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Daily Newsletter, Tuesday, 1/6/2015

Table of Contents

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

Market Wrap

Dizzy Yet?

by Jim Brown

Click here to email Jim Brown

The Dow spiked to +80 at the open before plunging -319 points to -239 followed by a +213 point rebound and then another -107 point drop to end with a -130 point loss. That is enough to make any investor dizzy.

Market Statistics

Oil led the decline with help from Greece, Bill Gross and Jeffery Gundlach. Crude oil declined another -4% to trade under $48 intraday and that crushed the energy sector, which makes up about 10% of the S&P. Saudi Arabia reiterated that slow growth in the global economy was causing the current glut in oil and affirmed that Saudi was not going to cut production.

Crude is in the crazy zone now and there is no doubt we will see higher prices months from now. The amount of global production that will die at these prices is roughly 11 million barrels per day over the next 12 months if prices stayed this low.

The U.S. lost -29 active drilling rigs last week to decline to 1,811 in total. That is down from the September peak for this cycle at 1,931 or a -120 rig drop with most of that drop in the last three weeks (-109). Companies are slashing capital expenditures like crazy and analysts believe we will see at least another 200 rigs shutdown and possibly as many as 400 in the coming months. Since shale well production declines about 70% in the first year it requires a steady stream of new wells to offset the production declines in the existing wells.

Baker Hughes said there were 9,566 wells drilled in the U.S. in Q3. That was a +413 increase from the rate in Q3-2013. That is roughly 5 wells per quarter per rig. We already lost -120 rigs so that means a drop of -600 wells per quarter. If we lose another 200 rigs as the minimum analysts expect that means a loss of another -1,000 wells per quarter or -1,600 in total. Secondarily, the remaining rigs are probably not going to be drilling flat out at the fastest rate possible. Completed wells will slow as companies try to reduce overtime and well costs. They may be contractually obligated by the lease agreements to drill wells on certain acreages but they don't have to drill at a breakneck pace. They can take their time knowing oil prices will rise again 3-6 months from now. The entire sector will go into conservation mode in an effort to reduce costs.

Another analyst that follows large offshore projects said the number likely to be approved for development in 2015 is around 20 compared to a ten-year average of 75 per year. That means 5-7 years from now there will be significantly less production.

The bottom line is that oil is not going much lower and when it finally rebounds it could do so violently because there are so many shorts. This is a twice a decade buying opportunity and funds will be racing into positions once the oil decline stops.


Bill Gross helped push the market over the cliff this morning with a warning that "the good times are over" and "some asset classes will have minus signs in front of them when 2015 is over." He warned that "knowing when the 'crowd' has had enough is often a frustrating task, and it behooves an individual with a reputation at stake to stand clear." He is suggesting that money managers are going to park money in treasuries and bonds rather than risk another bullish year in equities.

He warned that multiple years of interest rates near zero had failed to stimulate growth and that was a warning sign for the future since rates can't stay this low forever. "2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable." That was a veiled reference to equities. While Bill's track record on calling market tops and bottoms is not exactly stellar he is still an influential person and some managers will move money based on his statements.

Doubleline's Jeff Gundlach warned that "if oil goes to $40 the yield on the ten-year treasury will go to 1%. The geopolitical consequences could be -- to put it bluntly -- terrifying." He is right. Historically whenever there has been a severe decline in oil prices there has been a rise in geopolitical concerns including country defaults, wars and social unrest. Russia, Venezuela, Iran, Nigeria, Brazil, Mexico and even Saudi Arabia are at risk if prices remain this low.

Having Gundlach and Gross talking negatively about the market on the same day created almost a free fall decline that started at 10:30. Add in the flurry of headlines about Greece leaving the Euro and the impact on countries like Italy, Spain, Germany, etc and the outlook for Europe fell once again. The yield on the German Bund fell -16% in a single day.

The yield on the ten-year treasury fell to 1.889% intraday and nearly matched the October panic low at 1.86%. There are some serious deflationary fears in the market.


While on the topic, Mike Lewitt at Bridgewater Associates, projected that low oil prices will have a negative effect on the economy. In recent years oil exploration and production have been adding about 0.5% to GDP. Oil prices at $75 would subtract -0.7% over 2015. That projects that $50 oil could subtract -1.5% from GDP. Yes, low gasoline prices will help consumers but the sudden drop in drilling will produce a wave of layoffs, lack of investment and a drop in services and consumables in the energy sector. Cheap gas is not a free benefit. There are costs.

Over the last two months the estimates for energy earnings have declined from a -9% drop to -21% drop. This has led to cuts in earnings estimates for the S&P from $135-$138 two months ago to barely over $120 today. A drop in earnings forces a rise in PE unless stock prices decline as well. The stronger dollar is also forcing estimates cuts for S&P companies.

U.S. economic reports also pressured the markets. So far in 2015 we have seen eight economic reports and all eight data points have declined. That is not a good start for an economy reportedly coming off two back to back 4% GDP quarters.

The ISM Nonmanufacturing Index for December declined from 59.3 to 56.2 compared to consensus estimates for a drop to 58.2. This is not a good sign since the services sector is normally very busy during the holiday season. This was the third decline in four months.

The new orders component declined from 61.4 to 58.9. Backorders fell into contraction territory with a decline from 55.5 to 49.5. Business activity fell from 64.4 to 57.2. Five industries reported a decline in activity in December. Those were transportation, mining, education, arts and entertainment. Ten industries reported a growth in new orders with six industries reporting declines. Export orders declined from 57.0 to 53.5 as a result of the stronger dollar.


Factory Orders for November declined -0.7% and the fourth consecutive month of declines. Moody's was expecting a +0.2% gain. All types of orders declined. Nondurables fell -0.5%, durables -0.9% and nondefense capital goods ex-aircraft -0.5%. Core capital goods fell -0.5%. Those are a proxy for business investment. It appears that companies are cutting back on capital expenditures and that is slowing new orders.

The Intuit Small Business Employment Index rose at a slower pace in December. The headline number for employment growth declined from 0.15% to 0.14%. Compensation growth declined from +0.27% to +0.15%. Hours worked declined from +0.14% to -0.8%. Workers averaged 25.2 hours per week in December and down -0.8% from November. In theory workers should have worked more in December to handle the holiday demand. However, companies with fewer than 20 employees added about 30,000 jobs in December and the same pace as November.

We will get our first look at the overall December employment with the ADP Employment report on Wednesday. This will give analysts their last chance to revise estimates for the Nonfarm Payrolls on Friday. The current ADP estimate is for a gain of +227,000 private jobs compared to a gain of +208,000 in November.

The Nonfarm Payrolls on Friday are expected to show a gain of +250,000 jobs compared to +321,000 in November. I would be very surprised if we were close to 250,000 jobs and I would not be surprised to see the November number revised lower. However, I have been surprised many times before.


In stock news Michael Kors (KORS) fell -8% after Credit Suisse cut their rating from buy to neutral. The analyst said slowing handbag demand had led to "dramatic" discounting. Christian Buss lowered his price target from $103 to $79 and the stock closed at $67 after a -$6 drop. The analyst said a combination of rising inventories and slowing traffic has led to a dramatic increase in promotional activity in Kors stores and at wholesale distribution partners. The percentage of items on sale in premium department stores spiked +31% in December from +5% in October. On the Kors website the company marked down handbags by -65% in December. Inventory for the quarter rose +53% compared to the year-ago quarter. Sales are only expected to rise +25%. In Q3 the company missed sale store sales estimates of +19% with a +16% number. North America saw sales rise +11% instead of the +15% estimate.


Boeing (BA) delivered a record number of planes in 2014 and beat its own goal for the 787 Dreamliner. Deliveries of the 787 rose +75% to 114. Overall Boeing delivered 723 planes in 2014m up +12% from 2013 and at the high end of Boeing's forecast. Boeing booked a record 1,432 net orders valued at $232.7 billion. The 737 was the most popular with 1,104 orders and 485 deliveries. Unfilled commercial orders reached an all time high of 5,789 at the end of December.

Airbus is expected to announce their 2014 orders next week. They are expected to show 506 deliveries and 1,027 orders.


Transocean Offshore (RIG) got some bad news on Monday. Moody's said Transocean's $9.1 billion in debt could be cut to junk status because of the sharp decline in demand for offshore rigs. For instance the active rigs in the Gulf declined from 60 a month ago to only 54 today. That is a huge drop since these rigs lease for close to $500,000 a day. Transocean has nearly $2 billion in new rigs on order. These were ordered in 2013 when there was a deepwater rig shortage. Now they are faced with a sharp decline in demand and a glut of deepwater rigs at $50 oil.


Verizon (VZ) and AOL are in talks for a potential joint venture or an acquisition of AOL by Verizon according to people with inside knowledge. Verizon has not yet made a formal offer and no agreement is imminent according to the rumor. Verizon said it was more interested in partnerships than acquisitions. Verizon wants AOL's ad serving technology according to the Huffington Post. Verizon is planning an online video product offering and AOL has expertise in online content, mobile video and online advertising. Verizon is chasing AT&T and they need a big online presence to do that. AOL has 2.3 million paying subscribers.


Charter Communications (CHTR) will partner with Cisco Systems (CSCO) to offer a cloud based streaming TV service. This will allow Charter to better compete with companies like Comcast and make changes quickly to their content offerings. Cisco is supplying the data-center and networking equipment the Charter. Because the content will be delivered over the Internet there are no set-top boxes to install and that will allow a cheaper service. This will save Charter roughly $4 billion a year by eliminating the millions of set-top boxes. The service is already in live test with 25,000 customers in Fort Worth Texas. Charter shares fell -$4 and Cisco shares were flat.


After the bell Micron (MU) reported adjusted earnings of 97 cents that beat estimates by a nickel but a revenue gain of +13% to $4.57 billion was slightly below estimates. For the current quarter Micron expects revenue in the $4.2 billion range and analysts were expecting $4.614 billion. Micron said production of DRAM chips would decline in Q2 as it reconfigures production lines with improved technology. This changeover will occur in a seasonally slow demand period. The company said demand for DRAM chips continues to be strong. The minor revenue miss and the lower guidance knocked MU shares for a -$1.58 loss in afterhours.


Markets

Monday's market decline was the worst in three months and for a while Tuesday was not looking much better. The S&P is off to the worst ever three day start to a new year.

The S&P declined well under 2,000 intraday to touch 1,992 but rebounded to close back over 2,000 by +2 points. However, that was still under the 100-day average at 2,003.66. Closing under this level is negative but a quick morning rebound could easily correct that. Should the S&P decline back under 2,000 the next key level is 1,987 and the 150 day average as well as strong support from last year. If the 1,987 level breaks it would suggest a further decline to 1,900 or even the October lows at 1,820. While I don't expect that severe of a decline we have to project what the charts tell us rather than what we think is going to happen. If you know what to expect and it happens then you are better off because you planned for it. If it does not happen then we dodged a bullet.

The energy sector makes up about 9% of the S&P and the financial sector is about 15%. Their combined decline was more than the S&P could handle.


The Dow also declined to the 100-day before rebounding but I think that was just a coincidence. The Dow is not very reactive to moving averages because of its narrow 30 stock breadth. Any one or two stocks can easily move it 50 points or more so averages don't work with this index.

The next support level is 17,130 followed by 17,000. The crash in the blue chips can be chalked up to window-undressing by fund managers. They stored money in the highly liquid blue chips going into the end of the year so they would not miss out on any additional gains, their positions would look good on the year end statements but also so they could exit quickly in January and return to cash. They would rather buy a decent dip than just be long at a market top going into 2015.

I think it is telling that oil was down -4% and Exxon and Chevron were only down fractionally on Tuesday. Investors realize this is a twice a decade buying opportunity and the big oil stocks pay nice dividends while we wait for oil prices to recover.



The Dow Transports ($TRAN) fell -145 points even though oil prices were trading under $48. I warned about this last week. Cheap oil is not enough once they reached a certain level. Now there are serious concerns about the economy and the potential lack of freight to ship around the country. If drilling falls off a cliff as expected there will be hundreds of train loads of frac sand, well pipe and oil that will not be shipped by rail. There will be thousands of truckloads of products used in wells and to supply the man camps and communities around the oil fields that will not be moving. The busy airline season is also over until spring.

The transports are a market sentiment indicator for the economy. Cheap oil helped push the index back to its highs but it will take a growing economy to keep it there and analysts have some doubts about the current economic health.

The transports declined to the 100-day average and barely rebounded from that level. The index came within about 75 points from the December low at 8,580, which was also the 100-day average. The February, April and August declines also stopped at the 100-day so we have a good precedent set for a rebound tomorrow. However, the October decline rebounded from that average for two days before rolling over and crashing through the 200-day as well.

I would like to tell you the transports will rebound on Wednesday because of the 100-day but nothing is foolproof.


The Nasdaq crashed through the 100-day at 4,584 but rebounded to close slightly above it at 4,592. The Nasdaq has respected that level in the past but not as well as the transports. Since the big cap stocks can move the index significantly on any single day the Nasdaq is not that responsive to averages. All the major averages were busted in the October decline.

Apple was down -6.5% for the year intraday but recovered to close with a gain of a penny.

The Nasdaq missed making a two-month low by 20 points. Biotechs were the big winners but all the "big" stocks were in the loser's column. Amazon, Amgen, Google, Priceline, Netflix, etc. It is really hard for the index to gain any ground with those heavyweights dragging it lower.

Support is now 4,545 and the December low and resistance of 4,650.



The Russell 2000 was the big loser for the day with a -3% decline of -37 points. Apparently everyone who bought small caps for the January rally were reconsidering their strategy and dumping those stocks. There is almost nothing I can say that is bullish about the Russell.

However, we do have a strange convergence of all the major long term averages at about 1,152. That also happens to be support from the Nov/Dec consolidation pattern. The Russell came within 1 point of that level today before rebounding slightly. In theory the convergence of all these support points at 1,152 suggests this would be a good place for traders to buy and owners to defend.


Wednesday is going to be a critical for the market. We can chalk up the first three days of the year to window-undressing by funds, profit taking by investors deferring taxes on 2014 gains for another year, and further declines in the energy and financial sectors. If the market drop continues on Wednesday then there is something else at work here and we should be very careful about long positions.

Geopolitical concerns are starting to rise and that creates significant indecision on the part of individual investors. They typically don't understand the impact of Greece, the Russian ruble, deflation in Europe, a slowdown in China, a currency devaluation in Venezuela, etc. Most individual investors just want to buy stocks and have them go up. When that does not happen it confuses them and they tend to flee the market.

Wednesday will be critical for investor sentiment. The big afternoon rebound today looked like a capitulation event with a whopping 8.3 billion shares of volume but the -107 point drop right at the close showed there were still some sellers in the market.

Based on looking at a lot of charts tonight I am going out on a limb here and suggest Wednesday will be positive unless there is something else from overseas that produces negative headlines. With oil just under $48 and grossly oversold there is always the potential for a short squeeze that lifts energy stocks and the market.

I believe the market is short term oversold and is due for a bounce. That belief and $3 will buy me a cup of coffee at Starbucks so I would not bet the farm on my outlook. Trade what the market gives us, not what we expect the market to do.

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Jim Brown

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New Plays

Potential Short Squeeze

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Wayfair Inc. - W - close: 22.60 change: +0.58

Stop Loss: 21.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
The S&P 500 is down five days in a row. One stock bucking that trend is W. Shares of W are up five days in a row. The rally appears to be accelerating.

Who is Wayfair? According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and décor across all styles and price points. The Wayfair family of brands includes:
Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home décor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October last year and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. Since that opening day the stock has been cut in half. W traded down to $16.74 in mid December. The stock bottomed a couple of days before the S&P 500 did in the market's December decline.

There was a recent story about the surge in Class A shares of W. Sometimes mutual fund and hedge fund managers have limits on how much stock they can own in their portfolio. Their systems will not allow them to own more than a certain percentage of any one company based on the number of shares outstanding. When W initially came to market it had a very low count of Class A shares and a high number of Class B shares. The Class B shares are convertible into Class A.

According to Wayfair's CFO they asked Class B shareholders to convert some of their investment into Class A. That would boost the amount of shares outstanding. This is a bullish development since it means more fund managers want to own W and now they can with the increase in Class A shares.

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

The stock is also a short squeeze candidate. In a recent interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. Meanwhile short interest is more than 56% of the very small 11.1 million share float. If the current rally continues W could see a short squeeze.

Tonight I am suggesting a trigger to open bullish positions at $23.05.

Trigger @ $23.05

- Suggested Positions -

Buy W stock @ (trigger)

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

Buy the Feb $22.50 CALL (W150220C22.50) current ask $2.75

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

Daily Chart:



In Play Updates and Reviews

S&P 500 Dips Under 2,000 and Russell 2000 Breaks its 50-dma

by James Brown

Click here to email James Brown

Editor's Note:
It was not a good day for stock market bulls as widespread profit taking continues to plague the new year.

We saw GNC, SEE, and SWIR all hit our stop losses.


Current Portfolio:


BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 26.68 change: -2.06

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: -4.9%
Entry on January 05 at $28.05
Listed on January 03, 2014
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: see below

Comments:
01/06/15: The market sell-off might be over soon when traders start shooting recent leaders. Shares of CVTI were definitely targeted today. CVTI reversed hard with a -7.1% decline that erased the last three days worth of gains. More conservative traders may want to move their stop loss closer to the $26.00 area.

I am not suggesting new positions at the moment.

Earlier Comments: January 3, 2015:
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.

- Suggested Positions -

Long CVTI stock @ $28.05

01/05/15 triggered @ 28.05


Sprouts Farmers Market - SFM - close: 33.07 change: -0.14

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: + 0.1%
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:
01/06/15: SFM held up pretty well today. The stock dipped to $32.59 before bouncing back. Shares almost closed unchanged on the session. I would be tempted to launch new bullish positions on a rally above $33.50.

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




BEARISH Play Updates

Altria Group - MO - close: 48.98 change: +0.29

Stop Loss: 50.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 05, 2014
Time Frame: Exit PRIOR to Q4 earnings (see below)
Average Daily Volume = 6.6 million
New Positions: Yes, see below

Comments:
01/06/15: Yields on the 10-year U.S. bond plunged to new three-month lows. This is the lowest closing yield (1.96%) in almost two years for the 10-year note. That made high-dividend stocks more attractive. Tobacco companies, which typically pay a high dividend, bounced today and MO rallied up to resistance near its simple 50-dma before paring its gains. The real winners in the search for dividends were the REIT stocks today.

More aggressive traders could launch bearish positions on MO now with today's failure at the 50-dma. I am suggesting we wait for a new relative low and our entry point at $48.25.

Earlier Comments: January 5, 2015:
MO is part of the consumer goods sector. They are the biggest cigarette maker in America with 50.9% of the U.S. market. Fortunately for U.S. consumers the use of cigarette smoking is on the decline. MO's revenues last year declined year over year. That didn't stop shares of MO from outperforming the major market indices with a +28% rally in 2014.

The stock sports a 4.2% dividend yield but I doubt that will save it from the looming correction ahead. A big dividend did not help shares of rival cigarette maker PM last year. MO has produced a bearish double top with the twin peaks in December. Now it's starting to breakdown under support in the $49 area.

Tonight we are suggesting a trigger to open bearish positions at $48.25. The nearest support is probably the $45.00 area. We will plan on exiting before MO reports Q4 earnings but there is no confirmed date yet. Right now the company is estimated to report in very late January or early February.

Trigger @ $48.25

- Suggested Positions -

Short MO stock @ (trigger)

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

Buy the FEB $50 PUT (MO150220P50)

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


SodaStream Intl. - SODA - close: 19.26 change: -0.04

Stop Loss: 21.15
Target(s): To Be Determined
Current Option Gain/Loss: + 0.8%
Entry on January 05 at $19.42
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

Comments:
01/06/15: It was a relatively quiet session for shares of SODA, which closed virtually unchanged. I don't see any changes from my recent comments and would still consider new positions at current levels.

Earlier Comments: January 3, 2015:
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.

- Suggested Positions -

Short SODA stock @ $19.42

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

Long FEB $20 PUT (SODA150220P20) entry $2.05

01/05/15 trade begins. SODA gaps down 30 cents to $19.42
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 21.95 change: +0.46

Stop Loss: 24.10
Target(s): To Be Determined
Current Option Gain/Loss: +15.3%
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:
01/06/15: ZU tagged another new low at $20.80 before finally seeing an oversold bounce. Shares ended the session with a +2.1% gain. The simple 10-dma near $23.20 and the $24.00 area should be overhead resistance levels.

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



CLOSED BULLISH PLAYS

GNC Holdings - GNC - close: 45.19 change: -0.54

Stop Loss: 44.90
Target(s): To Be Determined
Current Option Gain/Loss: -4.8%
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:
01/06/15: GNC is down three days in a row. Today's drop hit an intraday low of $44.63 before paring its losses. Our stop was hit at $44.90. The pullback in GNC is likely all market related. I'd keep this stock on your watch list as shares will likely outperform once the market wide decline is done.

*small positions* - Suggested Positions -

Long GNC stock @ $47.15 exit $44.90 (-4.8%)

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

FEB $50 CALL (GNC150220C50) entry $1.30 exit $0.65 (-50.0%)

01/06/15 stopped out @ 44.90
12/31/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike

chart:


Sealed Air Corp. - SEE - close: 42.31 change: +0.22

Stop Loss: 41.65
Target(s): To Be Determined
Current Option Gain/Loss: +1.5%
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:
01/06/15: SEE ended the session with a gain of +0.5%, outperforming the broader market. Yet the intraday weakness saw shares tag our stop loss at $41.65.

- Suggested Positions -

Long SEE stock @ $41.05 exit $41.65 (+1.5%)

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

Jan $40 CALL (SEE150117C40) entry $1.90 exit $1.80 (-5.3%)

01/06/15 stopped out
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:


Sierra Wireless Inc. - SWIR - close: 44.77 change: -2.21

Stop Loss: 45.45
Target(s): To Be Determined
Current Option Gain/Loss: + 6.1%
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:
01/06/15: SWIR is another 2014 winner that is being crushed this week as investors lock in gains. Today's market drop sparked a -8% drop in SWIR. Shares managed to pare their losses down -4.7% by the closing bell. Our stop was hit at $45.45.

- Suggested Positions -

Long SWIR stock @ $42.85 exit $45.45 (+6.1%)

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

MAR $45 CALL (SWIR150320C45) entry $3.60 exit $4.80 (+33.3%)

01/06/15 stopped out
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: