Option Investor

Daily Newsletter, Tuesday, 1/6/2015

Table of Contents

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

Market Wrap

Dizzy Yet?

by Jim Brown

Click here to email Jim Brown

The Dow spiked to +80 at the open before plunging -319 points to -239 followed by a +213 point rebound and then another -107 point drop to end with a -130 point loss. That is enough to make any investor dizzy.

Market Statistics

Oil led the decline with help from Greece, Bill Gross and Jeffery Gundlach. Crude oil declined another -4% to trade under $48 intraday and that crushed the energy sector, which makes up about 10% of the S&P. Saudi Arabia reiterated that slow growth in the global economy was causing the current glut in oil and affirmed that Saudi was not going to cut production.

Crude is in the crazy zone now and there is no doubt we will see higher prices months from now. The amount of global production that will die at these prices is roughly 11 million barrels per day over the next 12 months if prices stayed this low.

The U.S. lost -29 active drilling rigs last week to decline to 1,811 in total. That is down from the September peak for this cycle at 1,931 or a -120 rig drop with most of that drop in the last three weeks (-109). Companies are slashing capital expenditures like crazy and analysts believe we will see at least another 200 rigs shutdown and possibly as many as 400 in the coming months. Since shale well production declines about 70% in the first year it requires a steady stream of new wells to offset the production declines in the existing wells.

Baker Hughes said there were 9,566 wells drilled in the U.S. in Q3. That was a +413 increase from the rate in Q3-2013. That is roughly 5 wells per quarter per rig. We already lost -120 rigs so that means a drop of -600 wells per quarter. If we lose another 200 rigs as the minimum analysts expect that means a loss of another -1,000 wells per quarter or -1,600 in total. Secondarily, the remaining rigs are probably not going to be drilling flat out at the fastest rate possible. Completed wells will slow as companies try to reduce overtime and well costs. They may be contractually obligated by the lease agreements to drill wells on certain acreages but they don't have to drill at a breakneck pace. They can take their time knowing oil prices will rise again 3-6 months from now. The entire sector will go into conservation mode in an effort to reduce costs.

Another analyst that follows large offshore projects said the number likely to be approved for development in 2015 is around 20 compared to a ten-year average of 75 per year. That means 5-7 years from now there will be significantly less production.

The bottom line is that oil is not going much lower and when it finally rebounds it could do so violently because there are so many shorts. This is a twice a decade buying opportunity and funds will be racing into positions once the oil decline stops.

Bill Gross helped push the market over the cliff this morning with a warning that "the good times are over" and "some asset classes will have minus signs in front of them when 2015 is over." He warned that "knowing when the 'crowd' has had enough is often a frustrating task, and it behooves an individual with a reputation at stake to stand clear." He is suggesting that money managers are going to park money in treasuries and bonds rather than risk another bullish year in equities.

He warned that multiple years of interest rates near zero had failed to stimulate growth and that was a warning sign for the future since rates can't stay this low forever. "2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable." That was a veiled reference to equities. While Bill's track record on calling market tops and bottoms is not exactly stellar he is still an influential person and some managers will move money based on his statements.

Doubleline's Jeff Gundlach warned that "if oil goes to $40 the yield on the ten-year treasury will go to 1%. The geopolitical consequences could be -- to put it bluntly -- terrifying." He is right. Historically whenever there has been a severe decline in oil prices there has been a rise in geopolitical concerns including country defaults, wars and social unrest. Russia, Venezuela, Iran, Nigeria, Brazil, Mexico and even Saudi Arabia are at risk if prices remain this low.

Having Gundlach and Gross talking negatively about the market on the same day created almost a free fall decline that started at 10:30. Add in the flurry of headlines about Greece leaving the Euro and the impact on countries like Italy, Spain, Germany, etc and the outlook for Europe fell once again. The yield on the German Bund fell -16% in a single day.

The yield on the ten-year treasury fell to 1.889% intraday and nearly matched the October panic low at 1.86%. There are some serious deflationary fears in the market.

While on the topic, Mike Lewitt at Bridgewater Associates, projected that low oil prices will have a negative effect on the economy. In recent years oil exploration and production have been adding about 0.5% to GDP. Oil prices at $75 would subtract -0.7% over 2015. That projects that $50 oil could subtract -1.5% from GDP. Yes, low gasoline prices will help consumers but the sudden drop in drilling will produce a wave of layoffs, lack of investment and a drop in services and consumables in the energy sector. Cheap gas is not a free benefit. There are costs.

Over the last two months the estimates for energy earnings have declined from a -9% drop to -21% drop. This has led to cuts in earnings estimates for the S&P from $135-$138 two months ago to barely over $120 today. A drop in earnings forces a rise in PE unless stock prices decline as well. The stronger dollar is also forcing estimates cuts for S&P companies.

U.S. economic reports also pressured the markets. So far in 2015 we have seen eight economic reports and all eight data points have declined. That is not a good start for an economy reportedly coming off two back to back 4% GDP quarters.

The ISM Nonmanufacturing Index for December declined from 59.3 to 56.2 compared to consensus estimates for a drop to 58.2. This is not a good sign since the services sector is normally very busy during the holiday season. This was the third decline in four months.

The new orders component declined from 61.4 to 58.9. Backorders fell into contraction territory with a decline from 55.5 to 49.5. Business activity fell from 64.4 to 57.2. Five industries reported a decline in activity in December. Those were transportation, mining, education, arts and entertainment. Ten industries reported a growth in new orders with six industries reporting declines. Export orders declined from 57.0 to 53.5 as a result of the stronger dollar.

Factory Orders for November declined -0.7% and the fourth consecutive month of declines. Moody's was expecting a +0.2% gain. All types of orders declined. Nondurables fell -0.5%, durables -0.9% and nondefense capital goods ex-aircraft -0.5%. Core capital goods fell -0.5%. Those are a proxy for business investment. It appears that companies are cutting back on capital expenditures and that is slowing new orders.

The Intuit Small Business Employment Index rose at a slower pace in December. The headline number for employment growth declined from 0.15% to 0.14%. Compensation growth declined from +0.27% to +0.15%. Hours worked declined from +0.14% to -0.8%. Workers averaged 25.2 hours per week in December and down -0.8% from November. In theory workers should have worked more in December to handle the holiday demand. However, companies with fewer than 20 employees added about 30,000 jobs in December and the same pace as November.

We will get our first look at the overall December employment with the ADP Employment report on Wednesday. This will give analysts their last chance to revise estimates for the Nonfarm Payrolls on Friday. The current ADP estimate is for a gain of +227,000 private jobs compared to a gain of +208,000 in November.

The Nonfarm Payrolls on Friday are expected to show a gain of +250,000 jobs compared to +321,000 in November. I would be very surprised if we were close to 250,000 jobs and I would not be surprised to see the November number revised lower. However, I have been surprised many times before.

In stock news Michael Kors (KORS) fell -8% after Credit Suisse cut their rating from buy to neutral. The analyst said slowing handbag demand had led to "dramatic" discounting. Christian Buss lowered his price target from $103 to $79 and the stock closed at $67 after a -$6 drop. The analyst said a combination of rising inventories and slowing traffic has led to a dramatic increase in promotional activity in Kors stores and at wholesale distribution partners. The percentage of items on sale in premium department stores spiked +31% in December from +5% in October. On the Kors website the company marked down handbags by -65% in December. Inventory for the quarter rose +53% compared to the year-ago quarter. Sales are only expected to rise +25%. In Q3 the company missed sale store sales estimates of +19% with a +16% number. North America saw sales rise +11% instead of the +15% estimate.

Boeing (BA) delivered a record number of planes in 2014 and beat its own goal for the 787 Dreamliner. Deliveries of the 787 rose +75% to 114. Overall Boeing delivered 723 planes in 2014m up +12% from 2013 and at the high end of Boeing's forecast. Boeing booked a record 1,432 net orders valued at $232.7 billion. The 737 was the most popular with 1,104 orders and 485 deliveries. Unfilled commercial orders reached an all time high of 5,789 at the end of December.

Airbus is expected to announce their 2014 orders next week. They are expected to show 506 deliveries and 1,027 orders.

Transocean Offshore (RIG) got some bad news on Monday. Moody's said Transocean's $9.1 billion in debt could be cut to junk status because of the sharp decline in demand for offshore rigs. For instance the active rigs in the Gulf declined from 60 a month ago to only 54 today. That is a huge drop since these rigs lease for close to $500,000 a day. Transocean has nearly $2 billion in new rigs on order. These were ordered in 2013 when there was a deepwater rig shortage. Now they are faced with a sharp decline in demand and a glut of deepwater rigs at $50 oil.

Verizon (VZ) and AOL are in talks for a potential joint venture or an acquisition of AOL by Verizon according to people with inside knowledge. Verizon has not yet made a formal offer and no agreement is imminent according to the rumor. Verizon said it was more interested in partnerships than acquisitions. Verizon wants AOL's ad serving technology according to the Huffington Post. Verizon is planning an online video product offering and AOL has expertise in online content, mobile video and online advertising. Verizon is chasing AT&T and they need a big online presence to do that. AOL has 2.3 million paying subscribers.

Charter Communications (CHTR) will partner with Cisco Systems (CSCO) to offer a cloud based streaming TV service. This will allow Charter to better compete with companies like Comcast and make changes quickly to their content offerings. Cisco is supplying the data-center and networking equipment the Charter. Because the content will be delivered over the Internet there are no set-top boxes to install and that will allow a cheaper service. This will save Charter roughly $4 billion a year by eliminating the millions of set-top boxes. The service is already in live test with 25,000 customers in Fort Worth Texas. Charter shares fell -$4 and Cisco shares were flat.

After the bell Micron (MU) reported adjusted earnings of 97 cents that beat estimates by a nickel but a revenue gain of +13% to $4.57 billion was slightly below estimates. For the current quarter Micron expects revenue in the $4.2 billion range and analysts were expecting $4.614 billion. Micron said production of DRAM chips would decline in Q2 as it reconfigures production lines with improved technology. This changeover will occur in a seasonally slow demand period. The company said demand for DRAM chips continues to be strong. The minor revenue miss and the lower guidance knocked MU shares for a -$1.58 loss in afterhours.


Monday's market decline was the worst in three months and for a while Tuesday was not looking much better. The S&P is off to the worst ever three day start to a new year.

The S&P declined well under 2,000 intraday to touch 1,992 but rebounded to close back over 2,000 by +2 points. However, that was still under the 100-day average at 2,003.66. Closing under this level is negative but a quick morning rebound could easily correct that. Should the S&P decline back under 2,000 the next key level is 1,987 and the 150 day average as well as strong support from last year. If the 1,987 level breaks it would suggest a further decline to 1,900 or even the October lows at 1,820. While I don't expect that severe of a decline we have to project what the charts tell us rather than what we think is going to happen. If you know what to expect and it happens then you are better off because you planned for it. If it does not happen then we dodged a bullet.

The energy sector makes up about 9% of the S&P and the financial sector is about 15%. Their combined decline was more than the S&P could handle.

The Dow also declined to the 100-day before rebounding but I think that was just a coincidence. The Dow is not very reactive to moving averages because of its narrow 30 stock breadth. Any one or two stocks can easily move it 50 points or more so averages don't work with this index.

The next support level is 17,130 followed by 17,000. The crash in the blue chips can be chalked up to window-undressing by fund managers. They stored money in the highly liquid blue chips going into the end of the year so they would not miss out on any additional gains, their positions would look good on the year end statements but also so they could exit quickly in January and return to cash. They would rather buy a decent dip than just be long at a market top going into 2015.

I think it is telling that oil was down -4% and Exxon and Chevron were only down fractionally on Tuesday. Investors realize this is a twice a decade buying opportunity and the big oil stocks pay nice dividends while we wait for oil prices to recover.

The Dow Transports ($TRAN) fell -145 points even though oil prices were trading under $48. I warned about this last week. Cheap oil is not enough once they reached a certain level. Now there are serious concerns about the economy and the potential lack of freight to ship around the country. If drilling falls off a cliff as expected there will be hundreds of train loads of frac sand, well pipe and oil that will not be shipped by rail. There will be thousands of truckloads of products used in wells and to supply the man camps and communities around the oil fields that will not be moving. The busy airline season is also over until spring.

The transports are a market sentiment indicator for the economy. Cheap oil helped push the index back to its highs but it will take a growing economy to keep it there and analysts have some doubts about the current economic health.

The transports declined to the 100-day average and barely rebounded from that level. The index came within about 75 points from the December low at 8,580, which was also the 100-day average. The February, April and August declines also stopped at the 100-day so we have a good precedent set for a rebound tomorrow. However, the October decline rebounded from that average for two days before rolling over and crashing through the 200-day as well.

I would like to tell you the transports will rebound on Wednesday because of the 100-day but nothing is foolproof.

The Nasdaq crashed through the 100-day at 4,584 but rebounded to close slightly above it at 4,592. The Nasdaq has respected that level in the past but not as well as the transports. Since the big cap stocks can move the index significantly on any single day the Nasdaq is not that responsive to averages. All the major averages were busted in the October decline.

Apple was down -6.5% for the year intraday but recovered to close with a gain of a penny.

The Nasdaq missed making a two-month low by 20 points. Biotechs were the big winners but all the "big" stocks were in the loser's column. Amazon, Amgen, Google, Priceline, Netflix, etc. It is really hard for the index to gain any ground with those heavyweights dragging it lower.

Support is now 4,545 and the December low and resistance of 4,650.

The Russell 2000 was the big loser for the day with a -3% decline of -37 points. Apparently everyone who bought small caps for the January rally were reconsidering their strategy and dumping those stocks. There is almost nothing I can say that is bullish about the Russell.

However, we do have a strange convergence of all the major long term averages at about 1,152. That also happens to be support from the Nov/Dec consolidation pattern. The Russell came within 1 point of that level today before rebounding slightly. In theory the convergence of all these support points at 1,152 suggests this would be a good place for traders to buy and owners to defend.

Wednesday is going to be a critical for the market. We can chalk up the first three days of the year to window-undressing by funds, profit taking by investors deferring taxes on 2014 gains for another year, and further declines in the energy and financial sectors. If the market drop continues on Wednesday then there is something else at work here and we should be very careful about long positions.

Geopolitical concerns are starting to rise and that creates significant indecision on the part of individual investors. They typically don't understand the impact of Greece, the Russian ruble, deflation in Europe, a slowdown in China, a currency devaluation in Venezuela, etc. Most individual investors just want to buy stocks and have them go up. When that does not happen it confuses them and they tend to flee the market.

Wednesday will be critical for investor sentiment. The big afternoon rebound today looked like a capitulation event with a whopping 8.3 billion shares of volume but the -107 point drop right at the close showed there were still some sellers in the market.

Based on looking at a lot of charts tonight I am going out on a limb here and suggest Wednesday will be positive unless there is something else from overseas that produces negative headlines. With oil just under $48 and grossly oversold there is always the potential for a short squeeze that lifts energy stocks and the market.

I believe the market is short term oversold and is due for a bounce. That belief and $3 will buy me a cup of coffee at Starbucks so I would not bet the farm on my outlook. Trade what the market gives us, not what we expect the market to do.

If you have not taken advantage of the EOY special there are only 5 days left before it expires. Do NOT procrastinate any longer.



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Jim Brown

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New Option Plays

Relative Strength In Healthcare

by James Brown

Click here to email James Brown


Alkermes plc. - ALKS - close: 60.93 change: +1.55

Stop Loss: 57.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 833 thousand
Entry on January -- at $---.--
Listed on January 06, 2014
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
Biotech stocks were not immune to the market's widespread sell-off today. Yet one stock was bucking the trend. That's biotech stock ALKS.

According to the company's marketing material, "Alkermes plc is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. The company has a diversified portfolio of more than 20 commercial drug products and a substantial clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

Investors want to see companies with a growing pipeline of drugs and ALKS certainly qualifies. Here is a list of treatments in various stages of clinical trials at ALKS current pipeline .

The stock's jump today was thanks to a press release issued this morning. Here's an excerpt from ALKS' press release:

[ALKS] today announced topline results from FORWARD-1, one of a series of supportive clinical studies in the comprehensive FORWARD phase 3 pivotal program for ALKS 5461, a once-daily, oral investigational medicine with a novel mechanism of action for the adjunctive treatment of major depressive disorder (MDD). The FORWARD-1 study was designed to evaluate the safety and tolerability of two titration schedules of ALKS 5461. In addition, the study assessed the efficacy of ALKS 5461 over an eight-week period, compared to baseline, in patients with MDD.

...significantly reduced depressive symptoms from baseline starting at Week One and continued to the end of the treatment period at Week Eight...

If this treatment gets approved by the FDA it could be huge. According to a Thomson-Reuters article, depression is a massive opportunity going forward. Almost 350 million people worldwide suffer with depression and it's the leading cause of disability in the world. As more and more healthcare systems around the world get better at diagnosing depression it's going to drive demand for treatment.

Jim Cramer, on CNBC, mentioned ALKS this morning and commented on the company's press release about this new depression drug.

Technically shares have been showing relative strength the last few days and ignoring the market's sell-off. Today's breakout past resistance at $60.00 has also produced a new point & figure chart triple-top breakout buy signal with a $100 price target.

I am cautioning readers that biotech stocks are volatile. ALKS is no different. This is another higher-risk, more aggressive trade. The option spreads are pretty wide, which puts us at a disadvantage.

Tonight we are suggesting small bullish positions if ALKS can trade at $61.75. I would prefer to buy March calls since ALKS reports earnings in late February but March options are not available yet.

Trigger @ $61.75

- Suggested Positions -

Buy the Feb $65 CALL (ALKS150220C65) current ask $3.10

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Profit Taking & Oil Weakness Power Another Decline

by James Brown

Click here to email James Brown

Editor's Note:

Investors are still taking profits on last year's winners and oil's plunge is crushing the energy sector names.

The stock market's widespread sell-off continues with the S&P 500 now down five days in a row. Bullish candidates BMRN and RRGB hit our stop loss today.

Current Portfolio:

CALL Play Updates

Athenahealth, Inc. - ATHN - close: 141.23 change: -2.56

Stop Loss: 144.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 516 thousand
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in early February
New Positions: Yes, see below

01/06/15: The market's continued weakness drove ATHN to short-term support near $140. A bounce from here might be an entry point but we are currently on the sidelines with a suggested entry at $150.45. We might adjust our entry strategy if ATHN can bounce tomorrow.

If we do choose to buy a bounce in ATHN we'll probably move the stop below today's low (139.23) and move the option strike lower. Stay tuned!

Earlier Comments: January 3, 2015
You might think Athenahealth is in the healthcare sector but it's actually in the technology sector. The company provides information services to the healthcare sector. ATHN describes itself as "athenahealth is a leading provider of cloud-based services for electronic health records (EHR), revenue cycle management and medical billing, patient engagement, care coordination, and population health management, as well as Epocrates and other point-of-care mobile apps. We connect care and drive meaningful, measurable results for more than 59,000 health care providers in medical practices and health systems nationwide."

Earnings in 2014 have been up and down. ATHN missed estimates in April 2014. They beat estimates in July and then reported in-line results in October. Their next report is expected in early February.

ATHN held an investor day on December 10th. They reaffirmed their 2014 guidance, which is essentially 22% to 27% year over year growth with gross margins in the 63% range. They also provided a 2015 forecast of +20% growth with revenues in the $900-925 million area. There was some concern that this 2015 guidance was too light but shares have been soaring in spite of the initial dip on the news.

If you're going to trade ATHN it's worth pointing out that David Einhorn, the outspoken hedge fund manager at Greenlight Capital, issued a very bearish call on ATHN back in May 2014. We don't know if he's still short ATHN but his opinion may have fueled the short interest in this name. The most recent data listed short interest at 26% of the small 37.5 million share float. Unfortunately for the bears they have been getting killed with the rally from its December lows.

ATHN's recent breakout past resistance in the $145-146 area is bullish and helped generate a buy signal on the Point & Figure chart that is suggesting at $178 target. Technicians will note that ATHN found support right where it was supposed to at prior highs (near $146).

If this rally continues ATHN could see more short covering. Tonight we are suggesting a trigger to buy calls at $150.45 with a stop at $144.90. We will plan on exiting prior to ATHN's earnings report in early February (no confirmed date yet).

Trigger @ $150.45

- Suggested Positions -

Buy the FEB $155 CALL (ATHN150220C155)

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

Royal Caribbean Cruises - RCL - close: 81.95 change: +0.24

Stop Loss: 78.40
Target(s): To Be Determined
Current Option Gain/Loss: -12.8%
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

01/06/15: RCL displayed relative strength on Tuesday. Shares did dip toward support near $80.00 and bounce. The rebound pushed RCL to a +0.29% gain versus the market's widespread drop. If both RCL and the S&P 500 are positive tomorrow I would consider this a new bullish entry point.

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

PUT Play Updates

Arista Networks, Inc. - ANET - close: 63.81 change: +0.01

Stop Loss: 66.25
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

01/06/15: I am still concerned about our ANET trade. The market continued to drop today but ANET recovered to close virtually unchanged. That's three days of relative strength in a row. More conservative traders may want to lower their stop closer to the $65 level.

I am not suggesting new positions at this time.

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

01/03/15 new stop @ 66.25
12/22/14 triggered @ $65.90
Option Format: symbol-year-month-day-call-strike

Dover Corp. - DOV - close: 69.14 change: -0.33

Stop Loss: 74.25
Target(s): To Be Determined
Current Option Gain/Loss: +56.5%
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

01/06/15: DOV continued to drop with shares down six out of the last eight session. Yet the afternoon bounce pared its losses to -0.4% versus -0.88% in the S&P 500. If DOV does rebound we can look for short-term resistance near $72 and its 10-dma.

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

01/03/15 new stop @ 74.25
12/29/14 triggered @ 73.40
Option Format: symbol-year-month-day-call-strike

Philip Morris Intl. - PM - close: 81.10 change: +0.69

Stop Loss: 82.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.4 million
Entry on January -- at $---.--
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in early February
New Positions: Yes, see below

01/06/15: Yields on the 10-year U.S. bond plunged to new three-month lows. This is the lowest closing yield (1.96%) in almost two years for the 10-year note. That made high-dividend stocks more attractive. Tobacco companies, which typically pay a high dividend, bounced today and PM rallied up to resistance near $82.00 before paring its gains. The real winners in the search for dividends were the REIT stocks today.

We're still bearish on PM. Our suggested entry point is $79.85.

Earlier Comments: January 3, 2015:
The first thought a lot of investors have when they think of cigarette maker PM is dividends. This company has been delivering strong dividends for years. Right now the stock's dividend yield is almost 5%. Yet that hasn't stopped the bearish trend of lower highs.

PM describes itself as "Philip Morris International Inc. (PMI) is the leading international tobacco company, with seven of the world's top 15 international brands, including Marlboro, the world's best-selling cigarette brand. Until March 28, 2008, PMI was a wholly owned subsidiary of Altria Group, Inc., since that time the company has been independent and is listed on the New York Stock Exchange (ticker symbol PM)."

PM has joined the cigarette revolution with smokeless e-cigarettes and a new hybrid model they're calling HeatSticks, which doesn't burn the tobacco but instead uses a battery to heat it.

Earnings have been mixed. Back in February 2014 they lowered guidance. That allowed the company to then beat estimates in July and October. Yet in their October report PM issued cautious guidance. The rising U.S. dollar is definitely hurting margins as PM sells its tobacco products around the world.

Technically shares are weak and have been underperforming the market. The current sell-off has pushed PM to the verge of a new sell signal on its point & figure chart. These are new multi-month lows and we think the weakness continues. Friday's intraday low was $80.63. I am suggesting a trigger to open bearish positions at $79.85. Earnings are expected in early February and we'll plan to exit prior to the announcement.

Trigger @ $79.85

- Suggested Positions -

Buy the FEB $80 PUT (PM150220P80)

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


BioMarin Pharmaceutical - BMRN - close: 90.28 change: -2.83

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: -42.6%
Average Daily Volume = 1.1 million
Entry on January 06 at $93.55
Listed on January 05, 2014
Time Frame: Exit prior to February option expiration
New Positions: see below

01/06/15: Our aggressive, higher-risk trade in BMRN did not last long. It was a volatile day in the U.S. market. Shares of BMRN started the session in rally mode and hit new relative highs with a rise to $94.88. Our trigger to buy calls was hit at $93.55 along the way. Then the market accelerated lower and BMRN followed suit. Shares dropped to $88.51 intraday and our stop was hit at $89.40 in the process.

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

FEB $95 CALL (BMRN150220C95) entry $5.40 exit $3.10 (-42.6%)

01/06/15 stopped out @ 89.40
01/06/15 triggered @ 93.55
Option Format: symbol-year-month-day-call-strike


Red Robin Gourmet Burgers Inc. - RRGB - close: 75.75 change: -0.65

Stop Loss: 72.45
Target(s): To Be Determined
Current Option Gain/Loss: -45.0%
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

01/06/15: Shares of RRGB spiked down to $72.00 and then bounced almost $3 off its intraday low. Our stop was hit at $72.45.

Super low gasoline prices should be bullish for consumer spending and especially the restaurant stocks. I would keep RRGB on your watch list for another entry point.

- Suggested Positions -

MAR $80 CALL (RRGB150320C80) entry $3.87 exit $2.13 (-45.0%)

01/06/15 stopped out @ 72.45 thanks to market's sharp decline
12/24/14 triggered @ 76.65
Option Format: symbol-year-month-day-call-strike