Option Investor
Newsletter

Daily Newsletter, Thursday, 1/15/2015

Table of Contents

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

Market Wrap

Volatility Across The Board

by Thomas Hughes

Click here to email Thomas Hughes
Volatility abounded today as data, earnings and a surprise central bank move sent assets of all classes moving.

Introduction

The top item of interest this morning was a surprise move from the Swiss National Bank. The bank decided to end its ceiling for the Swiss Franc versus the Euro and caused a massive shift in valuations across many currencies. The EUR/CHF fell more than 18% on the news and sent the euro crashing versus the dollar.

Asian indices were closed long before the announcement from Switzerland and were the only ones not to feel some sting from the move. Markets in this region closed 3% higher on average following an interest rate cut from the central bank of India and supported by an early rebound in oil. European stocks were also up in early trading, lifted by the oil price. They suffered a quick dip into negative territory when the Swiss news hit the wires but quickly rebounded to close near the highs of the day. All except the Swiss stocks, the Swiss SMI Index fell nearly 9%.

Market Statistics

The Swiss bank had an effect on early futures trading here at home but it was negligible and the indications remained positive. Today's economic data caused a wobble in values that eventually stabilized to the upside and this held into the opening bell. The S&P 500 was indicated to open about 5 points higher and that held true although it and the other indices turned negative within minutes of the open. It may be a coincidence but oil, which had been trading at a the high of the day around 9AM, retreated to break even and turned negative in tandem with the opening bell.

The first hour of trading was fairly active. The indices dipped nearly a full percent from the initial high and then rallied back to break even. The bulls were able to push the markets back into the green for a few minutes but were quickly repelled. Afterward they drifted back to the lows of the day and then lower to settle at levels that for many of the indices are consistent with long term support.

Economic Calendar

The Economy

There was a fair amount of economic data to wade through today. First up was the Empire State Manufacturing Survey, one of the first reads of 2015 data. The survey rose by 11 points to 10, moving into positive expansionary territory after last month's dip. The gains are due mostly to growth in New Orders and Shipments and offset by mixed readings on Labor. The number of employees component continues to show growth but the hours worked remains in negative territory. Input and output costs both rose slightly signaling some, but low, levels of inflation. The forward looking expected conditions index also rose, by 10, to the highest level all year and shows widespread optimism for the future 6 month period.


The Producer Price Index fell by -0.3% in December. This is slightly better than the -0.5% expected by the market and on top of an unrevised -0.2% in the previous month. The core PPI rose by 0.3% and is more in line with general conditions. The decline in headline numbers is due primarily to energy, down -6.6%, led by gasoline, down -14.5%. I think this to be a mixed reading but shows some underlying inflationary pressure in the general economy. On a year-over-year basis PPI is up 1.1%.

Jobless claims rose unexpectedly, most likely due to post holiday staff re-alignment. Initial claims rose by 19,000 from an upwardly revised figure for a net gain of 22,000 from last week. This above expectations for 295,000 and above 300,000 but as yet not disturbing. The four week moving average is still below 300,000 which makes claims appear to be stabilizing around that level. On a not adjusted basis claims jumped by 23.2% versus the 15.6% projected by the seasonal factors. This number may climb in the next week or two as we move through the end of year data.


Continuing claims fell by 51,000 to 2.42 million and are hovering just above the moving average. Continuing claims lag initial claims by a week so will likely show an increase in the next week or two as well. This week's reading is in still in line with recent trends and at levels supportive of labor improvements. The total number of claims for unemployment spiked in this weeks report, for the week ending 12/26. This is the data for Christmas week so this number could reflect people who didn't go out looking for work because of the holiday, as well as seasonal lay offs and other factors. While alarming it's just one week of data and could quickly recede if all the other labor trends remain constant. Regardless the spike, total claims is trending roughly 25% below last years levels.


The Oil Index

Oil was among the most volatile of today's trades. There was an early rebound that lifted prices more than 3% in the pre-market session that reversed mid-morning to sink prices by more than -4%. WTI was the most volatile but Brent and Natural Gas were not immune, both fell by at least -2% during today's session. A possible cause was today's and this week's economic data which has not been that great. The data shows there was likely a slump in output in December which led some speculation of weakening demand growth.

The Oil Index gapped up at the open, on the early strength in oil, then fell throughout the day. The index lost about a half percent by the close and was not one of today's biggest decliners. The index is now trading just above support targets with bearish indicators. Both MACD and stochastic are convergent with potential support but neither has confirmed as yet.

I redrew my XOI charts today, they were getting kind of messy, and came up with some interesting things. I now have a Fibonacci Retracement of the 2009-20012 bull market with two trend lines. The first is based on the 2009 start and 2010 confirmation of uptrend while the second is is the nearer term down trend line which began in September. The near term trend is still down and the index is being forced against potential support by the down-trend-line at an important Fibonacci level. And at a place intersecting the new up trend line which poses an interesting technical question. Which trend line will be stronger?


The Gold Index

Gold prices surged today. The metal climbed more than 2% in today's session driven by the Swiss central bank. The shift in policy sparked a flight to safety trade that had once been directed at the Franc. The banks decision not to support this trade any longer was probably a good move for them but caught a lot of currency speculators off guard. It also helped gold to break above $1250 and $1260. Gold is now trading at a four month high and 10% off the lows set last fall. At these levels it is beginning to look extended, and with more central bank activity on the calendar for the next week, could easily pull back.

The Gold Miners ETF GDX continued its break above resistance after pulling back in yesterdays session. Resistance at $20.50 is now becoming support but may be tested again. The indicators are bullish and on the rise after yesterday's dip but not overly strong and could indicate more consolidation, retesting support or even lead to whipsaw action. I'm more and more bullish on the miners each week but am still very cautious in the near term. Things may look different in the gold sector next week after the ECB and BOJ have their say. Speculation in the news suggests that the Swiss move is foreshadowing QE moves the ECB will enact next week, moves that were just deemed legal by EU courts.


In The News, Story Stocks and Earnings

The bankers were in the news and in general it is not great. As a group the big bankers have disappointed on the top and bottom lines driven by legal charges, lower revenues and other factors. Each of the big names reporting so far, Wells Fargo, JP Morgan, Citigroup and Bank of America are on the list. Needless to say the sector is getting slammed. The Banking Index fell 1.79% in today's session on increasingly bearish momentum. The index is approaching a three month low near $65 and the bottom of the 12 month range.


Target announced that it was exiting Canada, finally. The company has been struggling in the country for years and is estimated to have lost more than $5 billion on the move. The news was largely expected but otherwise well received by the market. The stock mad a small gap at the open to trade just below the all time highs set last week.


Intel reported earnings after the bell and beat expectations. The chip maker reported $0.74 per share versus the $0.64 expected by the street. Revenue beat although sales of PC chips was flat near $8.9 billion. Sales of data chips rose to $4.1 billion driving revenues and helping margins which have improved. The company guided a range in line with expectations but did not inspire confidence sending the stock down in after hours trading.


Schlumberger also reported after the bell. The oil services and information technology company reported adjusted earnings of $1.51, slightly ahead of expectations, on revenue that was in line with projections. Business was driven by North America which saw an increase of 17%. The company also reported that it is making moves to deal with the low oil environment which include job cuts and other restructuring. The stock fell in after hours trading and was trading at a 1 ½ year low.


The Indices

We got another wild ride today. The indices moved in a +1% range after opening in the green only to close in negative territory. Market action was not orderly, today's movement was a back and forth fight between the bulls and bears that have the indices down at long term support levels. Today's move was led by the techs but not limited to them.

The NASDAQ Composite fell by 1.48% today, dropping down to rest on the long term trend line. Today's action is accompanied by bearish indicators which point to a testing of the trend line but the longer term analysis is still in line with support at this level. A break below the trend line could lead to further selling with next targets at 4,500 and 4,000.


The S&P 500 was another big lose in today's session. The broad market fell 0.92% and is also now resting on its long term trend line. The index has been pressured lower by lackluster earnings and economic data but has yet to break the trend line. The indicators are bearish in the near term but continue to remain consistent with support along these levels in the short to long term. There could be further testing of support with a possible move down to 1970.This would pierce the trend line but is above the December low so not a threat yet. A move below 1970 may signify a deeper correction down to 1900 or lower and set up for potential reversal. However, unless outlook begins to deteriorate the long term trend will likely provide another buying opportunity.


The Dow Jones Industrial Average fell only 0.61% compared to the NASDAQ's 1.48% decline. The blue chips closed near the low of the day but off of the low set yesterday, a low that may indicate support levels. Yesterday's candle has a long lower wick which, along with MACD peak analysis and a support line drawn to the January 6th low reveal a potential support level consistent with the September highs around 17,250 set last fall. It definitely looks like the index is moving lower, into that support level, but it also looks like there is plenty of support there. A below 17,250 won't start to get serious until it break 17,050 at which point it may extend the retreat to 16,750.


The Dow Jones Transportation Average suffered the least decline. The transpots fell only 0.39% in today's session and are trading just above support. Support is consistent with the all-time high set in July, the break-out in October and the test of support in December so appears to have some strength. The indicators are bearish in the near term but like the other indices, remain consistent with longer term support. There is no indication of major reversal at this time so this pullback appears to be that, a pullback and another chance to buy on a dip.


The markets are struggling with some near term fears but the long term trends remain up. Fear born on plunging oil prices have been compounded by weak earnings and magnified by the Swiss central bank. These fears need to be taken into perspective. Low oil is good for the economy in general. Weak earnings happen sometimes, it is just the first week of the season and not all companies are disappointing. The Swiss central bank move was a surprise, it probably cost some people a lot of money but represents only a small shift in underlying fundamentals. For us here in the US long term economic trends remain positive and on the rise with no indication of letting up.

Expect more of the same volatility tomorrow because the mix of earnings and data continues. Earnings season rolls on with more reports from the banking sector including Goldman Sachs, First Citizens and Suntrust. On the economic front look out for CPI, TIC flows, Michigan Sentiment and industrial production. Rear looking December data in the form of CPI and Industrial Production is expected to show declines while the more current January Michigan Sentiment is expect to rise. Looking out to next week there is no let up to the data or the earnings. Earnings seasons gets into full swing and there are a number of market moving economic reports along with two major central bank meetings.

Until then, remember the trend!

Thomas Hughes


New Plays

Consistently Guiding Lower

by James Brown

Click here to email James Brown


NEW BEARISH Plays

SINA Corp. - SINA - close: 35.16 change: -0.57

Stop Loss: 36.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 15, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
China has the largest Internet audience on the planet. More than 641 million of their 1.357 billion people are online. In spite of these massive numbers Chinese Internet company SINA is having trouble making money.

SINA is part of the technology sector. They run a digital media network through SINA.com (their "portal") in addition to SINA mobile. They also control a majority stake in the Twitter-like microblog service Weibo.

Unfortunately for SINA shareholders the stock has collapsed. It's a long way from the all-time highs near $147 a share back in 2011. It's 2014 high was about $90. SINA was one of the market's worst performers last year with a -55% decline. That's likely because earnings have been so challenging. The last three earnings reports in a row have seen SINA guide lower. Revenues are falling and analysts are worried about margins.

The bearish trend of lower highs has pushed SINA toward key support near $35.00. A breakdown here could spark the next big leg lower. It is worth noting that Chinese Internet stocks can be volatile. I would consider this a more aggressive, higher-risk trade.

Tonight we are suggesting a trigger for bearish positions at $34.70 with an initial stop loss at $36.55, above the 10-dma.

Trigger @ $34.70

- Suggested Positions -

Short SINA stock @ (trigger)

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

Buy the MAR $35 PUT (SINA150320P35) current ask $2.29

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Update Your Stop Losses

by James Brown

Click here to email James Brown

Editor's Note:
The market volatility continues. It's time to update our stop losses.

Exit the ZU January PUT option tomorrow morning.

LGF hit our entry point. ASPS hit our stop.

We want to exit our TASR play tomorrow morning as well.


Current Portfolio:


BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 27.25 change: -0.43

Stop Loss: 26.45
Target(s): To Be Determined
Current Option Gain/Loss: -2.9%
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:
01/15/15: Another down day for the market pushed CVTI to a -1.5% decline. We are starting to worry about the stock's bullish trend. Tonight we'll try and reduce our risk by raising the stop loss to $26.45. I am not suggesting 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

01/15/15 new stop @ 26.45
01/05/15 triggered @ 28.05


Sprouts Farmers Market - SFM - close: 33.94 change: -0.45

Stop Loss: 33.45
Target(s): To Be Determined
Current Option Gain/Loss: + 2.7%
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:
01/15/15: Uh-oh! Yesterday's bounce in SFM has reversed. Shares created a bearish engulfing candlestick pattern today and closed below short-term support near $34.00 and its simple 10-dma. This is potentially bearish. We will move the stop loss up to $33.45. I am not suggesting new 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

01/15/15 new stop @ 33.45
12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike


TASER Intl. - TASR - close: 25.23 change: -0.68

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: -4.8%
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:
01/15/15: Market weakness is overpowering the potential growth story in TASR. Shares saw their attempt at a rally reverse and TASR underperformed with a -2.6% decline. More importantly shares appear to be breaking down from its bullish channel (see chart).

Tonight we are suggesting an immediate exit at the opening bell tomorrow.

- Suggested Positions -

Long TASR stock @ $26.50

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

Long MAR $27 CALL (TASR150320C27) entry $2.50

01/15/15 prepare to exit tomorrow morning
01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

Discovery Communications - DISCA - close: 29.47 change: -0.53

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +3.6%
Entry on January 14 at $30.57
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: see below

Comments:
01/15/15: DISCA continues to underperform the broader market and lost another -1.76% today. We are moving our stop loss down to $30.85. I am not suggesting new positions at this time.

Earlier Comments: January 13, 2015:
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.

- Suggested Positions -

Short DISCA stock @ $30.57

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

Long FEB $30 PUT (DISCA150220P30) entry $1.20

01/15/15 new stop @ 30.85
01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike


Lions Gate Entertainment - LGF - close: 28.99 change: -0.38

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings in early February
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
01/15/15: Our new trade on LGF is open. Shares broke support at $29.00 and hit our entry trigger at $28.85. The stock was bouncing higher into the closing bell. Traders may want to hesitate on launching new positions although nimble traders could use a new lower high below $30.00 as an entry point.

Earlier Comments: January 14, 2015:
Everyone loves the movies. While 2014 had some pretty big hits total box office receipts for the industry were $10.3 billion. That's a -5% drop from the 2013. "The Hunger Games: Mockingjay - Part 1" was one of the most successful films last year with a gross of $309 million.

LGF is the studio that makes the Hunger Games movies. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, channel platforms and international distribution and sales. The Company currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses."

In addition to The Hunger Games, LGF also makes the new Divergent films, which could be a big hit although probably not as big as Games. The company has also seen success in television with hits like Mad Men, Nurse Jackie, and Orange is the New Black. However, the stock tend to trade around its movie releases. That could prove challenging.

The last Hunger Games move is now last year's news. Shares of LGF could lack any serious catalyst to move the stock until the next round of movies come out. The next Divergent movie ("Insurgent") is expected to come out in March this year. Meanwhile the Mockingjay - Part 2 doesn't hit theaters until November 2015. If the stock's action is any indication then Wall Street is not very enthusiastic over the next Divergent movie.

Shares failed multiple times in the $35.50 area from mid November through December 1st. This is now a new lower high on the weekly chart (see below). While the broader market rallied in December, shares of LGF were under performing. That underperformance has continued into 2015.

Investors have taken notice of LGF's weakness. The most recent data listed short interest at 18% of the 84 million share float. The point & figure chart has turned bearish and is currently forecasting at $24 target but that could get worse.

Today LGF is about to test support at $29.00. A breakdown there could be our entry point. Tonight we're suggesting a trigger at $28.85.

- Suggested Positions -

Short LGF stock @ $28.85

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

Long FEB $30 PUT (LGF150220P30) entry $2.10

01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike


SodaStream Intl. - SODA - close: 18.06 change: -0.57

Stop Loss: 18.85
Target(s): To Be Determined
Current Option Gain/Loss: + 7.0%
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:
01/15/15: The sell-off in shares of SODA started to pick up speed today with a -3.0% decline. We are going to try and protect our potential gains with a new stop loss at $18.85. More aggressive traders will want to consider keeping their stop loss above short-term technical resistance at the simple 10-dma instead (currently at $19.05). 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

01/15/15 new stop @ 18.85
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: 20.37 change: -1.01

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +21.4%
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:
01/15/15: ZU tagged short-term technical resistance at its 10-dma and collapsed again. The stock closed at a new low after a -4.7% decline.

We are going to try and protect our potential gains with a new stop loss at $21.65. More aggressive traders will want to consider keeping their stop loss above short-term technical resistance at the simple 10-dma instead (currently at $21.72).

ATTENTION: If you are holding the January $25 PUT option listed below, we have to exit the put option tomorrow. I am suggesting an exit at the opening bell.

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

01/15/15 new stop @ 21.65
Prepare to exit the January put option tomorrow morning
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 BEARISH PLAYS

Altisource Portfolio Solutions - ASPS - close: 18.37 change: +0.31

Stop Loss: 19.25
Target(s): To Be Determined
Current Option Gain/Loss: +27.2%
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:
01/15/15: The oversold bounce in ASPS continued on Thursday and shares hit our stop loss at $19.25. The stock rallied +12% intraday and hit $20.25 before paring its gains to settle with a +1.7% rise.

ASPS is the best trade of 2015 so far. Option traders saw significant opportunity.

FYI: Don't forget if you happen to still be in ASPS or you're watching it, the company has a conference call tomorrow (about 11:00 a.m. ET) to discuss the situation with OCN.

- Suggested Positions -

Short ASPS stock @ $26.45 exit $19.25 (+27.2%)

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

FEB $25 PUT (ASPS150220P25) entry $3.80 exit $7.80 (+105.3%)

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

chart: