Option Investor
Newsletter

Daily Newsletter, Monday, 1/26/2015

Table of Contents

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

Market Wrap

Greece, Fed, Weather, Earnings, GDP

by Thomas Hughes

Click here to email Thomas Hughes
The market got off to a tepid start as Greek elections, an FOMC meeting, a wicked winter storm, earnings and an upcoming GDP release wrestle for attention.

Introduction

This week got off to a tepid start. For starters, elections in Greece put the ultra-left anti-austerity party in control of the government and the bail out at risk. This news would have sent the market plunging a year ago but today was taken in stride and shrugged off with little regard. Why, because it really doesn't matter to us, and maybe not to traders in Europe. EU stocks rose in today's session led by the German DAX 1.4% and new all time high.

Futures were flat to negative for most of the morning as the market digested earnings reports, anticipated other earnings reports as well as the FOMC meeting Wedesday and GDP estimate scheduled for release Friday. There is no expectation for the FOMC to adjust policy at this meeting but as always the statements and outlook will be important. The statement will be scrutinized for signs and indications of when, exactly, the rate hikes will begin and any change to expectations could become a significant market mover. On the GDP front expectations are creeping up. Consensus is now in the 3.5% range.

Market Statistics

Futures gained some strength going into the open but remained in negative territory. The open was weak and saw the indices retreat to support within the first few minutes of trading. Bottom was hit by 9:45AM, sending the indices back to break even where they trended for the rest of the day. The daily high, just above break even for most indices, was hit in the early afternoon and the markets closed near those levels at the end of the day.

With all the activity this week trading conditions will be compounded by a looming winter storm. As I write this wrap the flakes are beginning to fall and are expected to total as much as 3 feet in some areas. It is unclear now how much affect it will have on the economy, or damage it may cause, or if trading may be stopped due to weather but rest assured there was a lot of speculation on the matter. New York and other states have already issued major alerts, curfews and other measures to ensure public safety.

Economic Calendar

The Economy

There was no economic data released today. This week, however, is another important one as it includes the FOMC and the GDP estimate. Also scheduled for release are the Durable Goods, Consumer Confidence, New Home Sales, jobless claims, Pending Home Sales and Chicago PMI. The big days will be Wednesday (FOMC) and Friday(GDP) but the entire second half of the week is pretty heavy with potentially market moving data. And next week is full of data too, this is the last week of January which means ADP, Challenger, NFP and Unemployment.

Moody's Survey Of Business Confidence is back near record highs. The index ended 2014 at the record high of 41.1, dipped to 38.3 in the first weeks of the year and has now surged by 1.4 points in the most recent week to 39.7. In the summary Mark Zandi, Moody's economist and administrator of the survey, reports that

“Business sentiment has started 2015 near record highs. U.S. businesses are especially upbeat, consistent with an economy that is expanding well above its potential. Sales and hiring are notably strong, and investment spending intentions has never been as robust. It is also encouraging that pricing is holding firm despite the decline in oil prices, surging value of the dollar, and disinflationary forces overseas. Credit availability has also improved notably in recent weeks.”

According to data from FactSet 90 S&P 500 companies had reported earnings by last Friday. Of them 79% reported above the mean estimate (above average) while only 54% of them reported earnings above the mean estimate (below average). The current mean estimate for S&P 500 earnings growth is only 0.25%, down from 1.7% last week. This is led primarily by the energy sector but significant downside surprises from the big banks and some others have had an impact as well. With expectations so low it is not surprising that so many have beaten the expectation but so far we are on track for growth below the average growth we have seen over the past couple of years. This week is another heavy one of earnings for the S&P as well.


The Oil Index

Oil prices held steady, near long term lows, as the transition to Saudi Arabia's new king unfolds smoothly and a fast approaching winter storm has some traders betting on higher prices. There was some fear that the new king would diverge from current Saudi policy but so far all indications are that no, he will not. His first public statements support Saudi and OPEC policy and reaffirmed al-Naimi as oil minister. WTI and Brent both settled near break even after a day of mild volatility.

The oil sector was one of today's leaders. The Oil Index rose by more than 1.75% in today' session and is now approaching a potential area of resistance. The index is moving up from the long term trend line, and has broken the near term down trend, but is approaching a possible resistance line near 1,350. This level is consistent with an important Fibonacci Retracement that has provided support or resistance 5 times over the last 4 months. The indicators are bullish and pointing up so it looks like this level will be reached at the least. Whether or not prices will halt is still yet to be seen as Fibonacci is good for targeting places where signals may happen, and not so much as signals themselves.


The Gold Index

Gold prices retreated today as traders took the chance to lock in profits. Gold prices hit a five month high last week, supported by long term outlook and driven by the flight out of currencies. Today saw the metal drop a little over 1% to fall below $1280 as some of the impetus driving the trade petered out. Prices could retreat further over the next few days with $1250 as a likely target for support. FOMC policy/statements and economic data will be important, an indication of higher rates I think would be bullish, an indication that rates may rise sooner than expected I think very bullish.

The gold miners ETF GDX actually gained in today's session. The ETF fell in early trading and opened lower on the decline in gold but during the day lower prices attracted enough bulls to lift prices above break even. Today's action is the first sign of support now that the ETF is pulling back from the recent high and needs to be watched, now that it has broken out to the upside. In the near term the indicators are bullish but retreating from their peaks, in line with the underlying market and test of support. Over the short to long term they are also bullish, and convergent with at least a retest of the recent highs. Support is near $20.50 and the top of the top of the Nov/Dec bottoming pattern with upside targets near the recent high at $23.09.


In The News, Story Stocks and Earnings

Norfolk Southern reported earnings before the bell. The rail carrier met expectations for this year and announced near $2.5 billion dollars in planned expenses. The company reported $1.64 per share for the fourth quarter, down a nickel from last year on revenue slightly shy of expectations. On a full year basis 2014 net income totaled over $2 billion and is up 5% from 2013 and is a record for the company. The planned expenditures are to boost infrastructure, improve safety and otherwise set the company up for future growth. The stock fell in the early pre market session but buyers stepped in after the open to drive prices back up. The stock finished the day with a gain near 1.5%.


Homebuilder DRHorton beat expectations when it released earnings. The builder reported a surge in home sales that led to higher revenue and earnings. The company reported $0.39 per share, $0.04 higher than the $.035 expected by the street. Sales of new homes increased by 29% while the back log of homes not yet built has grown over 21% in the quarter indicating that this may not be a one time result. Shares of the stock rose by more than 1% in early trading and held that level into the open. The stock traded in a near 5% range during the day and closed near the open, forming a doji.


Microsoft reported after the bell. The stock traded right around the short term moving average all day and sank on the news. The company beat on the top and bottom lines but did not do it well enough to support buying. The stock dropped by a full percent and then traded in a wild range around that level after that.


Apple is scheduled to report after the bell tomorrow. The company is expected to report earnings of $2.59 per share, up from the $2.07 reported a year ago. Expectations are high and fueled by two headlines today. The first is that Apple may have sold more iPhones in China than in the US for the first time. The second is that the Pay feature is beginning to gain traction. This will not likely add a huge amount the bottom line but we may get an indication of what to expect in the future. The stock traded up today but created a black candle and a spinning top. The indicators are bullish and pointing higher but earnings could be a bust as well as a boon so Wednesday may be the day to really look at this one.


The Indices

The market was a little choppy today and it had plenty of reason to be. Not only is there a week of important economic events and earnings reports the snow was getting steadily heavier all day. I myself am out of the storms path but had plenty of opportunity to view it through the eye of the TV. All in all, it looked like another day of jockeying for position while the markets trade near support levels. Today's action was led by the Dow Jones Transportation Average. The transportation sector moved up by 0.65% on earnings and outlook. Today's move tested support along the short term moving average and is supported by rising indicators. Resistance is just above the current level, near 9,250 and the all time highs. It looks like this index could be testing resistance this week coincident with the FOMC and/or the GDP release.


The NASDAQ Composite Index was the next biggest gainer in today's session, posting an increase of 0.29%. The tech heavy index was not hurt by today's news, other than to test last week's closing prices, and closed at the high of the day. The index is moving higher from the short term moving average after making a trend line bounce, supported by rising indicators. The near term outlook is bullish but resistance is just above today's closing price and will likely be hit in the next couple of days. A break above that level, near 4,800 and the 14 year high, would be bullish and could lead the index to 4,900 or higher. Failing to break above resistance would find potential support near 4,700 and 4,600 along the long term up trend line.


The S&P 500 is next in line with a gain of 0.26%. The broad market index tested the short term moving average with this mornings decline and then closed at the day's high. The index is moving higher following a trend line bounce and is now gearing up for a test of resistance. The indicators are bullish and pointing up, indicating that prices are likely to rise, with resistance roughly 30 points higher near the all time high. Right now the only thing standing in the way is outlook and the Fed. We know how things have been, how they are and how they are expected to be, now we need to Fed to give the OK, again, and maybe for GDP to be good. A break above the all time high could lead to targets near 2,150 and 2,200 in the near to short term.


The Dow Jones Industrial Average brings up the rear in today's session. The blue chip index gained only 0.3% and barely closed in the green. The index had been dipping into the red just prior to close but a surge of buying in the final minutes pushed it back above break even. Today's move tested the short term moving average, confirming support, and was itself confirmed by the MACD. Momentum turned bullish today and is now confirming the stochastic crossover which occurred last week. This is pointing to a test of resistance, just above 18,000, that could lead to a break out. If so targets would be as much as 500 points above the all time in the near to short term.


The markets appear to be moving higher, in line with trends, following a test of long term support. Today's action confirmed near term support for many of the indices that could lead to further movement. While poised for a move higher, the indices are also faced with resistance at or near current all-time highs. This resistance needs to be broken for a longer term bull move to ensue and that move, or failure, has a good chance of happening this week. My guess is that Wednesday either before or after the FOMC statement is released, the market will start moving, with the chance for Friday's GDP to move it more.

Until then, remember the trend!

Thomas Hughes


New Plays

Wall Street Likes This Merger

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Tekmira Pharmaceuticals - TKMR - close: 25.52 change: +0.35

Stop Loss: 22.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 26, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 2.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
Biotech stocks were strong performers last year. They have continued to rally in 2015. One biotech that is outpacing its peers this year is TKMR.

The company made a lot of headlines last year with its experimental treatments for Ebola. According to the company, "Tekmira Pharmaceuticals Corporation is a biopharmaceutical company focused on advancing novel RNAi therapeutics and providing its leading lipid nanoparticle (LNP) delivery technology to pharmaceutical and biotechnology partners. Tekmira has been working in the field of nucleic acid delivery for over a decade, and has broad intellectual property covering its delivery technology."

The Ebola panic has faded but TKMR is still working on a treatment. The company's TKM-Ebola treatment is in phase-one clinical trials thanks to a $140 million deal with the U.S. Defense Department.

Ebola is not driving the rally in TKMR this year. TKMR's recent strength is thanks to M&A news. On Sunday, January 11th the company announced they were merging with OnCore Biopharma. According to the press release, TKMR "and OnCore Biopharma, Inc., a biopharmaceutical company dedicated to discovering, developing and commercializing an all-oral cure for patients suffering from chronic hepatitis B virus (HBV) infection, announced today that they have agreed to merge to create a new leading global HBV company focused on developing a curative regimen for hepatitis B patients by combining multiple therapeutic approaches."

Why is this significant? Hepatitis B affects a lot of people. TKMR's press release discussed the disease saying, "Hepatitis B is a serious infection of the liver caused by the hepatitis B virus (HBV) and is considered a major global health problem. Hepatitis B infection can cause chronic liver disease, which increases a patient's risk of death from liver cirrhosis and liver cancer. Estimates from the Centers for Disease Control and Prevention (CDC) indicate that up to 350 million people globally may be chronically infected with hepatitis B and, according to the World Health Organization (WHO), more than 780,000 people die every year due to hepatitis B. Most currently available therapies aim to suppress this viral infection but do not lead to a cure in the overwhelming majority of patients."

The stock market applauded the merger news and shares of TKMR soared +57% on Monday, January 12th. I'm sure a lot of that was short covering. The most recent data listed short interest at almost 10% of the 21.1 million share float. I suspect that data is out of date today.

It is interest how TKMR has not seen that much profit taking after such a big move. Traders have been buying the dips the last several days. Now TKMR is hitting new three-month highs. Shares look poised to rally toward resistance near $30.00.

Tonight we are suggesting a trigger to launch bullish positions at $26.10. I want to caution readers that biotech stocks are always a higher-risk, more aggressive trade. The right or wrong headline can send a biotech stock crashing or soaring overnight and TKMR is a perfect example with the move on January 12th. I am suggesting small positions to limit risk. You may want to consider call options as another way to limit your risk.

Trigger @ $26.10 *small positions*

- Suggested Positions -

Buy TKMR stock @ (trigger)

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

Buy the MAR $27.50 CALL (TKMR150320C27.50) current ask $1.65

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

Intraday Chart:

Daily Chart:



In Play Updates and Reviews

U.S. Stocks Ignore Greek Results

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market briefly declined this morning but traders quickly bought the dip. The major indices all posted gains with a relatively widespread rally on Monday.

Our plan was to close the ACAD trade this morning.


Current Portfolio:


BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 51.60 change: +0.35

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: +1.0%
Entry on January 23 at $51.10
Listed on January 22, 2015
Time Frame: Exit PRIOR to earnings in mid March
Average Daily Volume = 830 thousand
New Positions: see below

Comments:
01/26/15: BURL extended its current rally to four up days in a row. This is another record closing high for the stock. I would still consider new positions at current levels.

Earlier Comments: January 22, 2015
One of the best performing stocks last year was BURL. The stock gained +47% in 2014 versus the S&P 500's +11% gain.

According to the company website, "Burlington is a national off-price apparel, home and baby products retailer, operating in the United States and Puerto Rico. We offer great value to our customers by featuring high-quality, primarily branded apparel, home and baby products at "Every Day Low Prices", to deliver savings of up to 60-70% off department and specialty store regular prices. We operate more than 500 stores under the Burlington Coat Factory, Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes nameplates."

The company has been on a roll and is poised to see earnings grow +100% in its current fiscal year. Management has been consistently raising estimates. Back in September they reported earnings that beat estimates on both the top and bottom line and raised their full year guidance. They beat again with their earnings report in December and raised guidance. Then on January 9th they raised guidance again. We are starting to see Wall Street analysts raise their price targets for BURL into the $58-60 zone.

Investors have been consistently buying the dips. Now shares are in the process of breaking out past round-number, psychological resistance at the $50.00 level. Tuesday's high was $50.90. Tonight I am suggesting a trigger to open bullish positions at $51.10.

- Suggested Positions -

Long BURL stock @ $51.10

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

Long MAR $55 CALL (BURL150320C55) entry $1.87

01/23/15 triggered @ 51.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 36.88 change: +0.46

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: +11.6%
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:
01/26/15: Traders quickly bought the dip in SFM near $36.00 this morning. The stock rebounded to a +1.2% gain, outperforming the broader market indices.

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

01/24/15 new stop @ 34.85
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: 30.06 change: +0.22

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +1.7%
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:
01/26/15: DISCA lost 22 cents on Friday. Today it gained 22 cents. Shares appear to be hovering near support/resistance at the $30.00 mark. I am not suggesting new positions tonight. More conservative investors might want to tighten their stop loss.

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


Greif, Inc. - GEF - close: 39.88 change: +0.29

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: +0.2%
Entry on January 26 at $39.94
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: see below

Comments:
01/26/15: GEF is a new candidate we added this weekend. After Friday's breakdown under support at $40.00 we wanted to launch positions this morning. The stock opened at $39.94 and spent the rest of the day churning sideways in the $39.30-40.00 range. More conservative traders might want to look for a new relative low (under $39.28) before initiating new bearish positions.

Earlier Comments: January 24, 2015:
Shares of GEF are crumbling like wet cardboard. The company operates in the consumer goods sector. They make packaging and container products. According to a company press release, "Greif is a world leader in industrial packaging products and services. The company produces steel, plastic, fibre, flexible, corrugated and reconditioned containers, intermediate bulk containers, containerboard and packaging accessories, and provides blending, filling, packaging and industrial packaging reconditioning services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 50 countries to serve global as well as regional customers."

Unfortunately for investors GEF did not have a good 2014 on the earnings front. They missed analysts estimates the last four earnings reports in a row. In August 2014 GEF's management guided earnings lower. In December they lowered guidance again.

GEF's most recent earnings report was January 14th and Q4 earnings plunged -90% to $8.7 million. Revenues dropped -4% to $1.05 billion, below Wall Street estimates. For all of 2014 GEF said profits declined -38% and revenue slipped -3%. Once again management guided earnings lower. They now expected 2015 earnings in the $2.25-2.35 range compared to Wall Street estimates of $2.78 a share.

The company's earnings report provided an outlook where management issued this statement:

The company anticipates the overall global economy to reflect a modest recovery in fiscal 2015, with positive aspects of the improving economy in the United States being offset by the negative trends in other regions, particularly in Europe and Latin America. We anticipate that foreign currency matters will continue to present challenges for the company, as the strengthening of the United States dollar against other currencies will continue to impact the company’s revenues and net income.

Following GEF's Q4 results several analyst downgraded their rating on the stock. The point & figure chart is bearish and currently forecasting at $31.00 target.

Technically Friday's display of relative weakness (-2.7%) broke down through significant support near $40.00. We are suggesting bearish positions immediately on Monday morning. More conservative traders may want to wait for a little confirmation (perhaps a decline below $39.25). The nearest support looks like the $35 and $30 regions.

NOTE: GEF does have options but the spreads are too wide to trade.

- Suggested Positions -

Short GEF stock @ $39.94

01/26/15 trade began this morning. GEF opened at $39.94


Lions Gate Entertainment - LGF - close: 29.31 change: +0.46

Stop Loss: 29.65
Target(s): To Be Determined
Current Option Gain/Loss: -1.6%
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:
01/26/15: Warning! The oversold bounce in LGF has now hit four up days in a row. More importantly shares have broken out above what should have been resistance at $29.00 and its 10-dma. Tonight we are going to try and limit our risk by moving the stop loss down to $29.65. I am not suggesting new positions.

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

01/26/15 new stop @ 29.65
01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 20.01 change: +0.13

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +22.8%
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:
01/26/15: ZU spent today's session consolidating sideways on both sides of the $20.00 level. Resistance at the simple 10-dma is directly overhead at $20.45. More conservative traders may want to tighten their stop again.

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

ACADIA Pharmaceuticals - ACAD - close: 32.28 change: +0.40

Stop Loss: 31.25
Target(s): To Be Determined
Current Option Gain/Loss: -3.6%
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:
01/26/15: ACAD spent a good portion of last week underperforming the broader market. We decided in the weekend newsletter to exit this trade on Monday morning. The stock gapped up at $31.92 this morning.

*small positions to limit risk* - Suggested Positions -

Long ACAD stock @ $33.10 exit $31.92 (-3.6%)

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

FEB $35 CALL (ACAD150220C35) entry $1.00 exit $0.45 (-55.0%)

01/26/15 planned exit this morning.
01/24/15 prepare to exit ACAD on Monday morning.
01/20/15 triggered @ 33.10
Option Format: symbol-year-month-day-call-strike

chart: