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Daily Newsletter, Tuesday, 1/13/2015

Table of Contents

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

Market Wrap

Unbelievable Volatility

by Jim Brown

Click here to email Jim Brown

The Dow spiked to +282 at the open but quickly sold off to -142 at 17,498 before rebounding at the close to end the day at 17,611 and a -27 point loss. In case you are keeping track that is a 422 point intraday range and also another lower close.

Market Statistics

The morning rally seemed to center on the positive earnings out of Alcoa and the expectations for a positive ruling on open market transactions (OMT) by the ECB in Europe. There was a court ruling due out late today and a decision that OMTs were illegal would also reflect negatively on QE by the ECB. Since the entire investing world is counting on the ECB launching a huge QE program on January 22nd a negative ruling would be a huge disappointment. Also weighing on the market was a warning from KB Home.

On the economic front there was little data to influence the market but what little we did have was positive. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose to the highest level in 14 years in November. The number of open positions rose by +142,000 to 4.97 million. That is the most since January 2001. New positions in professional and business services, retailers and state and local government agencies rose the most. Hiring in leisure and hospitality and health-care firms declined.

There were 4.99 million hires in November, down from a seven-year high of 5.1 million the prior month. This reduced the hiring rate from 3.7% to 3.6%. The survey showed that 2.62 million people quit their jobs, down from 2.71 million the prior month. Total terminations fell from 1.76 million to 1.61 million.

The NFIB Small Business Survey Optimism Index rose from 98.1 to 100.4 for December. That was the third consecutive month of gains and an eight-year high. Those respondents planning on increasing employment rose from 11% to 15% and those expecting sales to increase rose from 14% to 20%. Overall seven out of the ten components saw increases.

The calendar for Wednesday has the Retail Sales for December and the Fed Beige Book for highlights. That is followed by the Philly Fed Manufacturing Survey on Thursday. All could be market moving. The reports highlighted in green are important but they tend to not move the market.


KB Homes (KBH) reported adjusted earnings of 27 cents compared to estimates of 52 cents. The company did not originally report an adjusted number and said earnings were $8.36 per share, which included an income tax benefit of $824.2 million. Shares rallied on the initial report but once the real number was produced on the conference call about 11:30 the shares crashed -16%.

Revenue did increase +29% to $796 million to beat estimates by about $20 million. However, on the conference call the CEO said they were seeing "soft demand" in some locations as the quarter progressed. The earnings miss and the soft demand comments tanked the stock. You have to ask yourself why demand is soft with 30-year mortgage rates near record lows and the relaxation of credit requirements. Why are people not buying new homes?


Tesla (TSLA) shares rallied $2 in regular trading but CEO Elon Musk dropped a bomb at the Detroit Auto Show after the close. He said sales in China had declined "significantly" because potential Chinese buyers don't believe the charging network is widespread enough to allow the cars to travel significant distances. He said they were working to change that impression and the Supercharger network is slated for large improvements in 2015 and 2016. Shares fell -6% to $190 in afterhours.

Musk said Tesla would be selling "millions" of cars by 2025 as they become a volume automaker rather than a niche producer. The Model-X gull wing SUV that is due out in late summer has already sold out for the entire year.



GoPro (GPRO) declined -12% on news that Apple had received a patent for a remote control camera. The camera can be controlled remotely through an iPhone or iPad. Since Apple is expected to have sold more than 270 million of their products in 2014 their entry into the GoPro space would be serious competition. GoPro sold 4 million cameras.

However, after analysts got a chance to review the patent they concluded it would not be serious competition for GoPro. Apparently it relates more to a camera that could be used for surveillance like a security camera or a baby monitor camera. The patent does state it could be a wearable camera with examples given as mounted on a bike helmet or a scuba mask so Apple does have other things in mind for the project.


Credit Suisse upgraded Apple shares from hold to outperform and raised their target from $110 to $130. The analysts said Apple was seeing "solid and sustainable iPhone volume." They expect Apple to sell 215 million iPhones in 2015 and 2016. He predicted higher margins as demand for the bigger phones increases and those sales lean towards the higher memory units with a larger number of apps and movie/music downloads.

The analyst also expected Apple to increase its cash-return program to $200 billion through 2017 with $165 billion in buybacks and $37 billion in dividends. He is also not including any material gains from the rumored 13 inch iPad, Apple TV, Apple Pay or the Apple Watch. If those turnout to be profitable he said his estimates could be revised higher.

The upgrade did not drive the stock price with Apple shares gaining only 97 cents for the day. Current Q4 earnings expectations are simply too high.


Amazon shares rallied +3% in the morning after Citigroup said the business would grow another 15% in 2015 compared to the industry average of 4%. The Citi analyst set a price target of $354 with the stock closing at $294. The gains faded with the market to end at only +3.33 for the day. The analyst said Amazon Web services could grow a whopping +35% this year. They are already the biggest cloud on the planet. He is expecting profits to have risen +25% in 2014 and margins to the highest level in 10 years. That is a pretty optimistic outlook.

Amazon also announced it had signed 79 year old Woody Allen to make his first ever TV series. The filmmaker will write and direct the 30 minute comedy series, which will premier in 2016. He has directed more than 40 films since his first in 1966 named "What's up Tiger Lilly." He has four Oscars to his credit and two Golden Globes. Amazon Studios was started in 2010 to develop full-length films and TV shows. Amazon spent nearly $2 billion on streaming rights and original content in 2014 according to Morningstar. Amazon has 13 new pilots that will be unveiled on Thursday to Prime members.

Earnings are on Jan 29th and they usually disappoint. I looked at buying puts on them over the weekend but the prices are astronomical since everyone expects them to disappoint.


Best Buy (BBY) was upgraded by Goldman Sachs from neutral to buy. The bank said a pickup in TV sales and good sector fundamentals should produce better than expected Q4 results. Shares were flat on the news.

Abbot Labs (ABT) was downgraded from buy to hold at Jefferies with a $50 price target. The analyst said this was a valuation call as the company lacks near-term visibility. Shares fell -1.6%.

Alaska Air (ALK) was upgraded by Deutsche Bank to hold from sell with a 12-month price target of $65. The bank said lower fuel prices should be positive. Shares gained about $1 to $61.

Franklin Resources (BEN) was downgraded by Bank of America from buy to neutral with a $60 price target. Company is facing multiple growth headwinds according to BAC. Shares declined 50 cents to $52.25.

E*Trade (ETFC) was upgraded by BAC from neutral to buy with a price target of $26. Core trends are improving and the company will likely return more capital to investors. Shares gained 28 cents.

Hewlett Packard (HPQ) was downgraded by Pacific Crest to neutral from outperform. It was a valuation call with shares up +145% over the last two years. Shares were down fractionally on the news.

Legg Mason (LM) was upgraded by BAC to buy from neutral with a price target of $62. Shares gained +2.6% on the news to $54.50.

Marathon Petroleum (MPC), not to confused with Marathon Oil (MRO), was downgraded by JP Morgan from buy to neutral with a price target of $97. Shares crashed -5% to $81 on the downgrade.

Sonic (SONC) rallied +4% to a new high after Piper Jaffray upgraded them from neutral to overweight with a price target of $38 with multiple growth drivers. Shares closed at $32.

Fresh Market (TFM) was downgraded by Piper Jaffray from overweight to neutral with a price target of $42 on worries over the CEO exit. Shares crashed -11.3% to $36 on the news.

We are right in the middle of the guidance warning season for Q4 as earnings reports accelerate starting next week. Companies giving positive guidance today were LLTC, ZLTQ, HTWR, MFLX, ISRG, NXTM and ELX. Inline guidance came from QTM, PRGS, GME, FLDM, ZIXI, DAN, BAGR, MVNR and ORBK. We saw negative guidance from SYK, DWCH, AAOI, IHS and HTCH. Relatively speaking the amount of negative guidance was minimal compared to the positive and inline guidance.

The flurry of earnings warnings so far this year has caused analysts to sharply lower their Q4 earnings estimates and this is also depressing the market. Q4 estimates have been cut from +8.1% growth to +2.0% and Q1 estimates have fallen from +9.2% to +2.8% and still falling. Analysts believe 2015 S&P earnings could fall -$6 to -$9 from prior estimates. Assuming a PE of 18 that equates to -108 to -162 S&P points. That means a year end estimate for 2,100 on the S&P could be cut to 1,940 to 1,992.

Estimates are just estimates and until we get 2-3 weeks deeper into the cycle we won't know if they are accurate or not. The market appears to be pricing in some earnings disappointments along with the worry over Europe and the strong dollar.

Crude oil helped push the market lower in the morning after WTI crashed to a new five-year low at $44.20 before rebounding to $46.45 at the close. At one point WTI was trading for more than Brent crude, which is the standard for waterborne crude pricing around the world. At one point in 2014 Brent was priced at more than $15 than WTI.

Despite the decline in energy equities today I continue to believe this is a twice a decade buying opportunity. Eventually crude is going to find a bottom and when it does the resulting move higher in equities is going to be violent. However, the Q4 earnings are going to be ugly. Current estimates are for a decline of -23.4% for Q4 and another -35% decline in Q1. This means we might be able to buy some energy stocks cheaper in February after earnings. However, if WTI finds a bottom in the coming days we could see a sharp rally in energy stocks before earnings and the post earnings drop could be minimal.

Bottom callers are breaking out all over with calls for $44, $43, $40, $38, etc. Most analysts believe any number that starts with a 3 is going to be the last straw for global producers. The financial crisis low was $33. Nobody wants to be the first producer to blink but the pain is immense for those countries that depend on oil exports for 50% or more of their revenue. One analyst jokingly said he would not be surprised if Russia nuked Saudi Arabia's big oil terminal to cut supply by 7 mbpd and blame it on terrorists. We are at the pain level where somebody is going to do something drastic soon.



Gasoline prices have now declined for 109 consecutive days to $2.11 today. That is an all time record streak. As long as oil prices continue to decline we can expect gasoline to decline as well. However, we are getting to the ridiculous zone. I am not sure how much further gasoline can decline and still be profitable for everyone in the retail chain. Gasoline futures set a new low at $1.26 today. My wife paid $1.599 for unleaded in Denver today at a Loaf & Jug. That does not leave much room for the refiners and retailers for profits. We could be nearing rock bottom.



The bond market is still telling us there is trouble ahead. The yield on the ten-year fell to 1.876% intraday and only .01 point above the intraday low of 1.868% back in October. The odds are very good we are going to see a lower low as treasuries remain a flight to quality.

The yield on the 30-year declined to 2.469% intraday and that is only a couple of bips above the July 2012 low at 2.452%. Anything below that 2.452% level is a 60+ year low. Think about that. Mortgage rates are at multi-decade lows and money continues to pour into treasuries. This is a warning on the state of the global economy.



Markets

The volatility today was huge. Selling off from a +282 open to -142 at 2:PM makes a very ugly candle and another lower high, lower low. It is very bad for sentiment. You expect big swings on a capitulation event where the market might drop -282 points and then explode higher as the dip buyers overwhelm the shorts. You rarely see the reverse where a big gain is wiped out in a matter of minutes into a triple digit loss.

Volume was 7.8 billion shares and fairly high for a Tuesday even in an expiration week. Volume was 2:1 negative, which given the magnitude of the move I am surprised it was not worse.

I warned in the weekend commentary if forced to pick a direction I would be shorting the Nasdaq 100 (QQQ) because they were leading the market. On Monday the NDX posted the biggest loss. Today it traded in a 118 point range from the opening high at 4,252 to the intraday low at 4,134 but rebounded to close negative by only 3.77 points. That is extreme volatility.

After pondering the index and stock charts for a couple hours tonight I am neutral for tomorrow. The big move up and down cleared a lot of buy/sell stops and I am pretty sure investors are in shock tonight. The focus is going to be on the bank earnings with JPM and WFC reporting on Wednesday. Traders will also be looking at Europe for direction ahead of the January 22nd ECB decision.

On the S&P the 100-day average is back in play at 2,007 with the low today at 2,008. The psychological 2,000 level is also a target after the dip to 1,992 last week. Resistance is now solid at 2,060 after two tests only three days apart. That gives even a newbie chartist a clear level to short.


The Dow may have traded in a 400+ point range but it closed with a lower low. Support at 17,500 was immediately bought with only a 2 point penetration. That occurred about the same time oil was rebounding so that could have been a factor. In the table below Chevron was the biggest loser with Exxon in the number 7 spot with only a fractional loss that was $1 off its lows.

Since JP Morgan is a Dow component they will influence the Dow's performance when they report earnings on Wednesday. Whatever they report will also impact Goldman Sachs and they are also a Dow component.

There were six Dow components making new 52-week highs this morning. Those were WMT, PFE, MRK, DIS, CSCO and UNH. If those stocks were not being offset by declines in XOM, CVX and others the day might have turned out different.

The double failure at 17,915 over the last four days makes that level strong resistance. The 100-day at 17,298 will be the level to watch on any further declines. The 100-day has been support on the last two declines even though the Dow is not normally reactive to moving averages.



The Nasdaq Composite dipped to 4,624 intraday but managed to rebound back over prior support at 4,650. The 100-day average, now 4,593 has acted as support on the last two declines. That gives us about 67 points of maneuvering room before a critical support test. There are a lot of big caps in the losers list below but on the winners side Google, Netflix, Biogen and Amazon kept the index from closing too far in the red.

The 4,750 level has now been strong resistance on the last two spikes higher so that is the clear level to watch on any future gains.



The NYSE Composite index was far weaker than the other majors and is confirming the lower high from last week. If it confirms a lower low under 10,400 we are in serious trouble.


The Dow Transports just barely held above the 100-day at 8,700. Any move below the 8,659 low from last week is going to trigger increased selling. The Transports are not supporting the Dow and odds are good they are going significantly lower.


The Russell 2000 was the only major index to finish the day in positive territory at 1,180 and most of the gain came in the final 30 minutes of trading. It is not enough for me to take my eyes off the Nasdaq 100 as my directional indicator this week. However, if the Russell moved over 1,200 I would immediately switch. The Russell rallied to a dead stop at 1,200 this morning before dropping back to 1,168 intraday.


I am still bearish until proven wrong. I am sure there is another short squeeze in our immediate future but after the shorts were cleared out at the open today they may be less anxious about launching a new set of plays tomorrow. However, if the market starts off negative they will regain their confidence very quickly.

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New Plays

Content Is Supposed To Be King

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Discovery Communications - DISCA - close: 31.21 change: -0.43

Stop Loss: 32.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
We have heard for a long time that content is king. Discovery has some great content. So why is the stock suffering so poorly? The stock market posted double-digit gains last year and yet shares of DISCA was one of the market's worst performers with a -23.8% decline.

According to company marketing materials, "Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the world's #1 pay-TV programmer reaching nearly 3 billion cumulative subscribers in more than 220 countries and territories. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. Discovery also controls Eurosport International, a premier sports entertainment group, including six pay-TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks."

It looks like the revenue picture has soured for DISCA. Back in February 2014 the company reported earnings and raised their revenue guidance. One quarter later, when they reported in July, they lowered the top end of their guidance. Then in November, when they reported earnings, DISCA missed Wall Street's revenue estimate and management lowered their revenue guidance.

In a recent interview Discovery's CEO said they are having trouble monetizing all of their content. The advertising environment has gone soft and they haven't figured out why there is a lull in ad spending.

Research is forecasting that online video watching will more than double by 2020. A USB analyst believes online will eventually pose a significant threat to more traditional TV watching trends and companies. Another analyst, this time with Sanford Bernstein, believes the huge declines in TV viewership will continue. Analyst Todd Juenger said, "We believe ad-supported TV is in the early stages of a structural decline." That's long-term bearish for TV. DISCA needs to do a better job of monetizing their content online.

Technically DISCA looks very bearish. The oversold bounce from November stalled in the $36 area several time. The point & figure chart is bearish and forecasting at $23.00 price target. Today DISCA is breaking down to new 52-week lows.

We are suggesting a trigger to open bearish positions at $30.90. Plan on exiting ahead of DISCA's earnings report in mid February.

Trigger @ $30.90

- Suggested Positions -

Short DISCA stock @ (trigger)

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

Buy the FEB $30 PUT (DISCA150220P30) current ask $0.90

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

ASPS Collapses On OCN's Trouble

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered a turbulent Tuesday as early gains faded and stocks hit new relative lows before paring their losses.

ASPS was a big winner for the bears today.

TREE hit our stop loss. SGEN has been removed.


Current Portfolio:


BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 27.31 change: -1.30

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: -2.6%
Entry on January 05 at $28.05
Listed on January 03, 2015
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: see below

Comments:
01/13/15: After holding up well the last couple of sessions shares of CVTI finally succumbed to the market's volatility today. The stock dipped to $26.56 intraday before closing with a -4.5% decline.

I am not suggesting new positions at this time. If CVIT doesn't bounce the up trend could be in jeopardy.

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: 34.47 change: -0.43

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: + 4.3%
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:
01/13/15: SFM is still looking good. The stock gave up about half of yesterday's gains. I am not suggesting new positions at this time.

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


TASER Intl. - TASR - close: 25.72 change: -0.12

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: - 2.9%
Entry on January 08 at $26.50
Listed on January 07, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: see below

Comments:
01/13/15: TASR held up reasonably well during today's market roller coaster. It does make me nervous seeing all of this weakness with TASR sitting on support on the bottom of its bullish channel. Yesterday I was suggesting a rally past $26.75 as a new entry point. Tonight I am suggesting investors wait for a rally past today's intraday high of $26.84.

Earlier Comments: January 7, 2015:
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.

- Suggested Positions -

Long TASR stock @ $26.50

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

Long MAR $27 CALL (TASR150320C27) entry $2.50

01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Altisource Portfolio Solutions - ASPS - close: 16.49 change: -10.45

Stop Loss: 19.25
Target(s): To Be Determined
Current Option Gain/Loss: +37.7%
Entry on January 13 at $26.45
Listed on January 12, 2015
Time Frame: exit prior to earnings in mid February
Average Daily Volume = 473 thousand
New Positions: see below

Comments:
01/13/15: It was a great day to be bearish on ASPS. It's not everyday that you see your bearish candidate sink -38.7% in a single session.

Our plan was to open bearish positions at $26.45. ASPS opened at $26.50 and sank to $26.26 in the first minute. The sell-off quickly accelerated.

Why did ASPS fall nearly 40% in one day? This was a reaction to news from ASPS' parent company Ocwen Financial (OCN). ASPS was spun off from OCN back in 2009. Yet the two have had a close relationship as William Erbey is the Executive Chairman at OCN and for a while was Chairman of the board at ASPS. When news hit this morning that California regulators might suspend OCN's mortgage license, investors probably feared that all of the companies associated with OCN might be targeted for investigation too. The California region is OCN's biggest source of revenue. Losing their license could be a death sentence. ASPS announced this afternoon that they will hold a conference call this Friday (11:00 a.m. ET) to discuss the issue.

So what do we do now with ASPS off more than $10 in one day? What are the odds of an oversold bounce tomorrow? OCN is already trading up +6% after hours after announcing they are cooperating with regulators. Meanwhile shares of ASPS appear to be trading around $17.15 after hours.

You may want to just thank your lucky stars for today's drop and immediately exit to lock in potential gains. However, I heard some trader on TV talking about adding to their bearish OCN position after today's decline. They clearly think there is more weakness ahead. The Premier Investors newsletter is lowering the stop loss down to $19.25. You have to decide if that stop is too wide or too tight for you.

Earlier Comments: January 12, 2015:
ASPS is part of the services sector. They provide a host of services to the mortgage, real estate, and financial industries; including collections, payments and servicing non-performing residential mortgage loans. According to a company press release, "Altisource Portfolio Solutions S.A. is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. Altisource leverages proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants."

The stock saw tremendous rise from its beginning back in 2009 near $6.00 a share. By December 2013 ASPS was trading above $170.00. That proved to be a peak. It's been a long and painful decline. ASPS is associated with Ocwen Financial (OCN). It looks like ASPS was spun off from OCN years ago. They are both financial services companies. Both are probably affected by government investigations. OCN was hit with an investigation by the U.S. Consumer Financial Protection Bureau (CFPB) and was handed a $2.1 billion fine from the government. Meanwhile ASPS has been dealing with an investigation from regulators in New York. At the same time earnings for ASPS have been volatile. After big beats earlier in 2014 their most recent earnings report, on October 23rd, was a big miss. Analysts have started downgrading the stock.

Investors are bearish too. The most recent data listed short interest at 23% of the very small 10.6 million share float. With that much short interest it does raise the risk of a short squeeze.

Technically ASPS looks terrible. The recent sideways consolidation has failed and ASPS just broke down to new multi-year lows. Tonight we're suggesting a trigger to open bearish positions at $26.45.

- Suggested Positions -

Short ASPS stock @ $26.45

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

Long FEB $25 PUT (ASPS150220P25) entry $3.80

01/13/15 new stop @ 19.25
01/13/15 triggered @ 26.45
Option Format: symbol-year-month-day-call-strike


SodaStream Intl. - SODA - close: 18.78 change: -0.26

Stop Loss: 20.25
Target(s): To Be Determined
Current Option Gain/Loss: + 3.3%
Entry on January 05 at $19.42
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

Comments:
01/13/15: SODA's attempt at a bounce this morning failed under its descending 10-dma. That's good news for the bears. The stock closed at another record low. I am not suggesting new positions at this time.

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

01/08/15 new stop @ 20.25
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: 21.22 change: -0.34

Stop Loss: 23.55
Target(s): To Be Determined
Current Option Gain/Loss: +18.1%
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:
01/13/15: ZU also saw its rally attempt fail under its simple 10-dma this morning. That's another victory for the bears. 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

01/08/15 new stop @ 23.55
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

Tree.com, Inc. - TREE - close: 45.30 change: -3.17

Stop Loss: 47.45
Target(s): To Be Determined
Current Option Gain/Loss: -5.3%
Entry on January 13 at $50.10
Listed on January 08, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 147 thousand
New Positions: see below

Comments:
01/13/15: This morning TREE pre-announced strong Q4 results and guided above Wall Street estimates for 2015. It was bullish news and the combination of the market's rally first thing this morning pushed TREE to a new high and above resistance at $50.00. Our trigger to open bullish positions was hit at $50.10.

Then the market collapsed and TREE followed it lower. Shares plunged from $50 all the way down to technical support at the 50-dma near $45.00. Our stop was hit at $47.45.

I cautioned readers that this was a more aggressive trade and suggested smaller positions to limit risk.

*small positions*

- Suggested Positions -

TREE stock @ $50.10 exit $47.45 (-5.3%)

01/13/15 reversed as the market dropped and hit our stop at $47.45
01/13/15 hit our entry trigger at $50.10
01/13/15 pre-announced strong Q4 results and 2015 guidance above estimates
01/12/15 After the closing bell TREE updated its revenue guidance.

chart:


CLOSED BEARISH PLAYS

Seattle Genetics - SGEN - close: 31.61 change: -0.42

Stop Loss: 32.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 10, 2015
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
01/13/15: We are throwing in the towel early on SGEN. Shares are not cooperating.

Trade did not open.

01/13/15 removed from the newsletter, suggested entry was $29.85

chart: