Option Investor

Daily Newsletter, Saturday, 12/27/2014

Table of Contents

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

Market Wrap

Markets Floating Slowly Higher

by Jim Brown

Click here to email Jim Brown

What if they opened the market and nobody came? Only a few investors showed up to trade on Friday but they did lift the major averages to new highs. Christmas week lived up to its historically bullish trend as investors put their holiday bonuses to work.

Market Statistics

It was a lackluster day in the markets but the Dow, S&P, Russell 2000 and S&P midcap 400 all closed at new highs. The Nasdaq Composite eased through resistance at 4,800 to close at a new 14 year high. The Nasdaq 100 failed to duplicate that feat with a close about 25 points below the November high close. The Dow Transports missed a new high by -2 points. It was a pretty good day despite the low volume and zero stock news.

There were no economic reports of note on Friday. Next week is just about as bleak. There is nothing of real interest on the calendar until Friday, which is the first trading day of 2015. The construction spending report is expected to show another decline and that will drag on the Q4 GDP.

The ISM Manufacturing for December is also expected to decline despite two quarters of GDP over 4%. The ISM peaked in August at 59.0 and some forecasts are for a decline to as low as 53.7, down from the November 58.7 reading. Fortunately this potential trouble spot for the market does not come until Friday so there is nothing material to rock the market boat for the rest of 2014.

Sony's movie "The Interview" opened at 331 theaters on Thursday in a very limited release with only a few show times. Many theaters reported the shows were sold out. The opening only produced $1 million in retail sales averaging $3,142 per theater.

At the same time it became available on YouTube, Google Play and Microsoft Xbox Live. Over the first 36 hours it was downloaded 7.5 million times on YouTube with a $5.98 price for a 48 hour rental. However, the paid link was easily shared with friends so we have no idea how many actual paid viewers there were.

TorrentFreak.com said within 20 hours of the movie becoming available there were more than 750,000 illegal copies downloaded on pirate sites. That rose to 1.5 million by Friday afternoon.

There would have been even more downloads from places like YouTube but the digital rights (DRM) were locked to USA/Canada only and anyone overseas was prevented from watching it legally.

This release is a prime example of why we will never have the simultaneous release online and in theaters of any major motion picture. The pirate community is too active and the movie producers would lose millions.

Sony shares were flat on Friday.

There were no package delivery problems this holiday season at least nothing caused by UPS or FedEx. The companies asked retailers in advance for volume estimates so the shippers could manage vehicles and manpower. After a last minute surge in packages that were over the prior estimates, FDX/UPS put limits on retailers to avoid problems like they had in 2013. The retailers were told to limit 11th hour promotions or the shippers would refuse their packages.

Through Monday UPS/FDX had delivered 97% of their packages on time according to a WSJ survey. UPS expects to handle 4 million packages by January 9th that consumers are returning. The UPS National Returns Day is January 6th and they expect to handle 800,000 returns on that day alone. The company said a recent survey showed that 62% of consumers have returned an item in 2014. That is up from 51% in 2013.

Data analytics firm StellaService ordered 4 items from 40 of the country's top retailers shipping the 4 orders to different U.S. regions. They placed the orders using each retailer guidelines for delivery by Christmas. Of the 160 orders placed, 11 packages did not arrive on time. According to StellaService Best Buy, Costco, Crate & Barrel, JC Penny, Kohl's, Macy's and Wayfair each had one item that did not arrive on time. Toys R Us and Staples each missed deadlines on two packages. One of the Staples orders was cancelled by Staples but they never notified the purchaser. StellaService said none of the late packages were the fault of UPS/FDX but the fault of the retailers.

StellaService said Apple, Dell, Nordstrom and Zappos allowed online orders until Dec 23rd and all the packages were delivered on time. Pretty amazing given the short fuse and crowded delivery system.

Amazon had the best record. Prime Now customers in major cities could order as late as December 24th and receive same day delivery. There was a $7.99 fee for one-hour delivery but free two-hour delivery. Several researchers tested the retailer and all reviews were satisfactory. In Manhattan the entire process on one video game order from cell phone to delivery took 30 minutes. During the process the cell phone received GPS updates of the package process. There is also a recommended tip that can be added to the order. The total cost of the $40 item including $7.99 fee, $5 tip and tax was $57. Amazon said customers bought 10 times more same-day delivery items than in 2013. While you may never need anything delivered in one-hour it is nice to know that capability exists.

The last Prime Now order delivered on Christmas Eve was 3 packages of Bai5 antioxidant infused beverage. The order was placed at 10:24 PM and delivered at 11:06 PM.

More than 60% of Amazon customers used a mobile device for their holiday shopping with the trend accelerating as Christmas neared.

Amazon said it added 10 million new Prime members at $99 during the holiday season. Prime members get free 2-day delivery of most items and they are estimated to spend more than twice what a regular customer spends during the year. I am a prime example of a Prime customer and I guarantee I spend more than twice what a regular customer spends. Probably more than several regular customers spend.

Amazon said the GoPro cameras were the best selling cameras on Amazon this holiday season. The Frozen Princess Elsa doll was the top-selling toy, with Anna and Elsa digital watches leading in that category. The Frozen Karaoke set was the third biggest seller in music behind "That is Christmas to Me" by Pentatonix and "1989" by Taylor Swift.

Amazon said the Fire TV was the best-selling streaming media box while the Fire TV USB Stick was the fastest-selling Amazon device ever. The top selling movies were "Guardians of the Galaxy" and "Maleficent." The best video game was "Call of Duty, Advanced Warfare." On Cyber Monday they sold 18 toys per second.

Amazon does not really breakout sales numbers but they did give some clues. They said they sold enough Elsa dolls to reach the top of Cinderella's castle 855 times. With the top of the castle at Disneyworld at 189 feet and the doll 12.8 inches tall that would suggest they sold 151,495 Elsa dolls.

They said if all the "Heroes of Olympus" books purchased were stacked in a pile they would be more than twice as tall as Washington state's Mount Olympus plus Mount Olympus in Greece. Mount Olympus in Washington is 7,979 feet tall. The Grecian Mount Olympus is 9,573 feet. With the books 4.4 centimeters thick that suggests 243,174 books were sold or roughly $2.1 million.

Amazon said it sold enough wiper blades for every driver in Mobile Alabama, the rainiest city in the USA. That equates to 292,653 wiper blades or $5.9 million at $10 a blade.

I am always amazed by the scale of Amazon sales. Those are just a couple of the more than 230 million items Amazon sells. There are more than 5 million items of clothing, 7 million in jewelry, 20 million in sports and outdoors and 600,000 grocery items.

Keurig Green Mountain (GMCR) announced it was recalling 7.2 million single serve brewing machines. The "Mini Plus" coffee makers can overheat and injure users by spraying hot liquids on them. The company said the machines could malfunction especially if used to brew more than two cups in quick succession. Keurig said it had received about 90 reports of injuries from the scalding hot liquid escaping from the brewers. An analyst at Stifel Nicolaus said the impact to earnings was likely to be minimal but it could negatively impact brand perception.

My daughter is on her third Keurig in three weeks. She bought them at Costco and returned them to Costco for replacements. She said they had a stack of returned units behind the service desk and the lady said they all had a pump problem. These were not the Mini Plus units mentioned above. Apparently they will have another recall soon on the larger units if this return rate continues. Time to short GMCR?

Tesla (TSLA) is offering to upgrade the battery package on the sporty two-seater Roadster it no longer produces. The upgrade will give owners as much as a 400-mile range and a 50% improvement over the initial battery package. Tesla said improved battery technology can provide 31% more energy than the original Roadster cells. They are also offering an improved aerodynamics kit, new tires and improvements to wheels and brakes to increase the mileage. The company is calling the improved vehicle the Roadster 3.0. The company is going to drive a Roadster from San Francisco to Los Angeles early in 2015 to demonstrate the new capability. Tesla sold about 2,500 of the $109,000 Roadsters, which were built on a Lotus chassis. Elon Musk said the Model S will also receive a battery pack upgrade but not in the near future. Stifel Equity Research said Tesla shares will top $400. Shares closed at $228 on Friday.

Freeport McMoran (FCX) announced a new discovery in southern Louisiana. The Highlander discovery produced 43.5 million cubic feet of gas per day. Freeport owns 72%, Energy XXI 18% and Tex Moncreif 10%. This is a well that Freeport inherited when it took over McMoran Exploration in June 2013. The 29,400 foot well had 150 feet of net pay and will be put on production in early 2015. Freeport owns 60,000 additional acres in the area and it now very optimistic that other exploration wells will be successful.

Crude prices weakened on Wed/Fri and the pattern suggests there could be a new low ahead. The rebound from the temporary bottom in the $55 range is weakening and we could see a test of the $50 level next week. This is probably due to some funds flushing their remaining oil positions before the end of December so they don't have to show them on their end of year statements. There is also a tax-sale component I am sure. Friday's weakness was also the result of comments by Saudi Arabia that they will "never cut production again." I do expect to see a rebound in January when funds begin to take new positions for 2015.

Oil is just one of the commodities in the CRB Index but none of the rest are supporting the index. There are no commodity buyers in sight and there is no inflation on the horizon. If anything there is a definite hint of deflation in the air. While a temporary drop in commodity prices is beneficial to corporate earnings a prolonged decline is detrimental. The commodity rout is definitely a warning sign for the future.

The Baltic Dry Index is not suggesting the commodity decline is done. The rate for shipping dry goods is near a two-year low and still falling. This means there is no demand for dry goods cargo carriers.


The markets moved to new highs with the Nasdaq the Russell 2000 tied as the strongest performers on Friday with .7% gains. This is typical end of year buying where tech stocks and small caps are lifted by retail investors putting end of year bonuses to work.

We can't get really excited about Friday's gains since the total volume was only 2.69 billion shares. That is easily the lightest volume day of the year. Considering the markets were making new highs that is troubling. You want to see new highs on stronger volume but we have to make allowances for the holiday schedule.

We should not look at a market gift too skeptically but we should be concerned if there is no follow through next week. The last week of the year is typically choppy with an upward bias. Remember, December 31st 2013 was the high for the year. I would really like to see that repeated in 2014.

Three of the last five January's were very strong with the market moving high in a hurry. The other two suffered serious declines. January 2010 peaked at 1,150 on January 19th before crashing back to 1,066 by February 5th. January 2014 peaked at 1,850 on the 15th and dropped back to 1,750 on February 5th.

Our market is fairly to moderately overvalued. Recently the indexes have been having trouble making new highs BUT there have been two decent selloffs in the last three months. Whether that will limit the amount of damage we could see in January is anyone's guess.

I am suggesting that we remain long into January but then take a defensive posture by option expiration on the 16th. That is typically a turning point in pivotal months and not just in January.

The percentage of S&P stocks over their 50 day average is 84% and we typically peak in the 84-88% range. That suggests caution is the watch word for the next several weeks.

The Bullish Percent chart for the S&P has plateaued at the 76% level and well below the previous highs in the 85% range. This is also an indication there may not be a lot of gas left in the rally tank.

The S&P closed at 2,088 and the obvious target here is 2,100. An aggressive trader could look to buy a few puts with a touch of 2,098 just in case that 2,100 level turns into a sell the news event. Support for the last three days has been 2,080.

The Dow struggled on Friday to hold its gains and I expect a retest of prior resistance next week. If that resistance has turned into support then we could be off to the races. If not then we could be limping into the end of the year. Initial support is 18,025 followed by 17,800. We are making new highs and there is no obvious overhead resistance.

The long tops on the candles for the last three days shows selling pressure at the close that left the Dow well off its highs. That suggests no confidence in the rally. However, these were very weak volume holiday trading days so it is tough to really draw any conclusions.

The Nasdaq just barely squeezed past resistance at 4,800 but it did it with a really decent +33 point gain. The Nasdaq is benefitting from the end of year window dressing and buying by retail investors. Techs and small caps are normally strong this time of year.

Funds were buying for window dressing and using the large caps to store money through the end of December. Amazon, Apple, Google, Tesla and all the major names were in the point gainer list.

The Nasdaq did use prior uptrend resistance as support for the last four days so I am feeling a little more confident about the gains continuing in the tech stocks. Support is 4,765.

The Russell 2000 finally broke over that strong resistance at 1,208 to breakout to a new high. This is a milestone and we need to see some follow through on Monday to prove this was not a one day wonder. As I said earlier this is a bullish period for small caps so I do expect the gains to continue. This has been a long time coming with a -20% correction in the middle.

I am looking for a choppy market next week as the remaining tax sellers try to capitalize on the bullish end of year trend. However, window dressing should win out with funds adding to their winners for end of year statements. I would remain long into January but then maintain a cautious stance into January option expiration.



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Random Thoughts

Contrary to my January caution above Bank of America analyst Savita Subramanian pointed out that January is the second strongest month of the year with a 64% average of gains since 1929. December averages 75% gains. After a strong year in which the S&P had double digit gains January averaged additional gains of +1.8% with positive returns 68% of the time.

As I pointed out earlier the S&P posted strong double digit gains in 2013 but January 2014 produced a sharp decline. Seasonal trends exist but there are exceptions to every trend.

Putin's Russia is floundering with an expected -5% drop in GDP in 2015. The government is launching a $100 billion bailout of state run companies. They have $600 billion in foreign debt with $100 billion coming due in 2015. Standard & Poor's said there was at least a 50% chance it would cut Russia's debt to junk status. With the ruble worth about half what it was a year ago those corporations can't make their debt payments so the government is going to bail them out in some way. They can't sell new debt because of the current market conditions. Russian export revenue is likely to decline from $174 billion in 2013 to $95 billion in 2014 if oil prices remain low.

Moody's said not only will Russia's economy decline -5.5% or more in 2015 but an additional -3% in 2016. "These developments will likely lead to a severe deterioration in the operating environment for Russian corporations, namely higher inflation, unemployment and debt-servicing costs as well as lower domestic demand, resulting in a deeper and more protracted decline in domestic economic activity than previously anticipated."

Russia has already blown through $96 billion in foreign exchange and gold reserves trying to prop up the ruble and they have $399 billion left.

On Friday Russia adopted an updated version of its military doctrine authorizing the use of strategic (nuclear) weapons against the U.S. or NATO, which it named as the two biggest threats to Russia's future. This is just one more jab by Putin at the West in order to remind them of their nuclear capability and warn them not to interfere in the Ukraine or anywhere else Putin decides to annex.

Putin capped prices on Vodka in an effort to retain his popularity. The price of vodka had been rising sharply because of the decline in the ruble. Vodka is heavily consumed in Russia where 25% of Russian males die before they reach their mid-fifties with the love of vodka partly to blame. By keeping the price of vodka low Putin is aiming to keep the population on his side and too drunk to care about the economy.

Of course not everything Putin does is going to win the hearts and minds of the population. He cancelled the Christmas holiday vacations for government workers as the government tries to figure out how to stop the slide in the ruble and the economic decline. He said the "government and its various structures cannot afford such extensive holidays, at least not this year." Christmas is celebrated on January 7th in Russia, the traditional date in the Eastern Orthodox Church.

Chinese banks are bleeding cash. Banks have seen an outflow of deposits for the quarter for the first time since 1999. Customers are moving their cash to trust funds or into the stock market. In the first week of December Chinese investors opened almost 600,000 stock-trading accounts. That was a 62% increase from the week before. Banks are offering everything from iPhones to fresh vegetables to induce customers to deposit money. If you deposit enough money (903,000 yuan) and are willing to leave it there for 5-years you can even get a Mercedes-Benz A180. Banks lost $153 billion in deposits for the quarter ended September 30th.

China announced on Friday that industrial profits declined -4.2% in November following a -2.1% decline in October. This suggests the Chinese government is likely to add more stimulus in the months ahead.

Japan approved a 3.5 trillion yen ($29 billion) fiscal stimulus program to boost the economy. In April a sale tax hike caused Japanese consumption to decline. The stimulus includes shopping vouchers, subsidized heating fuel and low interest loans for small businesses. About 1.7 trillion yen will be spent on public works and to improve disaster preparedness with 600 billion yen slated to revitalize regional economies. Japan's GDP declined -1.9% in Q3 after a -6.7% contraction in Q2 when the sales tax took effect. Another sales tax hike has been delayed indefinitely.

Saudi Arabia dispelled any rumors of cooperation with the U.S. to punish Russia, Iran and Syria by lowering oil prices. Putin had blamed a conspiracy between the U.S. and Saudi Arabia for the drop in oil prices. Saudi's oil minister said there was no truth to the conspiracy theory. He also said OPEC was not going to cut production, not now and not ever. "Saudi Arabia is not going to cut. This position we will hold forever, not just 2015." I think that means we should expect lower oil prices ahead.

The Saudi oil minister said this just as the Saudi authorities pledged to cut wages in the face of a $39 billion budget shortfall in 2015. "The kingdom will resort to borrowing and use of reserves to plug the country's deficit." Spending in 2014 is estimated to have been 1.1 trillion riyals, +20% over budget. The budget for 2015 is expected to be 860 billion riyals with revenue at 715 billion riyals. With youth unemployment more than 30% the government is going to have a problem cutting back on jobs and wages, which consume 50% of the Saudi budget. The Saudi government employs hundreds of thousands of people in "make work" jobs just so they can get a paycheck and support themselves. If the government cuts back on these empty positions there will be social unrest.

Jeffery Hirsch of the Stock Trader's Almanac pointed out that seasonal trends are pretty bullish for 2015. It is a pre-presidential election year and the best year in the 4-year cycle. Since 1939 the third year is up an average of 16.0% for the Dow and 16.3% for the S&P. Since 1971 the Nasdaq has averaged a 30.9% gain in year three. It is also the fifth year of the decade and there has only been one losing year in the last 13 decades. Years ending in "5" average 28.3% gain for the Dow since 1885 with the S&P averaging 25.3% since 1935 and the Nasdaq averaging 25.6% since 1975. The best three quarters in the four year cycle are Q4 of year two and Q1-Q2 of year three which we are heading into next Friday.

A North Korean spokesman said President Obama "always goes reckless in words and deeds like a monkey in a tropical forest." They are blaming Obama for the release of "The Interview" on Christmas Day. They said the movie was illegal, dishonest and reactionary. Don't they know the more they complain about it the more people will want to watch it? NK is now blaming the U.S. for their Internet outage last week and the repeat of that outage on Saturday. Of course Putin immediately came to North Korea's defense and congratulated them for standing up to the USA.

According to Lipper, 85% of all active managed stock mutual funds were trailing their market benchmarks at the end of November. In a typical year more than twice as many managers are outperforming and 66% trailing. This was the worst year for active managers in three decades.

Gasoline prices have fallen for a record 92 consecutive days according to AAA. The nationwide average fell to $2.32 on Friday and the lowest level in five-years. Stations in Colorado, Oklahoma, Kansas and Missouri have prices under $2.00 in some locations.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Individualism, private property, the law of accumulation of wealth and the law of competition…are the highest result of human experience, the soil in which, so far, has produced the best fruit."

Andrew Carnegie


Index Wrap

New highs, new highs!

by Leigh Stevens

Click here to email Leigh Stevens

The media picks up on continued new highs in the Dow, etc. even though only minor gains, without also noting recently slowing upside momentum. But then they'd have to KNOW something about the Market, other than the Dow went to (yet) another new high. Boring!

A point that I'd make here is that prices may drift mostly sideways ahead, perhaps dipping a bit in the process. I've learned not to make predictions that low volume in a holiday shortened week simply MEANS not much further near-term upside. Still that does seem more likely than not. But even scant new highs will keep all those non-investors wondering if they should join in the party!

Bullish sentiment spiked higher in the two more 'normal' volume days at the beginning of this past week. However, this Market is not 'overbought' in the way I normally define it, using both 13-day and 8-week Relative Strength Index (RSI) indicators respectively, on daily and weekly charts.

There's more room on the upside over time but near-term the major indices may pause. By the way, in case you didn't notice, the big cap Nasdaq 100 (NDX) hasn't yet gone to a new Closing high. When big cap tech lags I'm more watchful of where the S&P goes next. And, the Dow is hitting some technical resistance just over 18000.

Stocks appear to have priced in continued strength in earnings already. Q4 earnings come up next and a 'pause' or slow down in further gains may well be a result with a wait for how actual reports come in January.



The S&P has broken out above a line of prior resistance in the 2075 area and resumed its uptrend. The last low formed a classic 'V'-bottom and a move to new highs was the result. The holiday shortened week, as noted in my initial 'bottom line' commentary, saw reduced upside momentum compared to the oversold rebound that preceded it.

A minor pullback to prior resistance would not be surprising. I've noted support at the prior line of resistance, with technical/chart support extending to the 2050 area. Overhead resistance is seen at 2100, extending to 2120.

Over time SPX may see a substantial new up leg. My only cautionary note is that in that case, SPX would need to break out above resistance implied by the top end of its long-term uptrend price channel on a weekly and monthly chart basis.

Bullish sentiment has hit a recent high and this factor, on a contrarian opinion basis, may also limit near-term upside potential.


The S&P 100 (OEX) has reversed back to the upside after reaching a low that represented a move to 3.3% below its 21-day moving average. The S&P 100 and 500 tend to trade on balance at plus or minus 3 percent or so above/below a 21-day moving average. The snap-back rally was impressive, but where to now?

I anticipate OEX can move higher over time, such as to the 950 area, but near-term OEX may see a slowing of upside momentum compared to what came before. Currently, the big cap S&P stocks are likely seen as 'fairly' valued, at least not under-valued in the 920-925 area, pending Q4 earnings coming up in January.

I've highlighted next resistance in the 932 area, with a further upside target and potential resistance coming in around 943. Looking out over the coming weeks OEX could make it to the 950 area if it achieved a 'measured move' objective which assumes a next up leg equal to the last.

Key near support is seen at the 21-day moving average currently intersecting in the 910 area. Support then extends to 900.


The Dow 30 (INDU) Average has made it above resistance at 18000 and resumed its uptrend, which is often the case with a strong move back above the key 21-day moving average. In my view however, there are only about 6 Dow stocks in clear cut continued strong weekly uptrends; namely CSCO, DD, DIS, HD, PG, and V. There are fewer Dow stocks than there were to fuel a decisive new up leg and therefore am just cautiously bullish.

Moreover, INDU is hitting some technical resistance just over 18000 implied by the upper end of the Dow's broad uptrend channels on both weekly and monthly charts (not shown here). I was quite bullish at Dow 16000 and again on the pullback to near 17000. Above 18000 now, not so much!

On a daily chart basis as seen below, I've highlighted potential next targets/resistance at 18100 and then to the 18300 area. Near support comes in around 17800, extending to 17600.

Trading wise, I'd point out that one technical 'trigger' to take on bullish strategies was getting in when the 13-day Relative Strength Index was at a bearish oversold RSI reading; see my chart note regarding the last such low RSI reading. If you achieve a 900-1000 point gain, take the money and run!


The Nasdaq Composite (COMP) is bullish in its pattern with the recent strong move back above 4700. However, I don't know that a next 100 point gain to 4900 or a 200-point run to 5000 is going to be quick and relatively straight-forward. Bullish sentiment seems overly bullish to get to 5000 in January. Long-term a target is suggested that's to the 5000 area.

I've noted next resistance coming in around 4880, with a next target/resistance at 4950. Gaining another 80-100 points would look more doable to me if COMP establishes a base of support in the 4800 area, with dips to 4750 or to 4735 as possible. I note support at the 21-day moving average, currently intersecting at 4735, with next lower support in the 4650 area.

Bullish 'sentiment' is fairly high and January may be frustrating to the bulls if they assume that the next 200 points higher will be as seemingly 'easy' to achieve as the last 200-point gain.


The NDX 100 (NDX) chart is bullish in its pattern but unlike the broad Nasdaq Composite, the big cap Nas 100 Index has not made a new Closing high. Key next resistance comes in around 4330-4337, extending to 4345-4350. Next pivotal resistance then is suggested in the 4400 area.

Look for near support in the area of the 21-day moving average, currently intersecting at 4265, with next lower support at 4200, extending to 4175. 4100 is fairly major support.

An ultimate objective for NDX is to the 4500 area based on long-term chart calculations but such a target may be a few weeks off, assuming this level is achieved. Stocks appear to have priced in continued strength in profits already. Q4 earnings come up next and a 'pause' here probably would have much to do with the wait for actual reporting in January.


The QQQ chart is bullish with the move back above the 21-day moving average or to above 104. The Q's got back to 105 but pivotal prior high and implied resistance is still ahead, at prior closing and intraday highs at 106-106.25. Next key resistance then comes in at 107.

Near support is at 104 and it's important for a bullish chart outlook for QQQ to hold this area. Next key support is at the LOW end of the prior upside price gap higher at 102-102.1

Volume was low on the last spurt higher but the On Balance Volume (OBV) line is pointing slightly higher which is the direction needed. A longer-term upside target is to the 109-110 area but if this kind of objective is achieved it may be further out than January. I could see 107 being hit in the month ahead, with a pullback into February before another strong upswing developed.


The Russell 2000 (RUT) broke out above its 1190-1140 trading range finally and achieved new highs above 1200. I've estimated next resistances at 1220, then 1240.

IF the Russell resumed its prior strong upside trajectory from late-2012 into March of this year, the Index could reach 1400 and higher longer-term. That's a pretty big if but the longer that RUT consolidates at and above 1200, such a target isn't out of the question. There's a seasonally bullish tendency for the Russell in the early months of the year. Over time, the small to medium cap sector(s) may be seen as less fully 'exploited' than the S&P, Dow and the big cap Nasdaq stocks.

Pivotal near support is at 1200-1190, extending to 1180. Technical support came in previously at the recent low, in the area of the 50-day moving average; this average has now advanced to 1160.


New Option Plays

Technology & Industrial Goods

by James Brown

Click here to email James Brown


Apple Inc. - AAPL - close: 113.99 change: +1.98

Stop Loss: 109.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 56 million
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 4 to 6 weeks, exit ahead of Q4 earnings
New Positions: Yes, see below

Company Description

Why We Like It:
There are a lot of Apple fan boys and girls out there, especially on Wall Street. The stock has been a big performer this year with a +42.2% gain in 2014. This has pushed AAPL to new highs and the stock is now the biggest of the big cap names with a valuation of almost $670 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 f $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+.

It looks like bearish investors are giving up on AAPL seeing a correction. There was a new report out Christmas week saying short positions in AAPL had collapsed 31% to 53.7 million shares. AAPL currently has a float of 5.86 billion shares.

Right now all the focus is on AAPL's iPhone sales. They're expected to be huge. If they miss estimates the stock could see a significant sell-off. That's why we do not want to hold over the earnings report expected in late January.

The three-week pullback from the late November (Black Friday) highs has provided a new entry point for bullish investors. AAPL did see its rebound pause for a few days but traders bought the dip on Friday and AAPL displayed relative strength with a +1.7% gain and a breakout above its 20-dma and 30-dma.

Tonight we are suggesting a trigger to buy calls if AAPL trades at $115.25. We are not setting an exit target tonight but I will point out that the point & figure chart is forecasting a long-term target of $165.00. I anticipate an exit for us in the $120-125 area given our time frame.

Trigger @ 115.25

- Suggested Positions -

Buy the FEB $120 CALL (AAPL150220C120) current ask $2.70

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

Daily Chart:


Dover Corp. - DOV - close: 73.83 change: -0.37

Stop Loss: 75.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.7 million
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 4 to 8 weeks, exit ahead of Q1 earnings
New Positions: Yes, see below

Company Description

Why We Like It:
DOV is part of the industrial goods sector. They make an array of equipment and parts for multiple industries. According to the company, "Dover is a diversified global manufacturer with annual revenues of $8 billion. We deliver innovative equipment and components, specialty systems and support services through four major operating segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. Dover combines global scale with operational agility to lead the markets we serve."

Unfortunately for DOV investors the company's earnings picture has soured. Back in October they reported their Q3 results that beat Wall Street estimates on both the top and bottom line. Yet management issued relatively bearish guidance. It would appear that the outlook is worse than previously thought. On December 8th DOV issued an earnings warning and lowered their 2014 guidance. They're blaming restructuring costs and downsizing expenses.

The very next day (Dec. 9th) an analyst at Deutsche Bank downgraded DOV to a "sell" and lowered their price target from $83 to $65. Deutsche Bank's concern is DOV's exposure to the U.S. oil and gas industry. More than 33% of DOV's profits come from sales to the U.S. oil and energy sector. Given the plunge in crude oil prices this year (to five-year lows) the United States is already seeing a slowdown in oil rig use. A lot of the shale oil is expensive to drill and oil needs to be above $75 to be truly profitable. Right now oil is closer to $55 a barrel. That's going to significantly encumber capital spending for the oil industry and DOV could suffer as a result.

Technically shares of DOV broke their long-term up trend in 2014. Shares have developed a bearish trend of lower highs and lower lows. It looks like the most recent oversold bounce has just started to stall. We want to catch the next wave lower. Tonight I'm suggesting a trigger to buy puts at $73.40.

Trigger @ $73.40

- Suggested Positions -

Buy the MAR $70 PUT (DOV150320P70) current ask $2.20

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks End Week At New Highs

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. indices ended the holiday week at a new all-time high. Seeing the small cap Russell 2000 breakout is bullish.

Yet trading was relatively muted for most of the market as most investors are on vacation.

Current Portfolio:

CALL Play Updates

Packaging Corp of America - PKG - close: 79.15 change: +0.25

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -25.0%
Average Daily Volume = 1.0 million
Entry on December 18 at $78.94
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/27/14: The last couple of sessions have been pretty quiet for PKG. Shares are just drifting sideways on either side of $79.00 . The stock appears to be in a $78-80 trading range. Investors may want to wait for a new close above $80.00 before considering new bullish positions.

Earlier Comments: December 17, 2014:
PKG is in the consumer goods sector. The company operates eight paper mills and 100 corrugated products plants and related facilities. Put it all together and PKG makes packaging products around the world.

According to company materials, "PCA is the fourth largest producer of containerboard in the United States, based on production capacity, and the third largest producer of uncoated freesheet in North America. We have approximately 13,600 employees, with operations primarily in the United States and some converting operations in Europe, Mexico and Canada."

It's been a pretty decent year for PKG earnings. Back in February they beat Wall Street estimates and guided higher. They beat estimates again in April and July. Their most recent report was October 20th. Earnings per share were only in-line with estimates at $1.26 but that is a +37% improvement from a year ago and a +8.6% improvement from the prior quarter. Revenues soared a whopping +79% to $1.52 billion, slightly above estimates. Management then raised their Q4 EPS guidance above Wall Street's estimates.

Mark W. Kowlzan, Chief Executive Officer, said, "This was our 8th consecutive quarter of record earnings driven by strong sales volume, record mill productivity, and mill cost reductions. The integration of Boise packaging continues to generate significant synergies, and operational improvements in White Papers have resulted in lower costs and higher margins."

Technically PKG looks bullish. The early 2014 high near $75.00 was resistance but the stock broke through this level in early December. Traders have since bought the dip at this level so $75 is now new support. The stock is near all-time highs. The point & figure chart is forecasting a very long-term target of $121.00.

The December 4th intraday high was $78.50. Tonight I'm suggesting a trigger to buy calls at $78.55. We are listing the April calls. More nimble traders may want to trade the January calls instead but they only have about four weeks left. There are no February or March calls available yet. After option expiration this coming Friday (December 19th) we should see more options listed.

- Suggested Positions -

Long APR $80 CALL (PKG150417C80) entry $4.00

12/23/14 Caution: PKG has created a potential reversal pattern
12/22/14 new stop @ $77.85
12/18/14 triggered on gap open at $78.94, trigger was $78.55
Option Format: symbol-year-month-day-call-strike


Royal Caribbean Cruises - RCL - close: 82.27 change: -0.09

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: - 6.5%
Average Daily Volume = 2.9 million
Entry on December 24 at $82.30
Listed on December 22, 2014
Time Frame: We will likely exit prior to earnings in very late January
New Positions: see below

12/27/14: RCL ended the week near new all-time highs. I would consider new bullish positions at current levels. However, if you think the market is going to see a dip then consider waiting for a pullback in the $80.50-80.00 zone as an alternative entry point on RCL.

Earlier Comments: December 22, 2014:
The cruise line stocks have been pretty strong this year. Carnival Cruise (CCL) has been the weakest of the big three with a +11.5% gain in 2014. That compares to the S&P 500's +12.0% gain. Norwegian Cruise Line (NCLH) is up +32% this year. Meanwhile RCL has outpaced them all with a +69.9% gain in 2014 as of today.

According to a company press release, "Royal Caribbean Cruises Ltd. is a global cruise vacation company that owns Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisieres de France, as well as TUI Cruises through a 50 percent joint venture. Together, these six brands operate a combined total of 42 ships with an additional seven under construction contracts, and two on firm order. They operate diverse itineraries around the world that call on approximately 490 destinations on all seven continents."

CCL has suffered a series of mishaps, bad decisions, and just poor luck in recent years and RCL has managed to capitalize on its rivals misfortune, especially in Europe. Earnings growth for RCL has kind of mediocre. Their most recent report was October 23rd. RCL beat estimates by a penny while revenues were only in-line with Wall Street estimates. Management then guided lower for Q4. So why has the stock performed so well? Normally when a company lowers their earnings forecast the stock gets hammered!

A big part of the stock's rally has been weakness in crude oil. These are massive ships. They burn between 140 to 150 tons of fuel every single day. That's about 30 to 50 gallons a mile. Falling oil prices mean that fuel costs for these companies has plunged dramatically and should boost their profit margins.

Tigress Financial Partners recently shared their opinion that the cruise liner industry has "benefited from strong demand trends both domestically and globally and more recently the swoon in oil prices has helped to reduce one of their largest costs - fuel. We think long-term demand trends are bullish for the sector and lower oil prices not only mean lower fuel costs but more discretionary cash in consumers' pockets that can be used for additional expenditures on leisure time." Their point about consumers having more cash to spend on leisure is a big one.

The month of December has brought more good news for shares of RCL. On December 1st the S&P Dow Jones Indices announced they would replace Bemis (BMS) with RCL in the big cap S&P 500 index. That means all the mutual funds that track RCL have to buy it eventually. That went into effect on December 4th.

On December 8th analyst firm Jefferies said "The cornerstone of our view on RCL has been that it offers a superior product, this is based on the following: it has a younger fleet, more new ships being built, more impressive features available (e.g. high-speed internet), a better strategy with respect to distribution of cabins (more Balcony berths available) and better brand perception." Jefferies then raised their price target on RCL from $73 to $87.

The analyst love continued on December 22nd when Stifel analyst Steven Wieczynski said, "you have a stock that is trading at 14x forward earnings (2016) for average EPS growth of 28 percent/year for the next three years. When we look back at where Carnival Corp. has traded (15x-17x) on average on a forward EPS basis and then apply the same multiple to RCL, there is clearly a significant amount of upside from current levels" for RCL. Stifel raised their price target on RCL from $88 to $96.

Technically the stock has been showing strength with a bullish trend of higher lows and higher highs. The breakout past resistance at $80.00 is bullish. Today's intraday high was $82.20. Tonight we're suggesting a trigger to buy calls at $82.30.

- Suggested Positions -

Long MAR $85 CALL (RCL150320C85) entry $3.37

12/24/14 triggered @ 82.30
Option Format: symbol-year-month-day-call-strike


Red Robin Gourmet Burgers Inc. - RRGB - close: 76.42 change: -0.09

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: -12.1%
Average Daily Volume = 276 thousand
Entry on December 24 at $76.71
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/27/14: RRGB also delivered a very quiet session on Friday. However, we did see the stock bounce near round-number support at $75.00. I am suggesting traders use Friday's intraday bounce as a new entry point to buy calls.

Earlier Comments: December 22, 2014:
The price of gasoline in the United States has fallen for 89 days in a row as of today. That's the longest streak on record. The current national average is down to $2.376 a gallon. That's more than $1.00 off the recent peak. Who stands to benefit from this major correction in fuel prices? Restaurants.

Americans love to dine out. Paying less at the pump means a lot more disposable income to blow on casual dining. One firm that should benefit is RRGB. The company press describes RRGB as "Red Robin Gourmet Burgers, Inc. (www.redrobin.com), a casual dining restaurant chain founded in 1969 that operates through its wholly-owned subsidiary, Red Robin International, Inc. There are more than 500 Red Robin restaurants across the United States and Canada, including Red Robin Burger Works® locations and those operating under franchise agreements."

A couple of weeks ago Wunderlich Securities commented on the restaurant industry. They believe that industry sales could see some of their strongest monthly gains in years and restaurants are poised to do well in 2015. The combination of strong consumer confidence, improving labor trends, and falling gasoline prices is a great recipe for stronger sales at restaurants. The major restaurant chains have been reporting positive same-store sales for the fifth month in a row. That hasn't happened since early 2012.

Technically shares of RRGB have been showing some relative strength the last few days. The stock spent the first half of December consolidating sideways above support near $70.00. Now it's breaking out to new multi-month highs. If this rally continues RRGB could see some short covering. The most recent data listed short interest at 10% of the very small 13.8 million share float. The Point & Figure chart is very bullish and forecasting a long-term price target at $115.00.

Tonight we are suggesting a trigger to buy calls at $76.65. I do see potential resistance at $80.00 (round-number resistance) but we suspect RRGB could run for a while.

- Suggested Positions -

Long MAR $80 CALL (RRGB150320C80) entry $3.87

12/24/14 triggered @ 76.65
Option Format: symbol-year-month-day-call-strike


Skyworks Solutions - SWKS - close: 74.49 change: +0.17

Stop Loss: 71.35
Target(s): To Be Determined
Current Option Gain/Loss: +12.7%
Average Daily Volume = 3.9 million
Entry on December 18 at $73.00
Listed on December 17, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

12/27/14: SWKS found support near $74.00 again on Friday. Shares still look ready to breakout past round-number resistance at the $75.00 mark. I'm not suggesting new positions at the moment but more aggressive traders could use a breakout past $75.00 as an alternative entry point.

Earlier Comments: December 17, 2014:
SWKS is part of the semiconductor industry. The SOX semiconductor index has been a strong performer this year with a +23.5% gain in 2014. Yet SWKS has outshined its peers with a +138% gain year to date.

Who is SWKS? According to the company website, "Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

The earnings parade continued when SWKS delivered their Q4 report on November 6th. Analysts were expecting a profit of $1.08 per share. SWKS delivered $1.12. The company had already preannounced strong sales and quarterly revenues soared +50% to $718.2 million. Management then raised their guidance again (company's Q1 2015) and SWKS is forecasting earnings above Wall Street's estimates with revenues significant above prior expectations.

Since SWKS' last earnings report the stock has had a number of analysts reaffirm their bullish outlook and a few have upgraded their price targets.

Technically shares of SWKS have been building on a bullish trend of higher lows. However, the stock has been consolidating sideways the last two weeks under short-term resistance in the $71.00-71.25 area. After today's display of relative strength SWKS is setting up for a bullish breakout higher. The point & figure chart is already bullish and forecasting at $102 target.

I will warn investors that SWKS' all-time high going all the way back to February 2000 is the $78.25 area and could prove to be overhead resistance. Tonight we are suggesting a trigger to open bullish trades at $71.55.

- Suggested Positions -

Long FEB $75 CALL (SWKS150220C75) entry $4.08

12/22/14 new stop @ $71.35
12/18/14 triggered on gap open at $73.00, listed trigger was $71.55
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Arista Networks, Inc. - ANET - close: 65.25 change: +0.25

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: -16.7%
Average Daily Volume = 534 thousand
Entry on December 22 at $65.90
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

12/27/14: Trading in ANET has stalled the last few days with shares hovering near the $65.00 level. More conservative investors may want to wait for a new relative low, beneath $63.40, before initiating new bearish positions.

Earlier Comments: December 18, 2014:
ANET is in the technology sector. The company makes networking applications and cloud technology. According to company marketing materials, "Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista's award-winning 10/40/100GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista's platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers."

Shares of ANET held their IPO in June 2014 with 5.3 million shares priced at $43.00. The first trade was $55.25. The stock has been volatile but almost doubled with highs in the low $90s by September. Unfortunately for the bulls the rally has reversed.

ANET produced bearish double top near $94 in September. The stock did see a sharp pre-earnings rally before they reported results on November 6th. ANET beat estimates by 12 cents and beat the revenue estimate as well. Yet guidance was only in-line with Wall Street's estimates and traders sold the post-earnings pop. That has proved to be a new lower high.

Following its post-earnings reversal lower the company and the stock has been plagued with trouble. The stock has suffered thanks to two different lock ups expiring. November 11th was a lock up that allowed some ANET employees to sell about 50% of their stock. Then December 2nd was the 180-day lock up that allowed insiders to sell their shares (up to 53 million shares).

ANET was struggling with all of this additional supply coming to market. Then the company was hit with a massive lawsuit by networking giant Cisco Systems (CSCO) on December 5th. CSCO is a much larger rival and claims that ANET has violated patent and copyright infringement on several technologies. CSCO might have a case. ANET's CEO, Jayshree Ullal, spent fifteen years working for CSCO in its enterprise business. ANET claims that CSCO is merely trying to use the legal system to slow down a competitor.

It could take a couple of years for the legal battle to be resolved but Wall Street is turning more cautious. Since December 5th a few analysts have been lowering their price targets on ANET. Meanwhile bears are arguing that ANET is still too expensive with a P/E of 60 at current levels.

The U.S. stock market just produced its best two-day rally since 2008 and yet ANET did not participate. Instead shares faded lower. This relative weakness looks like a clear signal that the path of least resistance is lower.

Today's intraday low was $66.00. I'm suggesting a trigger to buy puts at $65.90. The $60.00 level could be round-number, psychological support but I suspect ANET could decline toward the $55 area. I want to reiterate that shares of ANET have been volatile so I'm suggesting smaller positions to limit risk.

*small positions to limit risk*- Suggested Positions -

Long MAR $60 PUT (ANET150320P60) entry $4.80

12/22/14 triggered @ $65.90
Option Format: symbol-year-month-day-call-strike