 exit $54.45 (-2.3%)

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

MAR $57 CALL (SMH150320C57) entry $1.60 exit $0.95 (-40.6%)

01/02/15 stopped out
12/30/14 new stop @ 54.45
12/23/14 triggered @ 55.75
Option Format: symbol-year-month-day-call-strike

chart: