Option Investor

Daily Newsletter, Saturday, 11/8/2014

Table of Contents

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

Market Wrap

No News is Good News

by Jim Brown

Click here to email Jim Brown

This could have been a summer Friday. Other than the jobs report nothing happened and the market reflected that lack of headlines.

Market Statistics

You would have thought it was Halloween Friday and everyone took off early to go trick or treating. Trading was lackluster and the results reflected the lack of interest. There was a small burst of buy orders at the close that offset a few market on close sell orders so the indexes closed about where they started the day.

We needed a week to decompress from the October rebound and that is what we got. The Dow Industrials and the Dow Transports were the only real gainers with the Nasdaq, S&P and Russell 2000 averaging about a .6% gain. That is nothing to write home about but considering the potential for a decent bout of profit taking I think everyone is glad to score any gain for the week.

The Nonfarm Payroll report was applauded and cussed depending on your viewpoint. The headline number was a gain of +214,000 jobs compared to the consensus estimates of +235,000. However, there were some huge whisper numbers with some as high as +300,000 so there were a lot of disappointed analysts. The indexes dropped sharply at the open on the headline miss.

However, the September number was revised up from +248,000 to +256,000 and the August number was revised up from +180,000 to +203,000. Remember, the August number came in at +142,000 when it was first released and caused all kinds of panic about the assumed end of decent job gains. Now it has been revised back over 200,000 and that means the last nine months have now seen gains over 200,000 and that has not happened since 1995. This was also the 49th consecutive month of gains and that has not happened since the 1930s.

It did break the trend from the prior six months for average gains over +250,000 and that was part of the disappointment factor. Look for future revisions to potentially remedy that.

The job gains may have been a little lighter than some hoped but it was one more Goldilocks number that is likely to be revised higher over the next two months. June was the last month that had a lower revision so the trend is definitely higher. June started out at +288K and ended up at +267K so we really can't complain.

This may have been the best report ever for October. Say what? If you back out the seasonal adjustments there were 1.064 million net jobs created according to the BLS. This is a record. The prior high for October was 980,000 in 2004. The seasonal adjustments for October were unexpectedly high and no reason was given for the rise. If they had used the same adjustment numbers as last October the headline number would have shown a gain of +373,000 jobs. The BLS is under investigation by multiple committees for falsifying data. Expect that to heat up when the newly elected take their seats in January.

The unemployment rate fell one point from 5.9% to 5.8% and for the right reasons. More than 416,000 people joined the workforce instead of the trend towards people dropping out in frustration. The labor force participation rate actually rose a point from a 30+ year low at 62.7% to 62.8%. Also, in the separate Household Survey there was a gain of +683,000 jobs. That is huge but it is overlooked by the crowd doing the sound bites on TV. The civilian labor force hit 156.3 million and a post crisis high.

The broader U6 unemployment rate fell from 11.8% to 11.5% and a post recession low.

Unfortunately the job gains were strongly tilted to low dollar jobs and part time employment. Restaurants added 42,000 jobs, retail trade +37,000, healthcare +25,000, hospitality services +52,000 and part time +15,000. Manufacturing added +15,000 after being flat for the prior two months and construction added +12,000.

The average workweek rose from 34.5 to 34.6 hours, the first gain in eight months and a post crisis high. Hourly earnings rose only +0.1% and the same lethargic pace of the last year.

One thing the Republican win will change is the 30 hour workweek as mandated by the Affordable Care Act. One of the first things they will change is to raise that to 40 hours so everyone can go back to working full time instead of part time. That will result in some workers being terminated and the ones that go back to full time will probably give up their second jobs. Nobody knows how that fix will come about but it is on the do list for 2015. Many employers cut hours to less than 30 in order to avoid having to give employees health insurance under the law. How that insurance rule will be modified is the key.

I believe the job market is strengthening. However, we have to get past the end of the year and see if the strength holds in 2015. Much of what we are seeing now could be related to temporary workers hired for the holiday season and people taking second jobs to raise some holiday cash.

The calendar for next week is truly bland. There are no market moving reports and very few reports in total. With the Q3 earnings cycle drawing to a close there may be a shortage of headlines to feed the market. When left to its own devices the market sometimes does unexpected things.

No new split announcements this week.

Split Calendar

(Be sure to check the bottom of this commentary for a special offer.)

In stock news there were some serious declines in the biotech sector. Intercept Pharmaceuticals (ICPT) declined -30% or -$74 after missing on earnings. For Q3 the company lost -$1.69 compared to estimates for a loss of -1.10. Revenue of $445,000 matched estimates. Shares of ICPT have more than quadrupled over the last 12 months. They also noted a trial of OCA in the medical journal Lancet, which called for long-term follow-up studies before approval from the FDA. Nobody likes to hear the terms "long-term follow-up studies" when they are trying to bring a drug to market.

Salix Pharmaceuticals (SLXP) fell -34% after reporting earnings of $1.53 compared to estimates for $1.56. The real problem was the resignation of the CFO and a guidance warning. They cut full year estimates from $6.16 to $5.20 and revenue is expected to fall from $1.6 billion to $1.4 billion. The CFO, Adam Derbyshire, resigned suddenly and there were concerns he had been carrying some inventory on the books improperly. The CFO quit suddenly during an audit by the board of inventory levels and values. The implication was the potential for dishonest numbers. The company has repeatedly told analysts there was 10-12 weeks of the drug Xifaxan in inventory. With this report they restated that to 9 months of inventory on hand. They would not answer questions on the change.

Sears Holdings (SHLD) spiked +31% on news the retailer said it was considering the sale and leaseback of 200-300 stores. The plan has the retailer creating a real estate investment trust (REIT) that would hold the stores. Sears would still operate the stores and pay rent. Sears said it would get "substantial proceeds" from the arrangement and shareholders would have the opportunity to buy shares in the REIT. Shareholders have wanted Sears to do something with its vast real estate holdings for nearly a decade now. At the same time they said same store sales declined -0.1% in Q3. Sears stores were expected to decline -0.7% and offsetting a gain of +0.5% in Kmart stores.

First Solar (FSLR) shares fell -11% after reporting earnings of 61 cents compared to estimates for 63 cents. Revenue was $889 million and well below estimates for $1.05 billion. The company said it had decided not to spin off some of its power plants and assets into subsidiaries known as "yieldcos," and that weighed on the stock. Yieldcos are similar to REITs with high yields. By spinning off their completed projects they can drive down the costs by about 20%. Apparently First Solar has decided to pass at the present time.

Monster Beverage (MNST) reported earnings of 70 cents compared to estimates of 68 cents. That was a +31.7% rise in profits. Revenue rose +7.7% to $626 million but still missed estimates of $642 million. The problem is increasing competition by Ultra and Muscle Monster products. Sales outside the U.S. rose +14.3% with a +7% rise in Europe and the Middle East. Wells Fargo said the current quarter should be strong and next year the company should see a major boost from the partnership with Coke.

Medication (MDVN) rallied 7% after reporting earnings of 96 cents and beating estimates by 13 cents according to Reuters. Revenue soared +234% to $200.5 million. The earnings reversed a loss of -18 cents in the year ago quarter. The company said full year revenue should come in at or above the high end of prior estimates thanks to strong sales of its prostate cancer drug.

After the bell Berkshire Hathaway (BRK.B) reported operating earnings of $2,876 per share and well above the $2,593 Capital IQ estimates. That was a gain from the $2,228 in the year ago quarter. Operating earnings ignore one-time items. Revenue rose +10% from $46.5 billion to $51.2 billion. Earnings were hurt by a write down of -$678 million in British retailer Tesco. Buffet is reducing his stake in Tesco. Berkshire had $62.4 billion in cash, up from $42 billion. The BNSF railroad investment added $1.035 billion in net income for the quarter despite serious operational challenges as a result of the congested rails. Shares of BRK.B declined 25 cents in afterhours.

The Q3 earnings cycle is about over. The big names for next week are Walmart, Cisco, JC Penny, Macy's and Applied Materials. Cisco and Walmart are Dow components but I would not expect either one of them to provide positive boost.

This week is filled with late reporting no-names for the most part but the following week earnings will drop off to a trickle. So far 446 S&P companies have reported. About 77% have beaten on earnings and 60% have beaten on revenue. That is the highest percentage of companies beating on earnings since Q2-2010 at 79%. The earnings growth rate for this cycle to date is now 7.6% with 54 companies left to report. At the end of Q3 the expectations for earnings growth was 4.5%.

So far 55 S&P companies have issued negative EPS guidance and 18 have issued positive guidance according to Factset. In Q3 earnings 37% companies have mentioned oil prices as a positive factor unless it was an oil company mentioning it.

The current forward PE for the S&P is 15.8 based on expectations for $128.37 in forward S&P earnings. This suggests the S&P is not over valued even at the record highs.

The 5-year average PE is 13.5 and the 10-year 14.1. However, both of those timeframes included the results of the financial crisis so they will be low. Earnings projections for the next four quarters are over $30 per quarter compared to the current $29.98 estimate for Q3. Earnings are expected to grow +8.5% over the next four quarters.

Crude oil imploded on Tuesday to touch nearly a four-year low at $75.84. The break of support at $80 was traumatic but the majority of energy stocks did not react as violently. There were declines but relatively speaking they were mild.

Some traders are still predicting a further decline to $70 or even $65 but that may be wishful thinking. Harold Hamm, CEO of Continental Resources, one of the biggest shale developers, called a bottom in crude last week saying prices would return to $85-$90 in the coming weeks. To prove his conviction he closed all his hedges for crude for 2015-2016. Continental made a one-time gain of $443 million from closing the hedges at the lower prices. A hedge is when a producer sells a futures contract at a set price for delivery of oil in that time frame. For instance, when oil was $105 back in June a producer could have sold the January futures contract to deliver oil for $105 regardless of what the price declined to by January. For someone like Continental with tens of thousands of barrels of production every day they can sell thousands of futures contracts for future delivery at a set price when the price rises. When it comes time to deliver they can either deliver the oil or buy back the futures contract for a profit. In that example they could buy back that contract today for $80 and pocket a $25 profit.

In the first visible sign of the impact of low oil prices Continental slashed its 2015 capex budget from $5.2 billion to $4.6 billion. Hamm said he was not going to increases the number of rigs in the field until prices returned to normal. They currently have 22 active rigs in the Bakken. Shares declined on the news on Thursday but rebounded with oil on Friday. Hamm owns 68% of Continental and he is going through a hotly contested divorce, which may prove to be the most expensive ever. This is also weighing on the stock despite his claims that any settlement will not impact his holdings in Continental.

What two words can strike fear into homeowners and elicit joy from energy traders? Polar Vortex. That term came back into the headlines last week and lifted gas prices from a 52-week low of $3.54 to a 5-month high at $4.49 in only nine days.

About a month ago weather forecasters began predicting another Polar Vortex winter based on readings from Siberia. Yes, Siberia. The snowpack in Siberia covered 21,000 square kilometers (SqKM) in October 2013. It was the 8th largest since records were started in 1949. This year that has risen to 22,786 SqKM and the third largest on record. According to Rutgers University Global Snow Lab there is already more than ten inches of snow covering the tundra north of Moscow. That is the first time since 2002 that this much snow was on the ground at the end of October. Roughly 900,000 square miles are covered in snow already compared to the 50-year average of 573,000 square miles. Nine of the 10 coldest winters on record have resulted from high levels of snow coverage in Siberia and what is called an arctic oscillation.

However, the cold slated for next weekend is the result of super typhoon Nuri. This giant storm in the Western Pacific is the largest since Jimmy Carter was president and it is headed for Alaska. As it moves north it is disrupting the jet stream and that will push the super cold air in the Arctic down into the U.S. and Canada. Temperatures in some U.S. areas are expected to be in the single digits and 20-40 degrees colder than normal for early November.

When the term Polar Vortex returned to the headlines the rush was on to buy stocks that profit from higher gas prices. It is worse this year because we are starting the winter with about 350 Bcf of gas less than we had in storage at this time last year. If you were not paying attention we almost ran out of gas last year with supplies falling from nearly 4 Tcf to around 800 Bcf before winter finally broke. You better fill those propane tanks right away because prices are going to rise.


Where do we go from here? The age old battle between technicians and fundamentalists is heating up as each day passes. The technicians are getting all worked up about the overbought conditions and the lack of a second dip since the October V bottom. The fundamentalists agree that another dip would not hurt and would welcome it as a buying opportunity because of the strong fundamentals underpinning the market.

I was having a debate with an analyst on Friday that felt the lack of forward motion last week meant the rally was about to fail. While that is possible we could always look at the glass as half full instead of half empty. I view the lack of a decline in the Nasdaq as evidence of dip buyers frantically hoping for the least little pullback to add to positions.

Everyone reading this knows I expected the Nasdaq to decline last week. I showed the isolated bearish candle last weekend and suggested we could see several days of weakness while those October gains were digested. We did get weakness in the Nasdaq but every dip was bought. The index only added +1.79 points for the entire week. While that was the final score there were other things to be learned.

The Nasdaq dropped -60 points from Monday's high at 4,654 to Tuesday's low at 4,594. The rebound was not vigorous but casual and lackluster. Tuesday's close at 4,623 was only -8 points below where we closed on Friday at 4,631.

There are multiple ways to take profits. The normal way is to have a 2-3 day highly visible decline where everyone knows when to get in when the index starts to rebound. The other way is to consolidate in place. That means traders rotate out of positions but not in enough velocity to overpower the buyers that are waiting just under the bid. It is an orderly transition and everyone accomplishes a portfolio restructuring without any bloodshed. That is what we had last week. After the Tuesday dip the buyers and sellers were evenly matched and nobody was in any rush to buy or sell.

In theory that suggests once the rotation is over the market would move higher. In practice that may not happen. You see a consolidation in place is nearly equivalent to a distribution event. That occurs at market tops and it is where current holders believe the rally is done and they attempt to sell to the retail buyers that still believe the rally has legs. The only difference is volume. In a distribution event the volume normally rises. Last week there was no change in volume. We had about 6.8 billion shares traded every single day. There was almost no difference at all. This suggests consolidation rather than distribution.

While the Nasdaq only gained 1.79 points for the week if you look at the intraday swings there was some decent volatility. It was not calm waters. The longer period chart suggests it was calm but the short term chart shows otherwise.

I looked at several hundred charts of Nasdaq stocks. Quite a few were showing an upside drift by the end of the week. When you think about all the big losses on some of the high profile Nasdaq stocks it was amazing we did not close a lot lower. That is a testament to how many of the smaller stocks were being bought.

I believe we could see the Nasdaq begin to move higher next week assuming there are no unexpected headlines. I think it has digested the October gains and fund managers are going to be looking for beta for one last push into the end of December.

Friday's low of 4,606.81 was 2 points above Thursday's low of 4,604.76. Wednesday's low was 4,607.73. Are you seeing a pattern here? After the dip to 4,595 on Tuesday the support has been very consistent at just over 4,605. That is the key level to watch on Monday. As long as any dips respect that level we have the potential for a move higher.

Don't get me wrong. Those clustered candles from last week are still bearish but apparently I am the only person that is worried about it.

The Dow dipped slightly on Tuesday but the rebound was immediate and it moves steadily higher the rest of the week to close at a new high on Friday. There is no weakness here despite the grossly overbought conditions. That is the beauty of a thin 30 stock index. Any 2 or 3 stocks can power it higher on any given day.

Support has firmed at 17,500 and resistance is now 17,750.

The S&P gained +14 points for the week to come to rest right at resistance at 2,033. I do like the stutter step at 2,015 where it dipped below on Tuesday but then quickly rebounded to close just below that level. On Wednesday it gapped higher to 2,023 and then came back to successfully test that 2,015 support level on both Wednesday and Thursday before sprinting higher. The upward progression from Tuesday to Friday was steady and measured. Buyers were in control but in no hurry.

On Friday the 2,033 level became resistance at the open and held all day. Given the lack of headlines and the mediocre volume I am not surprised traders were not in a hurry to be long at the close. There is plenty of time on Monday after the weekend event risk has passed.

Support 2,015, resistance 2,033.

The Russell 2000 traded dead flat for the week with a loss of -0.12 points. That was a lot of volume to go nowhere. However, Friday's close was a four-day high. The pattern could be deciphered as a rising wedge about to breakout or a bearish flag about to break down. However, these patterns normally resolve themselves in the direction of the larger trend and in this case the last three weeks have been positive.

It appears to me that the Russell has consolidated its gains and could try to break higher next week. A strong move over 1,175 could ignite the rest of the markets.

There is a night and day difference between the Nasdaq A/D line and the S&P-500. Clearly the Nasdaq stocks are having a much harder time recovering from the October slump.

Nearly 80% of the S&P stocks are trading above their 50-day average. Only 58% of the Nasdaq stocks are that high. This suggests the Nasdaq has room to run.

We had a good week despite the underperformance by some indexes. The market is at record highs and the outlook is good. Other than being overbought there is nothing on the schedule for next week that should impact the market. However, it is always the unexpected events that do the most damage.

We should remain in buy the dip mode until proven wrong. We should worry about volume. With volume flat at an average of 6.7 billion shares every day last week there was no emotion in the trading. The markets are at new highs. Volume should be rising. Investors should be excited. The next market key will be the next day that volume spikes. The direction on that day is likely to be our next trend.

(Be sure to check the bottom of this commentary for a special offer.)

Random Thoughts

President Obama authorizes another 1,500 troops for Iraq bringing the total to about 3,000 but he said there will probably be additional troops sent since the conflict will be open ended. Troops will be used as advisors to train the Iraqi military to fight ISIS. The administration reiterated that they will not be in a combat role. Analysts believe this is only temporary and they will eventually be imbedded with the Iraqi and Kurdish military to provide targeting and coordination for military aircraft.

Putin recently signed a new agreement between members of the Shanghai Cooperation Organization. The SCO consists of Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. India, Pakistan and Iran have applied for membership.

We should worry because the SCO was formed to be a counter to NATO. They claim it is an economic cooperation organization formed to combat extremism and enhance border security but the real intent is clear because of their announcements and support for member nations. The participants in the SCO signed a document "Model Memorandum on the Obligations of Applicant States for Obtaining SCO Membership." It should not be surprising that military support was mentioned. The organization backed the Russian position on the Ukraine and praised Putin's achievement of a peace initiative. Clearly they are drinking the Russian brand of political Kool-Aid.

Once they figure out how to integrate current enemies India and Pakistan into the organization there will be four nuclear powers able to counter NATO in just about situation in that part of the world. Eventually Putin's ally Iran will also be included and they will be nuclear capable in the near future. The combined countries will represent more than 3 billion citizens and nearly half of the world's population.

The biggest problem is not the nuclear deterrent. Another goal of the organization is to create a new financial structure that competes directly with the IMF and World Bank. The "New Development Bank" created last summer is the first step in that direction. If Russia and China can dethrone the U.S. dollar as the world's official reserve currency the U.S. would be in serious trouble. Our entire way of life in the U.S. is really built on the fact that our currency is THE reserve currency in which all commodities are traded. Oil, gold, wheat, etc. That keeps the dollar as the strongest currency on the planet because everyone has to buy dollars to use to purchase goods from around the world. China and Russia have wanted to change this for decades and now they are building an organization that could eventually make it happen. We should be very afraid.

The Russian ruble is collapsing with a -10% decline last week in less than 48 hours. With the country rapidly falling into a deep recession and oil prices -$25 below June levels the Russian government is in trouble. In 1998 the country defaulted, consumer savings were wiped out and the global markets went into a tailspin. We could be nearing another inflection point for Russia in 2015 if current conditions continue. The decline last week came after the central bank said it would no longer support the ruble. They had been spending billions every week trying to prop it up and they were burning up all their currency reserves in that effort. Now the ruble is unsupported and could decline significantly from here. This is another geopolitical problem because when countries become financially unstable one way to distract citizens from the problems is to go to war with somebody else. Critical times create significant geopolitical instability.

Meanwhile Russia has reinvaded the Ukraine with a column of 32 tanks, 16 artillery systems and dozens of trucks carrying ammunition, supplies and Russian soldiers. This occurred on Friday despite talks of a ceasefire after as many as 200 rebels were killed at the airport by government troops. Apparently the tide of the rebellion turned against the rebels without Russian troops to fight alongside of them.

Reasons the Rally Should Continue

Interest rates near record lows.

Mortgage rates near record lows.

Inflation slowing as a result of commodity deflation.

Oil prices at 4-year lows. Gasoline $2.94.

Fuel savings represents $260 million in weekly consumer stimulus.

Jobs continuing to grow at best pace in 9 months.

Canada added +43,000 jobs equivalent to +430,000 U.S. jobs.

S&P on track for record earnings.

Earnings growth up 10% in Q2, 8% in Q3.

About 77% of the S&P beat on earnings and the highest number since Q2-2010.

Fund inflows last week the most in 2014.

Election results means less regulation on business.

Economy is growing steadily at 3.1% pace.

Global central bank stimulus is on steroids.

QE3 stabilization still in effect for 6 months or longer. Fed is purchasing replacement treasuries for those that mature. Stealth QE.

Japan is going to dump up to $300 billion into the foreign equity markets.

Draghi said he was going to add 1 trillion euros to ECB balance sheet. Purchase of asset backed securities to start next month.

Dow Industrials, Dow Transports and Dow Utilities all at new highs to confirm Dow Theory rally.

Rest of the world sinking towards recession/deflation. Their money is fleeing to our markets.

Fund managers chasing beta into year end to make up for poor performance.

Next 3 months up +8% on average in midterm years, 6 months +15%.

Reasons Rally May Fail

The market does not need a reason to correct.

Market is short term overbought.

Bullish sentiment is at extreme levels. Very few bears. The last time it was this high was December 26th.

The Fed Remembers the Great Depression

The Fed is constantly reminded of the biggest central bank failure in U.S. history. In 1937, the year following the recovery from the Great Depression, the Fed prematurely tightened monetary policy and accidentally plunged the economy back into recession that lasted a very long time. Fast forward to 2014 and the Fed does not want to tighten too quickly on a fragile recovery and knock the economy back into recession and be forced to slash rates and possibly launch another QE program.

This worry was highlighted in a Fed survey of 22 primary dealers that trade treasuries directly with the Fed. The dealers see a 20% chance the Fed will raise rates in 2015 and then be forced to cut them back to zero within two years. The fact that the Fed even asked that question is evidence they are very afraid of raising rates too fast. They are desperately looking for affirmation of their likely plans.

Chicago Fed President Charles Evans said "The U.S. experience during the Great Depression -- in particular, in 1937 -- is a classic example for monetary historians." After a return to growth and inflation led the Fed to raise bank reserve requirements, and the government to reduce deficit spending, "the economy dropped back into recession and deflation."

New York Fed President William Dudley said the premature tightening of the 1930s "turned out to be a horrible mistake. It is actually characterized as the mistake of 1937."

One dangerous parallel is the surge in excess supply of tradable goods and a commodity surplus. In 1937 we had the same excess that we have now. Steven Ricchiuto, chief economist at Mizuho Securities, said, "We have created a world where we have produced an enormous amount of growth in the emerging markets with one model: export to growth. And the problem is, who are you exporting to?" There is no growth. Back in 1937 there was some inflation. Today inflation is only 1.4% and slowing.

Investors get all caught up in worrying about when the Fed will hike rates. In the current environment given what we know about the Fed's worry about acting too soon I don't think we are going to see any rates hikes of any substance for a long time.

This is even more likely because of the mounting stimulus in Europe and Japan. The Fed can't hike rates while the next two largest economies are printing money by the truckload. The dollar imbalance would become unsustainable.

Oil prices will go back up. The law of supply and demand plus ever rising prices of finding and producing a barrel of oil will force prices higher. We may have a temporary glut today but it is only temporary. By 2040 the number of cars on the road will increase from the 2 billion today to more than 3 billion thanks to rising auto acceptance in China and India and population growth to more than 9 billion. More than $1 trillion a year is spent exploring and developing new sources of oil. If prices stayed low that spending would grind to a halt and within 5 years we would be in the worst oil shortage ever. Global oil supplies decline by more than 4 million barrels per day every year. Without constant exploration and development to add up to 5 mbpd of new production the price of oil and gasoline would explode within months. Oil prices are going to rise. That is a fact of life just as immutable as gravity.

Faster than a speeding bullet? No, faster than a Z06 Stingray Corvette. GM just announced a $78,995 Z06 Corvette that will do 0-60 in 2.95 seconds. Yes, you read that right. I would love to be young again but then I would not have had $79,000 and definitely could not afford the insurance. Z06 Stingray

Apple's virus proof iOS may have met its match. A new malware program called "WireLurker" is "under active development" according to security research firm Palo Alto Networks. WireLurker can steal user information and continually requests software updates from zombie servers as it resides on your device. Apple said it had blocked infected apps including Sims 3 and Angry Birds, which had been distributed by an unauthorized app store in China. Apparently that did not stop the spread according to Palo Alto Networks.

Important Limited Time Offer

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 17 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with $50 off for anyone that subscribes this week. This offer expires on Monday. Once the special actually begins on Black Friday the price will revert to the normal.


Only 16 shopping days until Thanksgiving and 46 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The heights by great men reached and kept, were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night."

Henry Wadsworth Longfellow


Index Wrap

As Volatility Goes Down Down Down, Prices Go Up Up Up

by Leigh Stevens

Click here to email Leigh Stevens

The rally has slowed down some but the trend is up and the recent sideways consolidation in the Nasdaq is bullish until proven otherwise. I project next 'resistance' as possibly equal to the same percentage ABOVE the 21-day averages (in the major indices) as seen below the 21-day at the last bottoms.

The other aspect keeping me bullish near-term is moderate trader bullishness, with no extremes in bullish 'sentiment'. Traders are not bucking the rally, are not especially in disbelief about further upside potential but appear to have toned down expectations relative to the barn-burner of a rally that has come in the prior multimonth/multiyear advance fueled by the Fed's Quantitative Easing (QE), as well as positive earnings expectations.

This market is also nearing an 'overbought' condition and relative to buying at recent lows, the risk to reward outlook in calls isn't nearly as favorable as it was.

Current charts are bullish, just not wildly so when calculating the technical potential for a major extension of the current advance.



The S&P 500 is bullish in its pattern as it penetrated its prior highs and was holding this past week anticipated support at the Index's prior line of resistance. (Per my mantra that "resistance, once penetrated, tends to 'become' subsequent support on pullbacks".)

I've projected potential 'resistance' or a next upside objective for the 2060 area (then next at 2100) with 2060 being where SPX would be at the same 'extreme' in terms of a move to 5 percent ABOVE the 21-day moving average; which is where SPX got to BELOW the same (21-day) average at the last bottom.

This is not to say that I wouldn't be already be out of bullish positions if they were bought 'right'; e.g., at the last set of extremes, namely with price, an oversold RSI and overdone bearish sentiment of at least 1-2 days duration.

Support is highlighted at 2000 this week, with what should be substantial buying interest or next lower support, in the 1960 area.

Bullish sentiment has not hit extremes although the 13-day Relative Strength Index (RSI) is nearing its 'typical' overbought zone. The S&P 500 (VIX) volatility index has gone from a high of 26-30 at the recent bottom to 13 at the Friday Close.


The OEX is bullish, especially last by clearing resistance in the 900 area. My further upside projections are to a maximum of 917-920, possibly to as high as 935 over time.

If OEX was to extend its gains such that it reached 5 percent above its 21-day moving average, which was the percent 'extreme' seen on the downside recently that would equal a price around 917 near-term. This based on the idea that such extremes can be equal on a percentage basis; at least relative in the major indexes to the 21-day moving average. Stay tuned on that!

Key support now is suggested in the 880 area in OEX, with support then extending to 870.

The 13-day RSI is now in its 'overbought' zone and this suggests that the upside potential may not be huge absent a consolidation such as in a sideways to lower pullback. This would not have to be a deep pullback to 'throw off' the overbought RSI 'extreme'.


The Dow 30 (INDU) has had a terrific run up from its lows in the 16000 area. How much further upside on THIS move is a big question.

I've projected a next 'resistance' or upside target to the 17750 area, extending next to 18000. This rally has been impressive but now that the Average is 'overbought' according to the Relative Strength Index, I'm typically cautious on holding on for the last bit of this first wave higher.

INDU support is seen in the 17300 area, with next Dow support coming in around 17000 which should be fairly major support.

INDU is now at an overbought extreme in terms of the RSI as mentioned, which doesn't imply the rally will stop or reverse but the odds increase relative to this possibility.


The Nasdaq Composite is bullish in its chart pattern as the Index cleared substantial resistance at 4600, with the Index then bullishly consolidating above this level.

The next advance, assuming 4600 continues to hold up as support, could be to 4700 or a bit higher; I've highlighted the specific level as 4740 which is at the 6% upper envelope line where the percentage ABOVE the 21-day 'centered' moving average would be the same as the recent decline below this key trading average. This equation sometimes plays out with the major indices relative to moving average envelopes. Stay tuned on that.

Near support as mentioned is at 4600, with next support then seen in the 4500 area.

The RSI with Nasdaq is not quite showing the same overbought 'extreme' as with the S&P and Dow but its also closing in on it. Sentiment readings are more or less 'neutral' or at least not showing extreme bullishness by traders as measured by the CBOE daily equities call to put volume figures.


As with the broad Composite, the big cap Nas 100 Index is bullish as it cleared its prior highs in the 4100 area then has appeared to 'consolidate' these gains above the top end of the recent upside price gap area.

Next resistance for NDX looks like 4200, extending to the 4265 area, at the upper 'resistance' envelope line or band equal to 6% above the 'centered' 21-day moving average. When these envelope values get to an out of the normal range extreme on the downside, a similar such implied 'extreme' on the upside will often occur.

Near support is highlighted at 4100, extending to 4050 to 4000 even. 4000 should offer good technical support on the downside if 4100 gets penetrated on a Closing basis beyond a day.


QQQ is of course tracking the bullish underlying Nas 100 chart higher only with the Q's there is a somewhat more clear cut 'line' of resistance showing up (in the recent sideways consolidation) at 102, which naturally is seen as near resistance.

Next resistance is implied by the upper 6 percent 'envelope' line and comes in around 104. I can see a move to this area, but not a lot higher without a pullback or sideways move that consolidates the very strong rebound from the recent bottom.

Near support is at 101 then is highlighted on the daily chart at 100 and next to 99 even. The lowest I can envision the QQQ (ETF) tracking stock pulling back to is 98 currently.

The On Balance Volume (OBV) line continues to point higher, although daily trading volume has diminished after it spiked higher on the sell off into the bottom. Unlike company stocks, volume in QQQ rarely expands on rallies. Sell offs that break perceived support levels scare the bulls out, rallies typically bring in only gradual accumulation.


RUT has again moved toward the upper end of its broad trading range although the most recent bottom did extend the prior 1080-1200 price range to near 1040 on the downside.

I wrote last week that I though "RUT could have potential to the 1200-1210 area in the current move. That's an optimistic target."

This still seems optimistic but if the broad Market keeps charging ahead, the 'obvious' target for RUT would be a retest of prior highs just over 1200. Meanwhile, I've noted near resistance in the 1180 area, then at 1200-1208.

Support is highlighted at 1160 at the bottom of the last upside price gap with next support at 1140, possibly extending to around 1120.


New Option Plays

Consumer Electronics Titan

by James Brown

Click here to email James Brown


Apple Inc. - AAPL - close: 109.01 change: +0.31

Stop Loss: 106.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 55.5 million
Entry on November -- at $---.--
Listed on November 08, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Love it or hate it AAPL always has Wall Street's attention. It has a cult-like following. The company's success has turned AAPL's stock into the biggest big cap in the U.S. markets with a current valuation of almost $640 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

The company's latest earnings report was super strong. AAPL reported its Q4 (calendar Q3) results on October 20th. Wall Street was expecting a profit of $1.31 a share on revenues of $39.84 billion. The company delivered a profit of $1.42 a share with revenues up +12.4% to $42.12 billion. The EPS number was a +20% improvement from a year ago. Gross margins were up +1% from a year ago to 38%. International sales were 60% of the company's revenues.

AAPL's iPhone sales exceeded estimates at 39.27 million in the quarter and up nearly 16% from a year ago. The only soft spot in their ecosystem seems to be iPad sales, which have declined several quarters in a row. The company hopes to rejuvenate its tablet sales with a refresh of the iPad models. More importantly AAPL management raised their Q1 (calendar Q4) guidance as they expect revenues in the $63.5-66.5 billion in the quarter. Recent news would suggest that AAPL might deliver an incredible 50 million iPhone 6s in 2014. That's not counting their new iPhone 6+.

The better than expected results and bullish guidance sent the stock to new highs. The rally has created a quadruple top breakout buy signal on its point & figure chart that is currently forecasting at $135 target. Shares have been outperforming the broader market and AAPL is currently up +36% year to date.

Currently AAPL is up three weeks in a row but it spent most of last week consolidating sideways and digesting its prior gains. As we approach the holiday shopping season AAPL is poised to benefit from what should be stronger than average consumer spending with the company's stable of new releases to tempt consumers to upgrade their older electronics.

The daily chart shows AAPL's intraday high to be $110.30 on November 3rd but that's actually a bad tick. The real intraday high is about $109.90. Tonight I am suggesting a trigger to buy calls on AAPL at $110.25. We will start with a stop loss at $106.45. More conservative traders may want to try a stop loss closer to last week's low near $107.70 instead.

Trigger @ $110.25

- Suggested Positions -

Buy the 2015 Jan $110 call (AAPL150117c110) current ask $3.40

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

Daily Chart:

Intraday Chart:

In Play Updates and Reviews

Minor Jobs Miss Fails To Shake Stocks

by James Brown

Click here to email James Brown

Editor's Note:

The October jobs report came in 17,000 less than expected but the headline failed to spark any significant selling in the U.S. market.

NTES was closed on Friday morning.

We have updated several stop losses tonight.

Current Portfolio:

CALL Play Updates

Acuity Brands, Inc. - AYI - close: 140.39 change: -0.34

Stop Loss: 135.25
Target(s): To Be Determined
Current Option Gain/Loss: +18.4%
Average Daily Volume = 485 thousand
Entry on October 28 at $136.25
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: AYI experienced a little bit of profit taking on Friday following Thursday's bullish breakout past resistance at $140.00. Traders were buying the dips near $140 in Friday's session, which is a good sign.

More conservative traders may want to raise their stop loss again.

Earlier Comments: October 27, 2014:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

- Suggested Positions -

Long DEC $140 call (AYI141220c140) entry $3.80

11/01/14 new stop @ 135.25
10/28/14 triggered @ $136.25
Option Format: symbol-year-month-day-call-strike


Costco Wholesale - COST - close: 137.71 change: +0.62

Stop Loss: 134.75
Target(s): To Be Determined
Current Option Gain/Loss: +166.2%
Average Daily Volume = 1.9 million
Entry on October 30 at $132.25
Listed on October 29, 2014
Time Frame: Exit prior to earnings in December
New Positions: see below

11/08/14: COST added +0.45% on Friday, closing at another record high. Shares are now up three weeks in a row and up 15% for 2014. We are raising our stop loss to $134.75. If the stock sees any pullback we will look for support near $135.00.

I am not suggesting new positions at the moment.

Earlier Comments: October 29, 2014
COST is part of the services sector. The company runs a discount, membership sales warehouse. The company's latest earnings report said Costco currently operates 664 warehouses, including 469 in the United States and Puerto Rico, 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, six in Australia and one in Spain.

The company has struggled to hit Wall Street's bottom line estimates for over a year but steady improvement in their same-store sales have helped drive the stock higher. A strong back to school shopping season and higher membership fees fueled a better than expected quarterly report.

COST reported their Q4 numbers on October 8th. After missing estimates for five quarters in a row the company finally beat estimates. Analysts were expecting a profit of $1.52 a share on revenues of $35.3 billion. COST delivered $1.58 a share with revenues up +9.3% to $35.52 billion. The net profit number was up +13% and gross margins improved 15 basis points.

COST also reported that their e-commerce sales continue to grow at a brisk pace and their online sales rose +18% in their fourth quarter. Same-store (comparable store) sales remain a key metric to watch. COST's Q4 same-store sales were up +4% yet if you back out falling gasoline prices and currency effects their comparable store sales were up +6% for the quarter versus +4.5% a year ago. Membership renewal rates remain very strong at 91% in the U.S. and 87% globally. COST plans to open up to eight more locations before the end of the 2014 calendar year.

The company also recently announced their first foray into China. COST has entered the Chinese market with an online store through Alibaba Group's (BABA) Tmall Global platform.

The holiday shopping season is almost upon us with less than 60 days before Christmas. COST is poised to do well since the company caters to the higher-end more affluent customer.

Shares are hovering just below the $132.00 level. Tonight we are suggesting at trigger to buy calls at $132.25. We will plan on exiting positions prior to their December earnings report.

- Suggested Positions -

Long DEC $135 call (COST141220c135) entry $1.54

11/08/14 new stop @ 134.75
11/01/14 new stop @ 130.75
10/30/14 triggered @ 132.25
Option Format: symbol-year-month-day-call-strike


DineEquity, Inc. - DIN - close: 92.68 change: +0.17

Stop Loss: 89.65
Target(s): To Be Determined
Current Option Gain/Loss: -29.1%
Average Daily Volume = 154 thousand
Entry on November 05 at $91.55
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: Traders bought the dip in DIN twice on Friday. Shares started accelerating higher late that afternoon. This is another record high. Unfortunately the bid on our call option retreated but the option should recover quickly if DIN continues to hit new highs.

Tonight we are moving the stop loss to $89.65. I'm not suggesting new positions at the moment.

Earlier Comments: November 4, 2014:
Restaurant stocks were showing relative strength today. Better than expected earnings results from the likes of Red Robin (RRGB) and Bloomin Brands (BLMN) helped buoy the group. Additional stocks in this industry showing relative strength on Tuesday are: BWLD, PNRA, JACK, EAT, SONC, TXRH, KKD, DNKN, CAKE, DRI, and PBP. The one we like tonight is DIN.

According to a company press release, "Based in Glendale, California, DineEquity, Inc., through its subsidiaries, franchises and operates restaurants under the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,600 restaurants combined in 19 countries, over 400 franchisees and approximately 200,000 team members (including franchisee- and company-operated restaurant employees), DineEquity is one of the largest full-service restaurant companies in the world."

The company has seen success with a steady improvement in earnings. DIN has beaten Wall Street's estimates on both the top and bottom line three quarters in a row. Their most recent report was October 28th. Analysts were looking for a profit of $1.05 a share on revenues of $157.2 million. DIN served up $1.14 per share with revenues climbing to $162.85 million.

The company saw domestic system-wide same-store sales up +2.4% at IHOP and +1.7% at Applebee's. Management then raised their sales guidance on both Applebee's and IHOP. DIN also raised its dividend by 17% to $0.875 per share and they boosted their stock buyback program from $40 million to $100 million.

The restaurant industry should be a major beneficiary of the drop in oil prices. Lower gasoline prices at the pump mean consumers have more spending money and will likely burn a lot of that cash eating at restaurants.

Shares broke out to new highs on this earnings report and bullish guidance. Today the stock is at all-time highs. The point & figure chart is bullish and forecasting a long-term target at $118.00.

Tonight we are suggesting a trigger to launch bullish positions at $91.55.

- Suggested Positions -

Long DEC $95 call (DIN141220c95) entry $1.20

11/08/14 new stop @ 89.65
11/05/14 triggered @ 91.55
Option Format: symbol-year-month-day-call-strike


FedEx Corp. - FDX - close: 171.22 change: -0.48

Stop Loss: 165.50
Target(s): To Be Determined
Current Option Gain/Loss: +147.1%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: It was another bullish week for FDX. Shares managed to breakout past a trend line of higher highs (see chart below). Traders bought the dip on Friday and FDX pared its loss by the closing bell.

Tonight we are moving our stop loss to $165.50. More conservative traders may want to consider taking some money off the table.

I am not suggesting new positions at this time.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30

11/08/14 new stop @ 165.50
11/01/14 new stop @ 163.45
10/28/14 new stop @ 162.65, traders may want to take profits now!
10/25/14 new stop @ 157.85
10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
Option Format: symbol-year-month-day-call-strike


Keurig Green Mountain, Inc. - GMCR - close: 152.90 change: -0.16

Stop Loss: 148.65
Target(s): To Be Determined
Current Option Gain/Loss: +47.4%
Current Option/Gain loss if you sold the NOV $160 call: +677.7%
Average Daily Volume = 1.68 million
Entry on October 28 at $145.75
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: see below

11/08/14: GMCR also rebounded from its intraday lows on Friday but shares closed with a minor decline. The stock is still up for the week and marked its third weekly gain in a row. Shares are up five out of the last six weeks. The stock seems to be consolidating its gains in the $150-155 zone (actually closer to $154.00). We are going to try and reduce our risk by raising the stop loss to $148.65.

Keep in mind that earnings are coming up on November 19th. I am not suggesting new positions at this time.

Earlier Comments: October 25, 2014:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

- Suggested Positions -

Long NOV $150 call (GMCR141122C150) entry $6.17

- plus -

(On November 3rd, 2014, Sell the November $160 call)
Short NOV $160 call (GMCR141122C160) sold short @ $5.00

11/08/14 new stop @ 148.65
11/05/14 new stop @ 144.90
11/03/14 Sold short the NOV $160 call
11/01/14 Strategy Update: Sell the Nov $160 call on Monday morning, November 3rd
10/30/14 new stop @ 143.25
10/28/14 triggered @ $145.75
Option Format: symbol-year-month-day-call-strike


iShares Transportation ETF - IYT - close: 160.32 change: -0.06

Stop Loss: 156.85
Target(s): To Be Determined
Current Option Gain/Loss: +370.5%
Current Option/Gain loss if you sold the NOV $159 call: +900.0%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

11/08/14: Oil posted another loss for the week but it did bounce from its mid-week lows. This oversold bounce in oil might be slowing the rally in the transports, which have seen a huge rebound from their October low.

The IYT didn't move much on Friday but our November $143 call showed improvement.

Tonight we are moving the stop loss to $156.85.

We have two weeks left on our November options.

I'm not suggesting new positions at this time.

Earlier Comments: October 11, 2014:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40

- plus -

(sell short the Nov $159 call on October 29th)
Short NOV $159 call (IYT141122c159) entry $1.80

11/08/14 new stop @ 156.85
11/06/14 new stop @ 154.50
10/29/14 IYT gapped open higher at $157.44 (+56 cents)
10/28/14 Strategy Update: new stop @ 151.85, Plus, we want to sell the November $159.00 call (current bid is $1.75).
10/25/14 new stop @ 148.65, traders may want to take some money off the table now
10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
Option Format: symbol-year-month-day-call-strike


ServiceNow, Inc. - NOW - close: 67.79 change: +0.94

Stop Loss: 64.90
Target(s): To Be Determined
Current Option Gain/Loss: -15.7%
Average Daily Volume = 1.4 million
Entry on October 31 at $67.46
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: Shares of NOW continue to bounce from their midweek lows near the rising 10-dma. The stock displayed relative strength on Friday with a +1.4% gain. NOW looks poised to make another run at $70 soon.

Earlier Comments: October 30, 2014:
NOW is in the technology sector. The company provides cloud-based IT solutions across most of the world. According to the company website, "ServiceNow is the enterprise IT cloud company. We transform IT by automating and managing IT service relationships across the global enterprise. Organizations deploy our service to create a single system of record for IT and automate manual tasks, standardize processes, and consolidate legacy systems. Using our extensible platform, our customers create custom applications and evolve the IT service model to service domains inside and outside the enterprise."

NOW is less than three years old as a public company. Their IPO price was $18.00 and they opened at $23.75 back June 2012. It's been a roller coaster ride for investors but the trend is higher. NOW is one of the fastest-growing enterprise software companies. They're stealing market share from older, larger firms like CA Technologies, Hewlett-Packard, and BMC Software.

NOW is developing a very bullish pattern of strong revenues and raising guidance. The last four quarterly reports in a row have seen NOW meet or beat Wall Street's earnings estimate, beat the revenue estimate, and raise guidance every time.

Their most recent quarterly report was October 22nd. Wall Street expected a profit of $0.01 per share on revenues of $174.4 million. NOW delivered $0.03 with revenues rising +60% to $178.7 million. They added 150 new customers in the quarter, which puts their total at 2,514 clients. Their renewal rate is 98%. NOW raised their Q4 guidance above Wall Street's estimates.

NOW's President and CEO Frank Slootman said, "We had a solid third quarter as we continued to help our customers extend service management across the enterprise. The opportunities for us to expand within IT, as well as deliver value throughout the business, significantly broaden our addressable market and growth potential." Michael Scarpelli, their CFO, said, "Our strong third quarter performance included a record 11 deals greater than $1 million in annual contract value. We also achieved our first quarter of billings greater than $200 million."

Technically shares of NOW have broken out past resistance in the $65.00 area. The Point & Figure chart is bullish and forecasting at $74 target. The highs this past week have been near $67.00. Tonight I am suggesting a trigger to buy calls at $67.25.

- Suggested Positions -

Long DEC $70 call (NOW141220c70) entry $2.85

11/05/14 new stop @ 64.90
10/31/14 triggered on gap higher at $67.46, suggested entry was $67.25
Option Format: symbol-year-month-day-call-strike


PriceSmart Inc. - PSMT - close: 92.45 change: +0.22

Stop Loss: 89.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 156 thousand
Entry on November -- at $---.--
Listed on November 06, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

11/08/14: Friday proved to be a relatively quiet day for shares of PSMT. The stock traded sideways with traders buying the midday dip near its simple 200-dma. I'm a little surprised PSMT wasn't stronger. Before the opening bell the company announced October same-store sales growth of +1.7%, which was above analysts' estimates of +1.2%.

PSMT still looks poised to breakout to new relative highs. Our suggested entry point is $92.75.

Earlier Comments: November 6, 2014:
PSMT is in the services sector. The company is essentially the Costco of Latin America. A company press release describes them this way, "PriceSmart, headquartered in San Diego, owns and operates U.S.-style membership shopping warehouse clubs in Latin America and the Caribbean, selling high quality merchandise at low prices to PriceSmart members. PriceSmart now operates 34 warehouse clubs in 12 countries and one U.S. territory (six in Costa Rica; four each in Panama, Trinidad, and Colombia; three each in Guatemala, the Dominican Republic, and Honduras; two in El Salvador; and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands)."

A lot of PSMT's locations are in fast growing countries. Honduras has an annual growth rate of +3.1%. Costa Rica's is +4.2%. Columbia & Guatemala are growing at +4.3%. Panama latest GDP was +6.3%. Yet a few countries are struggling. Trinidad's growth rate is -1.2% while the Dominican Republic's plunged to an annual pace of -13%. Overall the consolidate trend is positive for PSMT's environment and they're building new stores in Columbia.

The company's latest earnings report was mixed. Their 73-cent earnings missed estimates by one cent but revenues were up +6.3% for the year and above Wall Street's estimate. This was PSMT's fourth quarter and they ended their fiscal year with sales of $2.4 billion, a +9.2% increase. Overall same-store sales rose +4.8%. Management reported double-digit sales growth for the year in Columbia, Panama, Trinidad, and Aruba.

Technically the stock has been in a bear market after a sharp decline from its late 2013 highs near $125 a share. PSMT appears to have built a base in the $80-92 range over the last few months. Now shares are starting to breakout from this significant consolidation pattern. Today's rally is significant because it's a bullish breakout above technical resistance at the 200-dma. The point & figure chart is bullish and forecasting a target of $102.

The October 29th intraday high was $92.68. Tonight I am suggesting a trigger to buy calls at $92.75.

Trigger @ $92.75

- Suggested Positions -

Buy the 2015 Jan $95 call (PSMT150117C95) current ask $3.50

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


The Sherwin-Williams Co. - SHW - close: 236.04 change: +2.82

Stop Loss: 229.75
Target(s): To Be Determined
Current Option Gain/Loss: +36.4%
Average Daily Volume = 526 thousand
Entry on November 05 at $231.00
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: The rally in SHW continued on Friday with shares still showing relative strength. The stock is now up four weeks in a row and not showing any signs of slowing down.

Tonight we are moving the stop loss up to $229.75.

Earlier Comments: November 1, 2014:
It's not very often you see a company about to celebrate its 150th birthday. For SHW that will be the year 2016. The company has been in business since 1866. The Company's core business is the manufacture, distribution and sale of coatings and related products. SHW is headquartered in Cleveland, Ohio. They sell through over 4,100 company-operated stores. Their global group has sales in more than 115 countries. Sherwin-Williams is also a very well known dividend payer and has annually increased dividends since 1979.

The slow and steady economic improvement in the U.S. has been beneficial. The real estate market has also helped SHW. New homes need new paint. The pace of new home sales in the U.S. hit six-year highs last month. While home sales do tend to slow down a bit in the winter months SHW should benefit from lower input costs. Crude oil and natural gas are big components in the paint and coatings industry. The severe drop in oil the last few months is a blessing for SHW.

The company raised their earnings guidance back in July. They issued bullish guidance again in their latest quarterly report. SHW announced earnings on October 28th. Wall Street was expecting a profit of $3.22 per share on revenues of $3.18 billion. SHW said their earnings rose +31.4% to a record-setting $3.35 per share. Revenues were up +10.6% at $3.15 billion, which missed the estimate.

SHW's remodeling business saw growth. The real driver was paint sales. Their paint stores account for the lion's share of sales, which saw revenues up +20%. SHW also purchased 2.0 million shares of their stock last quarter and still have 6.8 million yet to buy in their stock buy back program.

Management was optimistic. SHW's Chairman and CEO MR. Christopher Connor, said,

"We are pleased to report record sales and earnings per share in the third quarter and first nine months of 2014 on the continued positive sales volume and strong operating results of our Paint Stores Group. The Paint Stores Group architectural volume growth was positive across all end market segments. The Comex acquisition continues to perform better than expected in the year. Our Consumer Group improved its operating results through higher volume sales and operating efficiencies. Our Global Finishes Group continues to improve its operating margins through improved operating efficiencies."

Management raised their 2014 EPS guidance above Wall Street's estimates. They also raised their revenue guidance but this was only in-line with consensus. SHW now expects Q4 sales in the +6% to +8% range. They expect earnings to be in the $1.30-1.40 range versus $1.14 in the fourth quarter of 2013.

The stock's relative strength has driven shares to new all-time highs and a +25% gain in 2014. The point & figure chart is bullish and forecasting at long-term target at $286.

Tonight we are suggesting a trigger to buy calls at $231.00.

- Suggested Positions -

Long 2015 Jan $240 call (SHW150117c240) entry $3.37

11/08/14 new stop @ 229.75
11/05/14 triggered @ 231.00
Option Format: symbol-year-month-day-call-strike


Semiconductor ETF - SMH - close: 51.58 change: -0.40

Stop Loss: 48.85
Target(s): To Be Determined
Current Option Gain/Loss: +136.3%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: Semiconductor stocks have been very strong with a four-week rally from its October lows. Yet the rally started to stall the last couple of days. The SMH dipped toward its 10-dma before paring its losses on Friday.

I do not see any changes from my recent comments. The September highs near $52.60 could be resistance. I am not suggesting new positions.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

11/01/14 new stop @ 48.85
10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike


United Rentals, Inc. - URI - close: 113.39 change: -0.37

Stop Loss: 107.15
Target(s): To Be Determined
Current Option Gain/Loss: +15.5%
Average Daily Volume = 1.6 million
Entry on November 03 at $110.55
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: Shares of URI tagged potential round-number resistance at $115.00 on Friday before giving back all of its gains for the session. The stock did garner some bullish analyst comments on CNBC midday.

Broken resistance near $110 should be new support. Tonight we are raising our stop loss up to $107.15.

Earlier Comments: November 1, 2014:
URI is a company that is gaining market share. Traditionally the equipment rental business has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. The last couple of quarterly reports have been strong. In the July 16th report URI beat Wall Street estimates with a profit of $1.65 per share on revenues of $1.399 billion. That was a +47% improvement from a year ago and management raised their guidance.

The most recent report was October 15th. Again URI beat estimates. Analysts were looking for a profit of $2.12 per share on revenues of $1.51 billion. URI delivered $2.20 per share with revenues up +17.8% to $1.54 billion. This was a +34% jump in URI's earnings from a year ago. Margins hit a record +49.3% in the third quarter. They reaffirmed their guidance.

URI's CEO Mr. Michael Kneeland commented on his company's report and said,

"The third quarter provided further confirmation that our strategy and the North American construction recovery are both solidly on track. Our end markets are continuing to rally, creating numerous opportunities for well-managed, profitable growth. We reported a robust 16% increase in rental revenue for the quarter— and more importantly, the discipline behind that growth is evident in our record EBITDA margin and gains in volume, utilization and rates."

Technically the stock experienced a painful correction from $120 to $90 during the market's pullback in September-October. The bounce back stalled at resistance near $110 and its 100-dma and 50-dma. However, after a two-week consolidation in the $105-110 zone, shares of URI now look poised to breakout. Shares were showing relative strength on Friday with a +3.7% gain.

The 50-dma is directly overhead at $110.17 and the intraday high on Friday was $110.39. Tonight we are suggesting a trigger to buy calls at $110.55.

- Suggested Positions -

Long 2015 Jan $115 call (URI150117c115) entry $4.50

11/08/14 new stop @ 107.15
11/03/14 triggered @ 110.55
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

FMC Corp. - FMC - close: 57.00 change: -0.24

Stop Loss: 58.85
Target(s): To Be Determined
Current Option Gain/Loss: -46.1%
Average Daily Volume = 1.42 million
Entry on November 04 at $55.85
Listed on November 03, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: The bounce in FMC seems to be stalling at its 40-dma, which is a good sign for the bears. Traders may want to wait for show new relative weakness before initiating bearish positions.

Earlier Comments: November 3, 2014:
FMC is in the basic materials sector. They are a diversified chemical company with agricultural chemicals, minerals, and health and nutrition businesses.

It has been a rough year for shareholders as FMC peaked in March this year and has been sliding lower every since. That's because the earnings picture has been deteriorating. You can see on the daily chart below where FMC issued an earnings warning in June. Then when they reported earnings in late July they missed estimates. It's not great when you warn about earnings and still miss Wall Street's lowered estimates.

FMC's most recent earnings report was October 29th. The company missed on both the top and bottom line. Analysts were expecting a profit of 96 cents a share on revenues of $1.06 billion. FMC only delivered 95 cents with revenues of $1.02 billion. The biggest part of their business, the Agricultural Solutions, which represents nearly half of FMC's sales, reported a small +2% revenue growth from a year ago.

In the company press release, Pierre Brondeau, FMC president, CEO and chairman, said: "In the third quarter, market dynamics continued to affect our portfolio. Agricultural markets were impacted by multiple factors around the world, a softening of demand in China affected parts of our Health and Nutrition portfolio, and Argentina continued to weigh on Lithium's results." Brondeau also noted they are concerned over some beverage products in China that have seen two quarters in a row of declining demand.

The weakness in shares of FMC have produced a -24% decline in 2014 versus the S&P 500's +10% gain. Meanwhile FMC's point & figure chart is suggesting the selling will continue and is pointing to a $25.00 target.

Tonight we are suggesting a trigger to buy puts at $55.85. More conservative investors might want to wait for a breakdown under $55.00 instead.

- Suggested Positions -

Long 2015 Jan $55 PUT (FMC150117P55) entry $1.95

11/04/14 triggered @ $55.85
Option Format: symbol-year-month-day-call-strike


Intl. Business Machines - IBM - close: 162.07 change: +0.61

Stop Loss: 165.75
Target(s): To Be Determined
Current Option Gain/Loss: -15.0%
Average Daily Volume = 4.1 million
Entry on November 06 at $160.90
Listed on November 05, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: It has been a rough few weeks for IBM. After testing the $160 level on Thursday the stock managed an anemic +0.3% bounce on Friday. At this points I'd like to see a drop under Friday's low (160.85) or a drop under $160.00 before considering new bearish positions.

Earlier Comments: November 5, 2014:
IBM is considered a bellwether in the technology sector. The company was founded back 1910 and has been known as IBM since 1924. They've grown into a powerhouse of information technology, hardware, software, and services. Unfortunately for IBM and its shareholders the company's business seems to have stalled as it faces tougher competition across all of its products.

Big Blue, the company's nickname, was a master manipulator of the Wall Street earnings game. IBM has for years massaged its earnings per share results with massive stock buybacks. This wasn't a big secret. Then finally their strategy started to stall. IBM's stock struggled for years after its 1999 peak under $140 a share.

The stock market's QE fueled rally from the 2008 low fueled a massive run in IBM and shares grew from $70 late 2008 to over $215 in early 2013. While the U.S. market continued to run higher in 2013 and 2014 IBM did not participate. That's because revenues have been flat or declining since mid 2013. At the same time investors became more suspicious of the financial engineering of IBM's earnings results with its massive stock buybacks.

Big Blue has spent $108 billion on stock buybacks since 2000. About $12 billion of that was just in the first six months of 2014. IBM has also spent $30 billion on dividends since 2000. Now normally stock buybacks and dividends are shareholder friendly but critics argue that IBM has financed a lot of these expenses with debt. Meanwhile IBM's revenues have fallen to levels not seen since 2008.

IBM's most recent earnings report was October 20th and the results were a big disappointment that sent shares plunging to multi-year lows. Wall Street was looking for a profit of $4.32 per share on revenues of $23.37 billion. IBM reported $3.68 per share, a 64 cent miss. Earnings dropped -4% to $22.4 billion, another miss.

Management said revenues declined across all of their major product lines and geographies. EPS results were down -10%. Net income was down -18%. Gross margins were down 90 basis points to 49.2%. Revenues in the Americas, Europe, Middle East, and Africa were all down -2%. Revenues in Asia-Pacific slipped -9%.

IBM said they saw a significant slowdown in September and the sharp rise in the dollar played a big impact on its results. Furthermore management has removed their previous earnings guidance of $20 per share in 2015. Multiple analyst firms have lowered their price target on IBM following this report.

Bullish investors will argue that IBM has been steadily raising its dividend over the last several years, which is true. The stock currently has a respectable yield of 2.7%. Unfortunately, high-yield stocks are going to look less attractive when the Federal Reserve starts raising rates in 2015. Bulls will also argue that IBM is cheap on a valuation basis with its P/E down to 10. We also know a cheap stock can always get a lot cheaper. A value play could turn into a value trap.

Currently shares of IBM have already seen their oversold bounce roll over. If shares breakdown under their October lows the next support level could be the $140 area. Tonight we are suggesting a trigger to buy puts at $160.90. More conservative traders may want to use a trigger under $160.00 instead.

- Suggested Positions -

Long 2015 Jan $160 PUT (IBM150117P160) entry $4.00

11/06/14 triggered $ 160.90
Option Format: symbol-year-month-day-call-strike



NetEase, Inc. - NTES - close: 91.80 change: -1.00

Stop Loss: 91.45
Target(s): To Be Determined
Current Option Gain/Loss: -24.5%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

11/08/14: NTES was not cooperating with us last week. In the Thursday night newsletter we decided to exit positions on Friday morning. Shares gapped down at $92.52 and then underperformed the broader market with a -1.0% decline.

The company has earnings coming up on November 12th.

- Suggested Positions -

NOV $95 call (NTES141122C95) entry $2.45 exit $1.85 (-24.5%)

11/07/14 planned exit at the open
11/05/14 prepare to exit tomorrow morning
11/01/14 new stop @ 91.45
10/23/14 new stop @ 89.40
10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike