Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/20/2015

Table of Contents

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

Market Wrap

Oil, Earnings And Central Banks

by Thomas Hughes

Click here to email Thomas Hughes
A full slate of earnings reports, economic data and central bank meetings have the bulls and bears jockeying for position.

Introduction

Today's market action was another roller coaster ride that had the indices testing support once again. A long list of earnings reports, two major central bank meetings and economic data, mostly scheduled for later this week, have bulls ducking for cover and bears seeking shelter.

Asian markets began the trading day with a rally that initially carried over into the European markets. Chinese GDP was the reason, holding steady from the previous quarter and slightly above expectations. European indices were largely higher on this news as well as expectations for tomorrow's ECB meeting but the gains did not hold leaving many flat for the day. The positive sentiment had an effect on early trading here at home with futures indicating an opening 6-8 points above last weeks close.

The big headline impacting early trading was a downgrade of 2015 GDP expectation from the IMF. The new projection is for global growth of only 3.5%, compared to 3.8% in the previous report. They also downgraded 2016 GDP by an equal 0.3% to 3.7%. The report went on to say that there are significant growth factors in play such as low oil prices but these are being offset by “persistent negative forces”.

Market Statistics

The bulls were able to keep futures positive up to and after the opening bell but were not able to sustain a rally. The SPX opened with a gain of 1 or 2 points and moved another 4 or 5 points higher before selling in the energy and financial sectors dragged it lower. By 10Am the SPX was down by 8 points and proceeded to trade in negative territory for most of the day. After lunch the markets began to move higher, off of the lows, but did not move into the green until just after 2:30. From that point on market action remained in the green until the close of trading.

Economic Calendar

The Economy

Only one economic release today, the National Association of Home Builders Housing Market Index. The index, a gauge of builder sentiment, dropped by one point from an upward revision of one point. The January reading of 57 is one point below expectations but remains near an 8 year high. Other housing data due to be released throughout week includes housing starts, building permits and existing home sales.


Mark Zandi reports that Moody's Survey of Business confidence remains near record highs. The index rose by a tenth of a percent to 38.3 after ending last year at a record high. According to the summary sentiment in the US remains near record highs while business spending, hiring and sales are all strong. Improvement in the credit market also remains and expectations for the current year are strong.

Aside from weekly jobless claims the only other major report this week is the Index of Leading Indicators released on Friday. Jobless claims are expected to decline and the Leading Indicators are expected to show a gain of 0.4%.

The Oil Index

Oil got hit hard again although it did not set a new low. WTI lost as much as 4% in today's trading following the IMF's global GDP down grade followed by a similar drop in Brent. The downgrade, along with signs that production levels remains strong, is not good for oil bulls who need to see supply/demand stability. As of yet there is still no sign that demand is matching supply in a way to support prices that. < p> The Oil Index fell in today's session but not hard. The index dropped about 2%, compared to 4% for the underlying commodity, but regained most of the loss. Today's action was another test of support for the oil sector as short term and long term trends collide. The index is wedged between a down trend line (short term) and an up trend line (long term) with indicators in line with longer term support. The question is, which line will hold? Oil prices are low and very likely heading lower which is having an effect on earnings outlook and driving the index lower but at the same time low oil prices are good for the economy and by extension oil demand rising oil prices. The indicators are in line with support at this level and rolling into a trend following signal. However, a break above the down trend line near 1280-1300 is required. A drop below the up trend line could take the index as much as 100 points lower.


The Gold Index

Gold moved higher again today, adding another 1.5% or so to last week's prices. Gold is now trading around $1290 supported by long term economic outlook and flight out of currency. The metal is receiving the benefit of recent turmoil in forex trading centered on the Swiss National Bank de-pegging move last week. Momentum is to the upside and could carry prices higher with $1300 the next target for resistance. Regardless of direction I expect to see more volatility in gold and currency once the ECB and BOJ release their policy statements later this week.

The Gold Miners ETF GDX extended its break above resistance. Today the ETF moved over 2.5% higher after creating a small gap at the open. The ETF is moving higher, driven by rising gold prices, with indicators in line with higher prices. At current levels gold is more than 10% off of the lows set last year and in position to boost earnings expectations and outlook among the miners.

According to MACD bullish momentum is strong and on the rise, confirmed by a bullish crossover on the stochastic, and pointing to higher prices. The stochastic crossover is providing an additional sign of strength by forming above the upper signal line. Assuming that the ETF has indeed bottomed price action is confirming the reversal and the indicators are now confirming price action. This move has a target near $26.75, previous resistance and an important retracement level.


In The News, Story Stocks and Earnings

Earnings season is not off to a great start. We came into the season with the energy sector dragging expectations down and now weak reporting from the banking sector has them down even further. According to FactSet the average growth expected for the S&P 500 is now just 0.6%. This is the lowest expectation for over 2 years and down from last week's 1.7%. If trends hold true, and so far it looks like they will, most companies will beat the average estimate. As of last Friday 37 companies have reported and 84% of them reported above the estimate.

Johnson&Johnson reported before the bell, meeting expectations but failing to inspire a rally. The company reported earnings that were basically in line with projections with light revenue and full year guidance slightly above consensus. While in line with estimates the results are significantly down from last year and could be impacted in future quarters by negative currency conversions, this quarter alone saw negative impacts over 7%. Today the stock fell sharply at the open and is now trading near potential support.


Multiple names reported after the bell, all moving their respective stock. Netflix was the first to report and sent its shares skyrocketing more than 10%. The streaming media provider reported earnings of $0.72 versus the consensus estimate of $0.45 and a strong increase in new users. The one negative is that revenue came in a little light so the amount of further improvement remains questionable. The stock had been trading higher today and with after hours action is now near resistance at $395.


IBM also beat earnings expectations but did not spark a rally in its shares. Big Blue reported EPS of $5.81, $0.40 above estimates, but revenue was light and 2015 guidance is low. Shares initially surged on the report but eventually fell on weak expectations and nearly 3 years of continuously declining revenue. At last look shares were down about 2% and trading near the long term low.


Cree, maker of semi-conductors, intensly bright LED lights and other electronics reported a strong quarter with results in line with expectations. Earnings are down on a year over year basis but execs say that demand is strong, especially in the lighting business, and guided full year earnings in a range above the current consensus. Today's announcement sent the stock up by 10% in after hours trading.


The Indices

Market action was a little volatile today but only a little. One cause was oil. WTI plunged by 4%, but down to test current lows, not new ones, so the market did not react quite the same way it has in the past. Today's action was a slow and measured dip to support that found enough buyers to support prices. The Dow Jones Transportation led today's action with a gain of 0.96% by the close of trading. The transports never really dipped into the red like the other indices and are now trading just below the short term moving average. The index is moving higher from the bottom of a 2 ½ month range with indicators in line with the move; stochastic is forming a weak bullish crossover and momentum is shifting to the upside. Potential resistance exists at the moving average, near 8,850, but my current target is 9,250 and the upper boundary of the trading range. The longer term trend is up with no sign of reversing at this time but the index could remain range bound in the near to short term while earnings season plays out.


The NASDAQ Composite was able to squeak out a gain of nearly a half percent. The tech heavy index closed 0.44% higher after a strong open and test of support had it down by a half percent. Today's action created a doji and one that may be more important than the average. This one occurred along the long term trend line and as a test of support coincident with earnings season and important central bank meetings. As an individual indication of market direction it is not very strong but along with other factors serves to highlight support along the long term trend line. The trend is up and for now the index appears to be making another bounce along it. The indicators, while bearish at this time, remain consistent with support in the 4,500-4,600 range.


The S&P 500 closed with a gain of 0.15% after dipping nearly a half percent during the day. Today's action was similar to that of the NASDAQ and created a small bodied candle after testing support. Support is the combination of the long term trend line and the September all time high. The indicators are also consistent with long term support and rolling over into a possible trend following entry. First target for resistance is the short term moving average near 2035 with next target near 2050. Support, in the range of 2010-2020, could be tested again while earnings are coming out. A move lower will not be critical until below 2,000 and could take the index down as much as 50 to 100 points.


The Dow Jones Industrial Average brings up the rear today, barely closing with any gains at all, only 0.02%. The Dow, out of all the indices, had the most trouble getting above back above break even today and created a doji in the process. Price action is confirming support below 17,500 with indicators that consistent with support. If support continues to hold possible upside targets exist near the current all time high around 18,000. If not a move below support could take the index down as much as 1,000 points to my next targets near 16,500.


The indices appear to be consolidating along their long term trend lines and support areas. They are at a position on the charts where they could easily go one way or the other; bounce higher in line with trends or break support and move lower. While there are plenty of reasons to fear a broad market decline I don't think one is coming. The market is digesting earnings, getting a read on economics and waiting for a round of central bank meetings to come and pass. So far earnings are ugly, but not bad, and economic trends remain intact. The central banks are the real question now but how much long term effect can the ECB and BOJ have on the US stock market?

What is more important and could keep the market from moving too far in either direction are events next week. The FOMC has their meeting on Wednesday and we get the first read on 4th quarter 2015 GDP.

Until then, remember the trend!

Thomas Hughes


New Plays

Breaking Major Support

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Tribune Media Co. - TRCO - close: 54.55 change: -1.29

Stop Loss: 56.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 20, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 501 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Traditional television is dead. That's been the story for a long time with falling viewership in traditional television for several years. Yet that didn't stop a big rally in shares of TV companies like CBS and TRCO in 2013.

According to the company's marketing material, "Tribune Media Company (TRCO) is home to a diverse portfolio of television and digital properties driven by quality news, entertainment and sports programming. Tribune Media is comprised of Tribune Broadcasting's 42 owned or operated local television stations reaching over 50 million households, national entertainment network WGN America, available in approximately 71 million households, Tribune Studios, and Tribune Digital Ventures, including Gracenote, one of the world's leading sources of TV and music metadata powering electronic program guides in televisions, automobiles and mobile devices. Tribune Media also includes Chicago's WGN-AM, the national multicast networks Antenna TV and THIS TV. Additionally, the Company owns and manages a significant number of real estate properties across the U.S. and holds other strategic investments in media."

Last year was a rough one for TRCO. The stock peaked about $90 in July. It's now down about -40% from that high. We could argue that it's all about the TV advertising market. The Wall Street Journal ran an article in November last year suggesting that the entire industry is seeing a structural slowdown as more and more ad spending moves to digital outlets. Yet the last couple of earnings reports from TRCO came in significantly above expectations. Revenues are growing year over year. So is TRCO an exception or were the revenue comparisons to a year ago just really, really bad?

If price is truth then investors are bearish on TRCO. The stock's big oversold bounce in October last year turned into a bearish double top near $70.00. More recently shares have been sinking with a steady trend of lower highs. Today the point & figure chart is bearish and forecasting at $42 target.

Shares of TRCO were showing relative weakness again today with a -2.3% drop and a breakdown under support at $55.00. The intraday low was $54.23. Tonight I'm suggesting a trigger to open bearish positions at $53.95.

Trigger @ $53.95

- Suggested Positions -

Short TRCO stock @ $53.95

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Indecisive Ahead of ECB

by James Brown

Click here to email James Brown

Editor's Note:
The market could not decide what direction it wanted to move on Monday. Stocks traded up. Stocks traded down. The S&P 500 eventually closed with a minor gain.

The focus this week will be the ECB meeting on Thursday and if ECB President Draghi announces any QE program.

CVTI hit our stop loss. SINA has been removed.


Current Portfolio:


BULLISH Play Updates

ACADIA Pharmaceuticals - ACAD - close: 33.11 change: +0.43

Stop Loss: 31.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Entry on January 20 at $33.10
Listed on January 17, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.24 million
New Positions: see below

Comments:
01/20/15: Our brand new play on ACAD is now open. Traders bought the dip this morning at its rising 40-dma. When ACAD rebounded shares rallied to a +1.3% gain. Our trigger to launch positions was hit at $33.10.

Earlier Comments: January 17, 2015:
The biotech industry was a big outperformer last year. That outperformance looks like it could continue into 2015.

According to a company press release, "ACADIA is a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in neurological and related central nervous system disorders. ACADIA has a pipeline of product candidates led by NUPLAZID (pimavanserin), for which we have reported positive Phase III trial results in Parkinson's disease psychosis and which has the potential to be the first drug approved in the United States for this disorder. Pimavanserin is also in Phase II development for Alzheimer's disease psychosis and has successfully completed a Phase II trial in schizophrenia. ACADIA also has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. and two preclinical programs directed at Parkinson's disease and other neurological disorders. All product candidates are small molecules that emanate from internal discoveries."

You can view ACAD's current pipeline of drugs in development on this web page.

Shares of ACAD shot higher in early September after the FDA gave the company a breakthrough therapy designation for its NUPLAZID treatment for Parkinson's. Currently there is an estimated 6.3 million people around the world who suffer with Parkinson's and there is no cure. If ACAD can eventually get this therapy approved then the drug could generate an estimated $1 billion in sales in jut the United States.

There is speculation that ACAD is an acquisition target by a larger biotech or pharmaceutical company. That has got to scare the bears in this name. Believe it or not but there are a lot of bears shorting ACAD. The most recent data listed short interest at about 30% of the 79 million-share float. That's plenty of fuel for a short squeeze.

Technically traders have been buying the dips in ACAD near its rising 40-dma. You can see the bullish trend of higher lows and ACAD just bounced on it Friday. This looks like a good spot to speculate on a follow through higher.

We always consider trading biotech stocks as a higher-risk, more aggressive trade. The right or wrong headline can send biotech stocks crashing or soaring overnight. You might want to use call options to limit your risk. Tonight we are suggesting a trigger to open bullish positions at $33.10.

*small positions to limit risk* - Suggested Positions -

Long ACAD stock @ $33.10

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

Long FEB $35 CALL (ACAD150220C35) entry $1.00

01/20/15 triggered @ 33.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 34.14 change: +0.13

Stop Loss: 33.45
Target(s): To Be Determined
Current Option Gain/Loss: +3.3%
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:
01/20/15: SFM delivered a quiet session with shares churning sideways. I don't see any changes from my weekend comments.

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




BEARISH Play Updates

Discovery Communications - DISCA - close: 29.25 change: -0.17

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.3%
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:
01/20/15: DISCA tagged a new 52-week low before paring its losses. Shares underperformed the broader market with a -0.5% decline.

I am not suggesting new positions at this time. DISCA is potentially short-term oversold.

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: 28.09 change: -0.89

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings on February 5th
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
01/20/15: Our bearish play on LGF is off to a good start this week. Shares underperformed with a -3.0% decline. The market's major indices all produced an afternoon bounce but LGF did not participate in the rebound at all and closed on its low for the session.

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: 18.24 change: +0.32

Stop Loss: 18.85
Target(s): To Be Determined
Current Option Gain/Loss: +6.1%
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:
01/20/15: SODA trade may be over soon. Shares displayed relative strength today with a +1.75% gain. The simple 10-dma should be resistance at $18.75 but any follow through on today's bounce could hit our stop at $18.85.

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: 19.77 change: -1.04

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +23.7%
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:
01/20/15: It was another good day for ZU bears. Shares underperformed again and plunged to $18.92 intraday. Even with the afternoon bounce ZU closed down -5%.

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) -

(option trade was closed on Jan. 16th, 2015)
Jan $25 PUT (ZU150117P25) entry $1.15 exit $4.40 (+282.6%)

01/16/15 planned exit for the January $25 puts
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 BULLISH PLAYS

Covenant Transportation Group - CVTI - close: 26.06 change: -1.71

Stop Loss: 26.45
Target(s): To Be Determined
Current Option Gain/Loss: -5.7%
Entry on January 05 at $28.05
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings on Jan. 21st.
Average Daily Volume = 203 thousand
New Positions: see below

Comments:
01/20/15: Ouch! Something happened midday in CVTI. Between 10:30 a.m. and 10:52 a.m. the stock collapsed from $27.80-ish to below $25.20 (about -9.3%). I don't see any specific news behind this drop. One has to wonder if some information regarding their earnings report slipped out early. Our plan was to exit today at the closing bell to avoid holding over earnings. Unfortunately, shares have broken their bullish up trend and hit our stop loss at $26.45 in the process.

- Suggested Positions -

Long CVTI stock @ $28.05 exit $26.45 (-5.7%)

01/20/15 stopped out @ 26.45
01/17/15 Prepare to exit on Tuesday, Jan. 20th at the closing bell
(unless we get stopped out first)
01/15/15 new stop @ 26.45
01/05/15 triggered @ 28.05

chart:


CLOSED BEARISH PLAYS

SINA Corp. - SINA - close: 36.29 change: +0.60

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: see below

Comments:
01/20/15: SINA is not cooperating with us. The stock is up two days in a row. Today's rally left shares above short-term technical resistance at the 10-dma. Our trade has not opened yet and given the bounce we are removing SINA as a candidate. The long-term trend is still bearish so a failure at the 50-dma might be another bearish entry point.

Trade did not open.

01/20/15 removed from the newsletter, suggested entry trigger was $34.70

chart: