Option Investor

Daily Newsletter, Tuesday, 12/30/2014

Table of Contents

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

Market Wrap

Tax Selling and Profit Taking

by Jim Brown

Click here to email Jim Brown

Today's decline was no surprise. I warned this week would be choppy as procrastinators finally made the decision to restructure their portfolios before 2014 comes to a close.

Market Statistics

This week is normally choppy as the laggards take profits and/or sell their losers before the tax deadline at Wednesday's close. This is kind of like Christmas shopping. There are always some people who put it off until the last minute. With very low volume these last minute moves tend to move the market.

There were no economic reports driving traders. The Consumer Confidence report for December rose from an upwardly revised 91.0 to 92.6. While still below the October eight-year high at 94.1 it was still strong. November's headline number was revised up from 88.7 to 91.0.

The present conditions component rose from 93.7 to 98.6. The expectations component declined from 89.3 to 88.5. That was the second consecutive monthly decline. Those planning on buying a car declined from 12.9% to 12.1%. Prospective home buyers declined from 6.5% to 4.8%. Appliance buyers rose from 51.6% to 52.2%.

Only 18% of respondents expected business conditions to improve over the next six months. However, those that think current conditions are bad declined from 21.8% to 19.6% suggesting conditions may be improving.

The falling gasoline prices probably influenced the gains in the current conditions component while the normal post Christmas letdown and worry about paying those credit card bills with holiday charges may have depressed the expectation component.

The Texas Service Sector Outlook Survey declined from 17.3 to 12.7 and the third consecutive month of decline from the 27.4 high in September. All but one component declined and that was hours worked with a rise from 4.4 to 7.3, which should be a precursor to additional hiring except this could have been retail workers extending holiday hours.

Tomorrow's calendar is also weak with pending home sales the only material report. With the focus on energy recently the oil inventory report could also be a market mover on low volume. Last week's unexpected 7.3 million barrel gain was a weight on the market.

Friday's ISM is going to be the big report for the week but nobody will be around to see it. Volume will be extremely low so any unexpected decline in the ISM could be market negative.

The news moving the markets at the open was a protest in front of the Kremlin in Moscow. The protest was in opposition to the sentencing of Oleg Navalny, a blogger critical of the government who was convicted of embezzling money. He received a 3.5 year sentence while his brother Alexei who was convicted of the same crime received a suspended sentence.

Writing against the government in Russia is a criminal offense. The sentencing was thought to be a message to other bloggers to be careful what they say or they will be next. If your blogging does not violate some specific crime the government will make one up and convict you of that one. If you own a business the government wants they will charge you with tax evasion or EPA violations and seize the business. This is how things get done in Russia. However, if you agree to accept Putin as a partner in your business you will prosper. Putin is reportedly worth $150 billion as a result of corruption and partnerships like these.

The police moved in quickly to break up the protest with as many as 100 arrested. The U.S. State Dept called the sentencing of the brothers a "disturbing development designed to punish and deter political activism." Alexei was an opposition leader three years ago when tens of thousands took to the streets to protest Putin and the inner circle. Opposition leaders today claim jailing Alexei would have risked a new wave of protests so the government punished Alexei by jailing his brother instead.

Putin is on the verge of some serious trouble in Russia and he has to keep a firm hand on the population to prevent demonstrations from getting out of hand. Expect more protests in the future and more protestors going to jail. Analysts claim this is not a repeat of 1998 when Russia defaulted on its debt but Russia is in serious financial difficulty.

The markets were still weak as a result of the Greek presidential vote over the weekend. The third parliamentary election failed to elect a president and endorse the choice of Prime Minister Samaras and that means a general election will be scheduled for early in 2015 and there is a good possibility an anti-EU candidate could be elected and throw the economic recovery into jeopardy. The opposition candidate likely to run is against the bailout by the Troika and against the EU.

Treasuries rose for the second day on the worries over Russia and Greece. The yield on the ten-year declined to 2.19% after hitting 2.3% last Wednesday.

The best thing that happened all day was my friend Art Cashin celebrating his 50th anniversary of being a NYSE member. He started on December 30th, 1964, 50 years ago at the age of 23. He was one of the youngest to ever hold a seat on the exchange. He got to ring the opening bell at the NYSE today and a well deserved privilege. Congratulations Art!

In stock news Apple shares declined after ABI Research said iPad 2014 sales were expected to decline for the first time in the five-year history of the tablet. The forecast is for sales of 68 million units down from 74 million in 2013. Typically Apple gets 35% of its iPad sales in Q4 and the research firm expects sales in Q4 to lag estimates.

ABI also expects Amazon, Barnes & Noble and Google to also post lower tablet sales. Meanwhile Samsung is expected to post a gain with 43 million in sales compared to 38 million in 2013. Also expected to post gains are Acer, ASUS, Dell, HP, Lenovo, LG and Microsoft. Android tablets are expected to garner a 54% share of the branded tablet market with iOS at 41% and Windows 8 at 5%. ABI expects the overall sales of tablets to rise +16% in 2015 to 194 million and rising to 290 million in sales for 2019.

In the seven days leading up to Christmas 11% of new device activations were full size tablets and 11% for small tablets. The company said the larger iPhone six was impacting iPad sales.

Microsoft (MSFT) is said to be working on a stripped down browser to compete with Google's Chrome. Code-named Spartan, the new browser will look more like Firefox and Chrome and will support extensions. Internet Explorer may have helped pioneer the Internet back in the 1990s but it has grown to be big, bulky and slow compared to its competitors and it does not play well with mobile devices. Spartan will be bundled with Windows 10 according to ZDNet. Desktop users will receive IE 11 and Spartan. Chrome recently took over the top spot in the browser rankings with a 6% gain to 31.8%. IE dropped -6% to 30.9%. Apple's Safari holds a 25% share.

There is a dark side to cheap gasoline. Prices have collapsed so fast that a barrel of gasoline cost $50.40 on the spot market ($1.20 gallon) and the price of oil was $54. That means refiners would lose money refining gasoline today if it were not for the other products that are refined from the same barrel of oil. Diesel cost $78.54 per 42 gallon barrel or $1.87 a gallon. The oil glut has turned into a gasoline glut with gasoline futures hitting a 5-year low at $1.45 on Tuesday. Some analysts are now predicting a national average for gasoline under $2.00 while others are forecasting $2.13 to $2.19. These numbers will not last long if refiners can't make a profit. They are not going to refine gasoline for a loss. That will shrink supply and prices will rise. Last week the EIA reported a record output of 9.92 mbpd for refined gasoline. With diesel and jet fuel prices finally dropping we should see refiners back off from the 93.5% utilization factor we saw over the last two weeks.

Researchers believe they have discovered patient zero in the Ebola outbreak. The source was a 2-year-old boy in Meliandou, Guinea. He played in a tree that was a nesting place for bats. Researchers theorize he contacted the disease from the bat droppings and died in December 2013. His family became infected from him and spread that infection throughout his village and on to Liberia, Sierra Leone, Nigeria, Mali and Senegal. So far more than 20,000 people have been infected and more than 8,000 have died. If only the parents and child had practiced basic safety methods like frequent hand washing the outcome may have been significantly different.


Remember last week when the market was setting new highs? Investors poured more money into U.S. based equity funds at a record rate. Mutual funds and exchange traded funds (ETFs) saw their biggest weekly inflows ever. According to Thomson Reuters U.S. funds took in more than $36.5 billion last week. That is in addition to $81.3 billion that has flowed into ETFs since October. According to TrimTabs.com that is the largest three-month inflow ever. According to ETF.com the S&P tracking ETF (SPY) received $27.3 billion of that total.

Very large inflows are negative on a contrarian basis. That means everyone is "all in" at a market top. Of course there will be more inflows this week and next as retirement contributions and year-end bonuses are put to work. That typically supports the market into the January option expiration cycle.

The S&P gave back -10 points to close at 2,080 with one trading day left in 2014. With 2,100 the unofficial target for the end of 2014 it would take a very bullish day on Wednesday to hit that target. With the S&P up +12.5% for the year it would also take a huge market drop to take us back to single digit gains.

The tax sellers should be done but given the rebound off the December lows we could still see some additional profit taking. If you don't have a specific reason to be in the market I would probably pass on adding new positions until next week. I still remember January 2008. The last three days of December posted losses and January 2nd started a -130 point S&P decline by January 22nd. The market was strongly directional to the downside but 2008 was a different time and the beginning of the financial crisis. We can't really compare that January with expectations for this January but it does make me cautious.

My official outlook is for further gains in early January and then some serious profit taking after option expiration. Whether that comes true or not remains to be seen.

The 2,080 level is initial support on the S&P so there is the potential for a rebound on Wednesday. A further decline could spoil hopes for a strong start to 2015 on Friday.

The Dow continued its pattern of weakness that started last week. The intraday shadows on those candles from last week predicted a future decline. The Dow weakness today was led by Caterpillar but it was broad based with only four companies finishing in the green. However, there were no big losses. This appeared to be simple profit taking rather than some change in direction.

The Dow closed back below 18,000 but still above three uptrend lines of resistance, which should now be support. I am neutral on the Dow fundamentally but the +1,034 point rebound from 17,069 on December 17th to the 18,103 high on December 26th is begging for some profit taking. The Dow should not rebound 1,034 points in 7 trading days without a decent retracement of some of those gains.

The Nasdaq Composite declined to close below prior resistance at 4,800 but still above uptrend support at 4,770. This could aid in producing a rebound on Wednesday but I am cautious we could see further choppy trading. I would not rush into Nasdaq stocks or any stocks for that matter until next week and then only after seeing how the market begins 2015.

There is no reason to rush into the market on Wednesday. Don't let your early celebration of New Years Eve trick you into making trades while under the influence of a high blood alcohol content. Enjoy your parties and plan to take a sober look at the market on Monday.



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New Option Plays

The Affordable Care Act Impact

by James Brown

Click here to email James Brown


Humana Inc. - HUM - close: 145.77 change: +1.29

Stop Loss: 142.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.1 million
Entry on December -- at $---.--
Listed on December 30, 2014
Time Frame: Exit prior to earnings in February
New Positions: Yes, see below

Company Description

Why We Like It:
Business is destined to improve when the U.S. government is essentially forcing citizens to buy your product. The Affordable Care Act (a.k.a. Obamacare) requires people to have health insurance or pay a penalty. In 2014 the penalty was $95 per adult or one percent of your taxable annual income, whichever is greater. In 2015 that penalty rises to $325 per adult or 2% of your taxable income. Putting politics aside on Obamacare it has been a blessing for the health insurance companies with millions of new customers.

HUM is in the healthcare sector. According to a company press release, "Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company focused on making it easy for people to achieve their best health with clinical excellence through coordinated care. The company's strategy integrates care delivery, the member experience, and clinical and consumer insights to encourage engagement, behavior change, proactive clinical outreach and wellness for the millions of people we serve across the country."

Investors have been pretty forgiving with HUM. Back in November they missed Wall Street's earnings estimates. The stock did drop from $140 to $130 on this miss but less than two weeks later it was trading near $140 again. Investors could be betting on even more enrollments for Obamacare. The Congressional Budget Office is forecasting 13 million enrollments by the end of 2015. On a side note it doesn't hurt that HUM recently authorized a $2 billion stock buyback program to replace their $1 billion plan.

In early December shares of HUM received a couple of price target upgrades. One was for $160 and another for $165 as analysts believe HUM should grab market share in 2015. The point and figure chart is bullish and forecasting a long-term target of $173.00.

Technically we like how HUM has found support near its bullish trend of higher lows and just started to bounce. Shares displayed relative strength today with a +0.89% gain. The intraday high was $146.14. Tonight we are suggesting a trigger to buy calls at $146.35.

Trigger @ $146.35

- Suggested Positions -

Buy the FEB $150 CALL (HUM150220C150) current ask $4.20

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

A Down Day For Global Markets

by James Brown

Click here to email James Brown

Editor's Note:

Stocks were down across the globe on Tuesday. Big declines in Europe and Japan pressured American markets lower. China posted losses but fared better than its peers.

Most of our candidates trended lower today as well.

Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 112.52 change: -1.39

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

12/30/14: U.S. stocks encountered a little profit taking on Tuesday. AAPL was no exception. Shares drifted back toward short-term support near $112.00. We are still on the sidelines with a suggested entry point to buy calls at $115.25.

Earlier Comments: December 27, 2014:
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)

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

Packaging Corp of America - PKG - close: 78.94 change: -0.17

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: -22.5%
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

12/30/14: PKG appears to be asleep. Shares remain stuck in the $78-80 trading range I mentioned a few days ago. 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: 82.53 change: -1.03

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: - 5.0%
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

12/30/14: RCL also experienced some profit taking today with a -1.2% decline. The $82 and $80 levels should offer some short-term support. I would prefer to wait for a dip near $80 before considering new bullish positions.

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: 77.85 change: -0.54

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: + 5.9%
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

12/30/14: We see a similar story here with RRGB. After gains yesterday this stock dipped today. I am not suggesting new positions at this time. The $80.00 level is potential round-number resistance.

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

PUT Play Updates

Arista Networks, Inc. - ANET - close: 60.64 change: -0.93

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: +14.6%
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

12/30/14: ANET continues to underperform the broader market and lost another -1.5% today. Shares are nearing what could be potential support at $60.00 and at its December 8th intraday low at $59.16. Do not be surprised if ANET produces a short-term bounce in this area ($59-60).

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

Dover Corp. - DOV - close: 73.47 change: +0.22

Stop Loss: 75.25
Target(s): To Be Determined
Current Option Gain/Loss: -10.9%
Average Daily Volume = 1.7 million
Entry on December 29 at $73.40
Listed on December 27, 2014
Time Frame: 4 to 8 weeks, exit ahead of Q1 earnings
New Positions: see below

12/30/14: DOV hit our bearish entry point at $73.40 yesterday. The stock managed a small bounce today with some help from its simple 10-dma and 20-dma in the $72.90 area as technical support. I would still consider new bearish positions now but more conservative traders might want to wait for a new relative low under $72.80 before buying puts.

Earlier Comments: December 27, 2014:
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.

- Suggested Positions -

Long MAR $70 PUT (DOV150320P70) entry $2.30

12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike