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Daily Newsletter, Wednesday, 1/7/2015

Table of Contents

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

Market Wrap

Oversold Bounce

by Keene Little

Click here to email Keene Little
Following 5 straight-down days in the market we were due a bounce and today provided it. Now we wonder if the dead cat will quickly revive itself before landing back on the ground.

Wednesday's Market Stats

Today was spelled R-E-L-I-E-F. Following 5 straight-down sessions off the December 29th high, today's bounce was a relief to investors who are starting to worry about the idea that this market can't go down. Exceeding 3 straight-down days, on Monday, had broken a string that was not broken in all of 2014. Not once in 2014, since December 2013, did the market drop more than 3 days straight. So dropping 5 straight days had some sitting on the edge of their chairs wondering what was happening.

January is still very young, with only 4 trading days so far but following yesterday's loss for SPX it made for the 4th worst start to the new year in all of its history. The three previous worse starts were in 1932, 2000 and 2008. Those years were not very kind to the stock market and that kind of statistic is also going to spook investors who up until now were not even contemplating a down January, or year for that matter.

The rally started overnight as equity futures started rallying as soon as the closing bell rang so it appeared somebody wanted to spark a rally this morning, which they got. Now we wonder if it was the dead-cat variety or something more bullish. At the moment I'm leaning toward the former, which I'll explain further when I review the charts. This morning's ADP employment data, which was OK but not great, and the FOMC minutes this afternoon was credited for today's rally. Hogwash. The rally was already well underway before this morning's report and the release of the FOMC minutes did nothing for the market (expect a tiny jiggle in prices at 14:00).

One of the recent fears that has caused a stronger selloff in the stock market is what's been happening to oil. While we high-five each other at the gas pumps as well as with the home heating oil delivery guy, there are many companies and employees that are not so happy. With oil prices below the cost to produce at many of the shale and tar sands areas, the drilling companies have had to slow down their activities. That means layoffs at these companies.

When you think about the number of companies supporting the oil industry you'll start to get an idea what kind of negative impact declining oil prices will have on a lot of people. Lower prices at the pump aren't going to help much if you're out of a job. Whether its producers of drilling pipe (WSJ reported this morning that U.S. Steel announced it will idle plants in Ohio and Texas, affecting 756 workers) or builders of housing in the shale oil locations, the oil industry has a huge impact on many businesses.

Much of the drilling in shale oil fields has been done with borrowed money. This is an area that was distorted by the Fed's accommodation policies -- cheap money was available for borrowing and the costs of the loans weren't much of a factor in the profit/loss formula. Just as their easy-money policies led to malinvestments (defined as flow of capital into areas that would not have otherwise received investments) in the dot.bomb industry, leading to the 2000 high, the same policies led to malinvestments in the housing industry, which led to the 2007 market high. Now we've likely had malinvestments in the oil patch and that very likely will lead to market highs here.

The assumption by the banks was that the loans would be paid back with the profits from oil that was selling for more than $80. After all, a decline below $80 would be a 6 sigma event and I mean, how often does that happen (wink)? Now those loans are starting to look like the sub-prime problem in real estate back in 2007 and the dot.bomb euphoria into 2000.

Many of the loans to the oil industry were the riskier higher-yield (junk) bonds and as I've shown many times recently, HYG (the high-yield bond ETF) actually peaked in May 2013 and then made a lower high in June 2014. Investors in these bonds started to get a whiff of the deterioration in the fundamentals well before oil started coming down. The weekly chart of HYG shows the recent break of support at the June 2013 low, at 88.27, a bounce back up from December 16th (with the stock market) but now heading back down and again testing the June 2013 low. Another break below 88.27 might not recover.

High Yield bond fund, HYG, Weekly chart

Russia also owes U.S. banks a lot of money but no one feared they wouldn't pay when they were pulling in boat loads of money from their oil and natural gas sales. Between economic sanctions, led by the U.S., and the drastic reduction in income, the Russian ruble has collapsed and this has forced Russia's central bank to prop up their currency and bail out some of their banks. How much do you think Russia will be interested in paying its debt to U.S. banks? The $60B (maybe more) that's owed might have to be written off by U.S. banks and on top of the bad loans to drillers, home builders in the oil patch regions and the plethora of businesses associated with the oil business, we could some real stresses placed on the banking sector soon. A JPMorgan analyst recently stated energy junk bonds could see a 40% default rate if oil stays below $65. All of these concerns are weighing on investors (those who are paying attention anyway), especially for the banking sector. The chart of BKX, which I'll show later, certainly looks like investors are becoming more than a little concerned. And investors in general should follow the money (banks).

The bottom line is that there are so many tentacles reaching out from the oil industry and many reach deep into non-oil related industries and jobs. Workers moving away from the Bakken field? What happens to the homes there (and their mortgages)? What happens to the extra teachers who were hired? What happens to the Walmart employees who were being paid $17/hour in order to compete with the oil industry's needs for employees? All of these things might not happen until later in 2015 and 2016 but smart investors like to look out at least 6 months and watch for what's coming. Unfortunately retail investors tend to do their investing by looking in the rear view mirror and extrapolate from there. Did I say retail investors? Actually economists (the Fed most certainly included) do that and then make their predictions based on their rear-end assessments and then retail investors respond.

As for oil/gas prices, all of this means we should enjoy our cheap gas and home heating oil but recognize as traders and investors that the stock market doesn't like it when there's a fundamental shift in what was a driver of growth for our economy. Cheap energy will of course be of great benefit for many industries, such as the airlines, but the negative aspects of a shrinking energy industry but the negative ripples through the economy will be greater and that's what the stock market's decline in the past week has been reflecting. Scooby Doo is looking ahead and just said "ruh-roh."

The strong rally in the dollar is also causing concerns about the harm that it creates for big international companies, where the higher value of the dollar makes it more expensive to sell overseas. Reduced earnings will make it more difficult to justify the already-high P/E ratios for many of these companies.

I know 100% of the analysts who predicted what 2015 will be like are all bullish. Not one predicted a down year for 2015 and that itself should be a warning to any card-carrying contrarian. Now with the 4th worst start for a January, and what I believe will be additional downside pressure this month, we might end up with a negative January barometer. All of this is to say I think it behooves everyone to keep an open mind about the downside potential. I've received some hate mail recently about my bearish opinion, which I take as another contrarian signal. When a rally is obvious to everyone it's obviously wrong and the start to this month could be a wake-up call to some.

I'll start out with the RUT's charts tonight because it has the most bullish potential. While I am bearish the current market and believe we'll see lower prices in the coming week, it's the RUT that I'm using to keep me honest (and scared when short). The RUT has been a good canary index and I'll continue to use it that way.

The RUT's weekly chart below shows yesterday's decline found support at its 50-week MA, near 1153, and today it bounced back above to its uptrend line from October-December, currently near 1169. This keeps the ending diagonal 5th wave possibility alive (rising wedge for the move up from October to complete the 5th wave of the rally from June 2012), which calls for one more leg up to a new high. As long as the December 16th low near 1134 is not broken I'll continue to respect the bullish potential here.

Russell-2000, RUT, Weekly chart

The RUT's daily chart below zooms in on the move up from October. Today's rally stopped at its broken 50-dma, near 1176, so any failure here would leave a bearish back-test and kiss goodbye. A drop back down and below 1153 would be a bearish heads up that all we had today was a dead-cat bounce, which I think is all we'll get but I'm looking for a higher bounce before continuing lower. A rally above 1200 would have me a very nervous bear and above 1217 would be a sure bet for a new high, potentially up to about 1235 in opex week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1153

The uptrend line from October for SPX was broken yesterday and so far the only thing today's bounce has accomplished is a back-test of the trend line. A selloff from here would leave a bearish kiss goodbye but I'm looking for a higher bounce before selling off. The 20-dma is coming down and looks like it will cross the 50-dma tomorrow near 2043. That's the level I'll be watching to see if a back-test leads to a bearish kiss goodbye there. I'm showing the potential for a larger 5-wave decline into the end of January, getting down to perhaps the 1870 area by the end of the month. That would then set up a large bounce correction in early February before heading lower again. The bullish potential for one more new high, like the RUT, requires the bulls keep this bounce going but so far I think it's a lower probability move.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2072
- bearish below 1992

The bold blue lines on the SPX 60-min chart below are for the rising wedge pattern and the first indication that it might not result in one more new high was yesterday's breakdown. It's fighting to get back above the line, currently near 2025, and I think we'll get another leg up for the bounce, as depicted, but if it stalls around the 2043 area it will be an opportunity to short it for the next leg down. If it rallies strongly above 2045 or only pulls back in a choppy pattern I'll then be more inclined to believe in the "one more high" scenario.

S&P 500, SPX, 60-min chart

The DOW did a better job holding onto its uptrend line from October-December, breaking it yesterday but closing only slightly below it. Today's bounce brought it back up to its broken uptrend line from October 2011 - November 2012 (bold green line) and is only a little shy of its 50-dma, near 17632 today. It should be close to its 20-dma in the next day or two, probably near 17650. A 50% retracement of the decline is at 17683 so that gives us a target zone to watch for the bounce to set up a reversal for a short play. Much higher than 17800 would have me thinking a little more bullishly for the same pattern as discussed for the RUT and SPX.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,262

NDX never achieved a new high in December, above its November high so it's tough to tell if we've got a slightly different wave count. For now I'm calling the December high a truncated finish to its rally, to keep it in synch with the other indexes, in which case the depiction for a 5-wave decline (bold red) is the same as the other indexes as well. But if the lower high in December is a b-wave bounce in what will be a large a-b-c pullback from November then the rally to a new high will come after the pullback completes, possibly down near its 200-dm that's currently nearing 3930, as well as its uptrend line from November 2012 - June 2013. That's just food for thought for now and something I'll contemplate further if and when NDX gets down there and looks to be finding support.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4277
- bearish below 4064

As the stock market sank lower this past week the bond market enjoyed another rally, which drove yields lower. It's now decision time for the bond market, at least for the 30-year bond. As can be seen on its weekly chart below, TYX dropped down to a price projection at 2.476 with yesterday's low at 2.472. This is a price projection for two equal legs down from December 2013 and could be setting up a big bounce back up within its longer-term down-channel. The decline is also testing price-support near 2.5, which is where it dropped to in 2008 and 2012, as well as the bottom of a down-channel for its decline from December 2013. So there are plenty of reasons for a bounce from here (selling in bonds) and stock market bears should remain aware of the potential for rotation out of bonds and back into stocks. But if TYX drops much below 2.47 it's going to add to the bearishness for the stock market. I continue to believe TYX will see 2% before it sees 4%, maybe even before it sees 3%.

30-year Yield, TNX, Weekly chart

The banks are perhaps providing one of the stronger hints that we've had a change in character for this market. Unlike the broader averages, BKX has dropped below its December low. More than half of the 2-1/2-month rally from October was given back in a week and while it's possible we'll get another v-bottom reversal like we saw in October (where's a Fed head and a bullish statement when you need one?), I think the bearish setup into the December 29th high, followed by the very strong decline, tells us something has changed. The 3-drives-to-a-high pattern in November-December, with bearish divergence provided a strong hint of a coming reversal.

KBW Bank index, BKX, Daily chart

On the BKX chart above I added the trend lines that show an expanding triangle, which is an ending pattern that shows how price volatility can increase dramatically at an important high. But, not surprisingly, support at its uptrend line from March 2009 - October 2011, near 69.90, pulled in the buyers (and short covering at support) and now we wait to see if support will hold longer-term. If a bounce is followed by another break lower it's going to be a strong signal that the 2009-2014 bull is finished. The bulls still have a chance here but at the moment I think it's for the bears to lose.

The Energizer Bunny. That's the name we need to give to the U.S. dollar right now. The rally just keeps going regardless of resistance levels that it runs into or target prices achieved. It's hard to see on my weekly chart below, but the dollar has now reached a price projection at 92.46 (with this morning's high at 92.51) where the 5th wave of the rally from May is equal to the 1st through 3rd waves, a common projection for an extended 5th wave. If the 5th wave extends to where it will be 162% of the 1st through 3rd waves it will continue to rally to about 97. There's another projection at that level, which is where the 2nd leg of the rally from May 2011 would be 162% of the 1st leg (for either an a-b-c or 1-2-3 move up). The top of a parallel up-channel for the rally from April 2008 is currently near 93.30 so that's a level of interest if reached. Unfortunately we've got mixed signals between RSI and MACD, as far as divergence, so they're not helping. The dollar is bullish until we get a sizeable breakdown.

U.S. Dollar contract, DX, Weekly chart

Gold gets a relatively small bounce and I get inundated with emails telling me why this is it! This is the time to buy gold before it heads for $5000! As long as so many keep looking to buy the low in gold we should keep looking for new lows. The bounce off the November 7th low has been very choppy and therefore it continues to look like a correction to the longer-term decline. It's once again testing the top of its down-channel from 2011-2012 so a break above yesterday's high at 1223 would be at least short-term bullish, perhaps for a run up to a price projection I have for a larger bounce at 1276 but regardless, I think we're looking at lower prices still to come.

Gold continuous contract, GC, Weekly chart

How low can it go? That's of course the question everyone is asking about oil. As can be seen on its daily chart below, the steepening downtrend lines is an indication of a waterfall decline and not something you want to try to catch. There are a lot of bloody hands out there trying to catch falling knives. The last downside projection I have for oil, once it broke below 49.81, is 43.63-44.42, which are price projections based on the wave pattern. At 43.63 the extended 5th wave of the move down from June would equal the 1st through 3rd waves. At 44.42 the 5th wave of the leg down from November 21st (which is the larger 5th wave down) would equal the 1st wave. Once this leg down from December 22nd completes it should complete the larger 5-wave move down from June and set up a multi-month bounce/consolidation. If we're to get a 4th wave correction in the decline from August 2013 it's not going to be a good environment to trade since the only ones who benefit in a 4th wave correction are the brokers.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports will not have anything that's market moving but Friday morning will be important as we get the NFP report. About this time traders are getting a little nervous about how the Fed is going to deal with an improving employment picture (which won't last if the energy market starts to deteriorate further) while the stock market declines. Do they talk about QE4 (wait, you'll see, and it won't be far away) or do they start trying to remove their accommodative stance. The Fed is boxed in and it's just a matter of time before the market really gets it.

Economic reports and Summary

The Santa Claus rally is from about mid-December through the first few trading days in January so one could argue it was a bust this year. Maybe a little net rally but certainly nothing like the bulls had expected. And when Santa fails to call at Broad and Wall...plus now we've got a negative start to January (4th worst one in its history and only matched by previously bad years for the market) and that portends a negative January. A negative January says the year will be negative. Fighting all this are bullish tendencies for the market (3rd year in a 2nd term presidential cycle, year ending in '5') so traders can take their pick of signals, especially if January finishes negative, which at the moment I think will happen.

As for me I'd rather stick to the charts rather than Trader's Almanac or any other source of "well, normally the market is bullish/bearish during this period." There is nothing normal about this market and all the false propping by the Fed (much of it only verbal, which Mario Draghi has perfected) has led to enormous economic distortions, which I discussed in the beginning of the wrap about what's going on in the oil field and its huge impact on the economy. I can only derive clues about the coming year from what the EW pattern is telling me and that's hard enough (subject to interpretation). At the moment I'm expecting more downside this month, possibly starting from a slightly higher bounce on Thursday, but after that I'll put the pieces together as they develop and my opinion will be based on the developing pattern.

In the meantime I think it's prudent to trim your stock holdings, establish hard stop levels and trade short-term. If you're bearish and itching to get in on the short side I think we've got a good trading opportunity here. It goes without saying bears should be trading short term and go for base hits -- bear markets are tough to trade, especially when you have central bankers coming out and promising more money in an effort to stop any market decline. Bear market rallies tend to produce the sharpest rallies that then fail in v-top reversals, catching both sides offside.

Good luck in the coming month and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Bears Could Be Shocked

by James Brown

Click here to email James Brown


NEW BULLISH Plays

TASER Intl. - TASR - close: 25.98 change: +0.41

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 07, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
50,000 volts. That's what a Taser electro-muscular disruption (EMD) device shoots through your body to override the central nervous system. Your body freezes as all the muscles contract.

Their website describes the company as "TASER International makes communities safer with innovative public safety technologies. Founded in 1993, TASER first transformed law enforcement with its electrical weapons. TASER continues to define smarter policing with its growing suite of technology solutions, including AXON body-worn video cameras and EVIDENCE.com, a secure digital evidence management platform."

They may have started with electrical weapons but now the company is expanding to mobile video cameras worn on a law enforcement officer's gear. The company has been in the news lately thanks to President Obama. On Monday this week Obama wants to spent $75 million over the next three years to outfit the nation's police force with body-worn cameras.

The White House believes that body-worn cameras on police will help reduce violence and avoid another event like the one in Ferguson, MO. Current estimates suggest there are only 70,000 police wearing cameras now. Obama's plan would almost double that. Industry analysts are forecasting significant growth if the federal government approves Obama's plan. There are nearly 800,000 policemen in the U.S. There's plenty of room to grow. Plus TASR is expanding internationally.

The bears will argue that TASR's stock is expensive with a P/E near 63. There is no denying that. However, the body-camera business could soar. Currently it's less than 8% of their annual sales. The real winner could be TASR's Evidence.com ecosystem. This is a subscription service for law enforcement to back up and manage all the data from TASER electric weapons, body-worn cameras, and more.

The stock hit multi-year highs on back in December following President Obama's comments suggesting the federal government endorsing body cameras for cops.

I will caution investors that TASR can be a volatile stock. You may want to limit your position size. I will point out that the latest data lists short interest at almost 30% of the 51.3 million share float. If the rally continues TASR could see some short covering.

Technically shares of TASR just bounced near the bottom of its bullish channel. We think TASR will outperform if the rally resumes. The simple 10-dma is at $26.36. Tonight we are suggesting a trigger to open bullish positions at $26.50. We will plan on exiting prior to TASR's earnings announcement due in late February.

Trigger @ $26.50

- Suggested Positions -

Buy TASR stock @ (trigger)

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

Buy the MAR $27 CALL (TASR150320C27) current ask $2.30

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

Daily Chart:



In Play Updates and Reviews

Best Day In Three Weeks

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered its best one-day gain in three weeks in spite of a terrorist attack in France.


Current Portfolio:


BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 28.05 change: +1.37

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
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:
01/07/15: The stock market's widespread bounce on Wednesday helped CVTI recover more than half of yesterday's painful decline. The stock outperformed the major indices with a +5.1% gain. We are back to breakeven near $28.00. Today's intraday high was $28.13. I'd look for a rally past $28.20 before initiating new positions.

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: 33.77 change: +0.70

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: + 4.5%
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:
01/07/15: SFM is another stock that outperformed the broader market as traders rushed back in to buy the dip. After a two-day drop SFM bounced with a +2.1% gain. I'm suggesting investors use today's rebound as a new entry point for bullish positions.

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


Wayfair Inc. - W - close: 22.34 change: -0.26

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

Comments:
01/07/15: I am surprised by the relative weakness in shares of W today. This morning the stock spiked higher but failed under the $23.00 level. W spent most of the session consolidating sideways in the $22.10-22.50 zone.

We remain on the sidelines. Our suggested entry point is $23.05.

Earlier Comments: January 6, 2015:
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)

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




BEARISH Play Updates

Altria Group - MO - close: 49.88 change: +0.90

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:
01/07/15: MO is not cooperating. Today's rally and close above its 10-dma and 50-dma is short-term bullish. If shares close above round-number resistance at $50.00 we'll likely remove MO as a bearish candidate. Right now our suggested entry point is 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: 19.14 change: -0.12

Stop Loss: 21.15
Target(s): To Be Determined
Current Option Gain/Loss: + 1.4%
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:
01/07/15: The early morning bounce attempt in SODA failed near $19.50 and shares underperformed the broader market with a -0.6% decline. The company is facing increased competition. This afternoon there was another story about how Dr. Pepper has partnered with Keurig (GMCR) to allow consumers to make Dr. Pepper brand drinks with GMCR's new soda machine. The exact flavors from Dr. Pepper (DPS) has not been announced yet.

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: 21.24 change: -0.71

Stop Loss: 24.10
Target(s): To Be Determined
Current Option Gain/Loss: +18.0%
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:
01/07/15: The relative weakness in ZU continues. Shares failed to participate in the market's widespread rebound on Wednesday. Instead ZU's early morning bounce faded and shares dropped another -3.2%.

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