Option Investor

Daily Newsletter, Saturday, 2/21/2015

Table of Contents

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

Market Wrap

Greece Release

by Jim Brown

Click here to email Jim Brown

After watching the Dow and S&P trade in a narrow range all week on worries over the negotiations with Greece the announcement of a deal on Friday released the indexes to make new highs. While the Greek problem is not over the can has been kicked down the road for another four months. Traders breathed a sigh of relief and celebrated by adding to long positions.

Market Statistics

The EU and Greece hammered out a tentative four month extension to their existing bailout program. Apparently Greece caved in to almost everything they said they would not accept. Greece will be supervised over this four month period by the EU, ECB and IMF otherwise known as the Troika. Greece said it would never agree to continue the current bailout program with severe austerity measures and yet when the smoke cleared they were forced to agree. The extension still has to be approved by the parliaments of the EU countries by next Friday but officials expect that to happen.

Greece was backed into a corner because they have no money, major bills were coming due and the banks were hemorrhaging cash. The ECB had been supporting the banks with temporary loans of about $4 billion a week. If Greece had not agreed to the extension the ECB loans would have stopped and the banks would have failed. Greece had no money to pay government workers, military and to keep the government services running. This is why traders had assumed a compromise agreement would be reached because the new government in Greece had no real options except for the nuclear option of leaving the eurozone and crashing their economy even worse.

Shares in the National Bank of Greece (NBG) rallied +22% on news of the bailout deal. However if you look at the last 5-6 days on the chart you can easily see that traders were already betting a deal would get done. Traders have been assuming all week that a deal would happen and that is what kept the indexes from slipping to far below their early week highs.

Once the rumors began to break that a deal had been done the markets rallied with the Dow rising from 17,992 at 12:00 to close at 18,140. Basically 148 points of the Dow's 154 point gain came after the first rumor broke. The Dow close was a new historic high and the first new high for 2015 for the Dow. Even with the big gain and the new high the Dow only gained +121 points for the week.

There were no economic reports of note on Friday. Next week's calendar is highlighted by the Yellen testimony on Tuesday and Wednesday. Tuesday is important because the first day tends to suffer from foot in mouth disease. Sometimes answers to questions don't come out exactly as she would have phrased them in a prepared speech. On Wednesday she will get a chance to correct any mistakes after she has had an opportunity to ponder her Tuesday answers. The actual testimony is the same but the answers to questions are unscripted. Analysts will be watching closely for clues to her rate hike bias to see if it has changed.

There are several housing reports and a couple of Fed manufacturing sector reports. The week ends with a GDP revision and it is expected to decline to just over 2% growth for Q4.

Analysts are starting to worry about Q1 and the impact of the severe weather. You may remember last year that Q1 GDP declined -2.11% in Q1 as a result of the polar vortex shutting down a lot of the Northeast for weeks at a time.

No new split announcements this week.

Other than the news on Greece it was a very quiet day. The highlight in the earnings category was Deere (DE). Earnings were $1.12 compared to estimates for 83 cents. Revenue fell -19% to $5.61 billion. The company said farm income will drop the most this year since the Great Depression. Deere has cut production and laid off hundreds of workers as demand for farm equipment declines. The number of combines sold in the U.S. declined -25% in 2014 and sales of tractors with at least 100 horsepower fell -12%.

Commodity prices have crashed with corn prices falling -50% and soybeans down -40% from the record prices seen in 2012. Farm income is expected to decline in 2015 for the third consecutive year. Deere guided for 2015 income to about $1.8 billion and less than the prior projection in November of $1.9 billion. Shares declined sharply at the open but rebounded to close slightly positive. Warren Buffet said in the recent SEC filing that Berkshire increased its stake in Deere to 5%.

Intuit (INTU) shares rallied +6% after reporting a loss of 6 cents that beat expectations for a loss of 13 cents. Revenue of $808 million beat forecasts of $784 million. For the current quarter the company expects earnings of $2.70-$2.75 and analysts expected $2.90. The real power behind the stock spike was a 50% increase in Quickbooks subscribers compared to a 43% gain in the prior period. TurboTax subscribers rose +19%. Sales from TurboTax rose +54%.

Lab Corp (LH) reported adjusted earnings of $1.65 compared to estimates for $1.63. Revenue of $1.51 billion beat estimates for $1.49 billion. On Thursday the company completed the acquisition of Covance for $5.7 billion. Based on post acquisition metrics the company guided for revenue growth of 40-44%. Full year earnings are expected to be $7.35-$7.70 compared to analyst estimates for $7.33. Free cash flow is expected in the $1.1 billion range. Shares spiked +3% on the news.

Iron Mountain (IRM) reported earnings of 25 cents that missed estimates of 31 cents. Revenue of $778 million missed estimates for $787 million. They guided for full year earnings from $1.15 to $1.30 and revenue from $3.03 to $3.15 billion. This midpoint was a decline from 2014 revenue of $3.12 billion. Shares fell -5% on the news.

The Barnes Group (B), an industrial and aerospace parts supplier, reported earnings of 62 cents compared to estimates for 61 cents. Revenue of $310 million missed estimates for $315 million. They guided to full year earnings in the $2.42 to $2.57 range. Investors must have liked the numbers because shares rose almost 8%.

Cheniere Energy (LNG) reported a loss of 50 cents compared to estimates for a loss of 29 cents. Revenue was $66 million. The loss was related to the early extinguishment of debt and write off of costs associated with that debt. Cheniere is not currently an operating company. They are building the largest LNG export facility in the U.S. in Louisiana and another facility in Corpus Christi Texas. Their first exports are expected in late 2015 and volume will grow as additional trains come online over the next 4 years. Sabine Pass is scheduled for 6 trains with the capacity of 4.5 million tons of LNG per annum each (MTPA). Corpus Christi is scheduled for 3 trains at 4.5 MTPA each.

Cheniere has already presold roughly $7 billion a year in LNG for the next 20 years at Henry Hub prices plus a fee. The cost of natural gas is immaterial to them because they collect a fee per Mcf for acquiring and liquefying the gas. Actually if gas remains cheap they will be at a significant competitive advantage to almost every other LNG exporter in the world. I strongly recommend Cheniere for a long term investment.

Cyberark Software (CYBR) is on fire. Since bottoming at $33 on February 2nd the stock has more than doubled. Analysts are saying that Cyberark, FireEye (FEYE) and Palo Alto Networks (PANW) are the best of breed in the security business. The gains have been powered by funds with Friday's volume over 6 million shares. This is not your father's software security stock. I can't imagine anyone buying this spike but I have been saying that for a week. This looks like a dot com stock back in 2000. They also blew out earnings on two weeks ago with 21 cents compared to estimates for 5 cents.

Salix Pharmaceuticals (SLXP) shares surged again with a +5% gain to $158. Reuters said Valeant (VRX) was close to acquiring the company for $160 per share. The deal could come as early as next week. Salix has been in play for several weeks with various rumored partners but Valeant has always been the top contender. At $160 the deal would be worth $10.2 billion and the largest deal Valeant has ever done and they have done a lot of deals. The CEO recently said they expected to complete several smaller deals in 2015 but did not rule out a big deal. Shire Plc (SHPG) said last week it was also taking the initial steps to bid on Salix. Endo International (ENDP) also said it wanted Salix but the company said no thanks.

Shares of Noodles & Co fell -32% after reporting earnings of 13 cents that missed estimates by a penny. Revenue of $108.5 million also missed estimates of $110 million. The biggest problem was 2015 guidance for growth around 20% when analysts were expecting 34%. Same store sales remained lackluster at +1.3%. Baird downgraded them from outperform to neutral and Janney Capital cut them from buy to neutral.

Rocket Fuel (FUEL) ran out of fuel after reporting a loss of 18 cents compared to estimates for a loss of 25 cents. Revenue of $139.5 million also missed estimates of $145.5 million. The company is a big data, artificial intelligence, advertising placement company. In theory they can mine the data and determine which ads will work in which position. However, costs surged in the latest quarter and revenues did not keep pace. The stock has been on a downward trajectory since January 2014. Shares fell -27% on Friday.

Boeing (BA) is flying high after an entire year of consolidation. On Wednesday the company said it will keep returning significant amounts of cash to shareholders and promised a painless transition from the 777 to the 777X in the next couple of years. Boeing said there would be no decline in production rates on the existing 777 model. The company also signed a new order for (6) 737s valued at $594 million from Alaska Airlines (ALK). Alaska Air is taking delivery of 19 new planes in 2016. Including the new deal Alaska Air has ordered 79 jets from Boeing and is replacing all its 737-400s with 737-900ERs, which carry 25% more passengers on the same amount of fuel.

Last week Boeing announced a $1.6 billion order for (17) 737-800s from Transavia, a subsidiary of Air France. Korean Air also ordered (5) 777 freighters valued at $1.5 billion. Business is booming for Boeing. Sterne Agee reiterated a buy rating with a price target of $196. Boeing will generate $23 billion in free cash flow for the period 2015-2017 and have $16 billion available for buybacks after paying generous dividends.

Next week is small cap earnings week. There are several hundred companies reporting and most I don't recognize. I did pull out more than I expected out of the list and there are some big caps mixed in with the unknowns. There are several retailers including Target, TJX, Sears, Kohl's and Macys. Building supply heavyweights Home Depot and Lowes will tell us how the home selling season is shaping up. Hewlett Packard, Express Scripts, SalesForce.com, Budweiser and Berkshire Hathaway round out the top names.

Apple may or may not be planning an electric car and they have declined to comment on "rumors and speculation." However, Apple has hired so many engineers from electric car battery maker A123 Systems that A123 has sued Apple over the poaching. A123 said Apple was on the verge of gutting A123 completely. The lithium batteries from A123 are found in several hybrid cars including the BMW and Chevy Spark. Apple also tried to hire battery experts from LG Chem Ltd, Samsung Electronics, Panasonic, Toshiba and Johnson Controls according to the lawsuit.

Apple also hired Johann Jungwirth who for six years led research and development for Mercedes-Benz in North America. He joined Apple in September. He specializes in building internet connected cars and autonomous driving.

Elon Musk has also complained that Apple has been hiring away his engineers at a record pace. Musk said Apple was offering $250,000 signing bonuses and 60% increase in salaries to Tesla engineers. Musk also admitted he spoke with Apple's acquisitions team last year but would not disclose the topic.

Based on publicly available employment records Apple has hired dozens of executives and engineers from other auto companies. A longtime engineer at Autoliv, a maker of automobile safety systems, joined Apple to work in their special projects group in January. The special projects car team now has more than 200 employees.

Two vans registered to Apple and covered with sensors similar to the early Google prototypes have been spotted in San Francisco and Brooklyn. This suggests they are experimenting with self driving cars as well.

Analysts believe Apple could not actually produce a car until about 2020 because of all the engineering that needs to be done and manufacturing of the individual parts as well as building the manufacturing facilities.

Apple may not want to admit it but there are far too many signs that they are headed towards producing a prototype car. They may not want to produce it but they could easily license the production to somebody already in the business.

Apple shares rallied to a new high and a market cap of $754 billion. Since January 1st the Nasdaq has gained +207 points and 106 of those points were added by Apple.

All the talk about Apple getting into the electric car business and Elon Musk admitting he spoke with Apple's acquisition team has rocketed Tesla shares higher as well. TSLA shares have gained +13 points in the last two days. Tesla's market cap is only $27 billion and Apple has $180 billion in cash. They could snap up Tesla in a heartbeat and even pay a huge premium and not break the bank. However, I doubt Elon Musk wants to work for Apple.

Crude oil prices declined -$2 for the week to close at $50.34. Two of the factors affecting prices included another surge of 7.7 million barrels into U.S. inventories pushing them to 425.6 million barrels and the highest level since 1930. Cushing inventories rose nearly 4 million barrels to 46.3 million and a six-year high. Cushing Oklahoma is the futures delivery point for WTI.

Secondly it appears China has completed filling their strategic oil reserves and the number of Very Large Crude Carriers (VLCC) either unloading in China or headed for China fell to 62 and the lowest since September 19th. Each tanker carries 2 million barrels. China began filling its reserves in early October when a record 89 tankers were making trips to China with an average of 76. The country imports an average of 6 mbpd in normal times. If China has finished its four month stocking binge then the biggest surplus buyer in the market may no longer be in the market. This would mean that the surplus oil being produced every day has to find someplace else to go.

I have written about this problem over the last couple weeks. When the global tank farms reach capacity and there is no place to store oil the price could drop sharply. This could happen in the weeks ahead.

The U.S. produced a record 9.28 mbpd last week despite the continued drop in active rigs. It will be another 3-6 months before U.S. production slows appreciably because wells that have already been drilled still need to be completed and connected to pipelines and gathering systems. U.S. inventories have grown by 43.3 million barrels (12%) over the last six weeks.

Table for week ended 2/13. Green is a recent high, yellow a recent low.

For the week ended 2/20 active rigs declined another -48 rigs to 1,310 and the lowest since 2009. Oil rigs declined -37 to 1,019 and gas rigs declined -11 to 289 and a new 18-year low. Offshore rigs rose +2 to 54. Since the 1,931 high in September active rigs have declined by -621 rigs (-32.2%) and the fastest decline on record.

Oil inventories are going to continue to rise after the U.S. refinery strike expanded this weekend to include largest U.S. refinery at Port Arthur and others. The Motiva Port Arthur refinery processes 600,250 bpd. The union also included the Motiva Convent, Louisiana plant with 235,000 bpd and the 238,000 bpd Norco, Louisiana refinery. The new strike orders also covered the Shell chemical plant in Norco. If no agreement is reached by Sunday morning 6,550 workers at 15 plants, including 12 refineries accounting for 18.5% of U.S. production will be on strike. That is the largest strike since 1980. In theory the plants will keep running with management operating the controls but the longer the strike runs the more production will be shutdown due to equipment problems and maintenance issues. Gasoline prices will be rising.


Now we have a confirmed breakout to new highs. I warned last Sunday that a new high by only a couple points was not really a breakout. The indexes, with the exception of the Nasdaq, weakened and lost a few points throughout the week while the drama played out surrounding Greece.

The S&P finally surged over the psychological resistance at 2,100 and "should" be targeting the next resistance level at 2,125. The S&P traded in a very narrow 8 point range Monday through Thursday. Friday's open saw a -12 point gap down open to 2,085 related to option expiration and the continued drama over Greece. That one move was larger than the range for the entire week. That dip was immediately bought but the rebound stalled at 2,095 for 90 minutes until the Greek rumors began to break. The S&P range for Friday was 25 points and we closed on the highs.

In theory this combined surge by all the indexes has pushed us over the psychological threshold and we could continue moving higher, headlines permitting.

Support is now 2,090 and resistance 2,125.

The Dow finally punched through the 18,100 level but it is not clear sailing from here. There are multiple longer term uptrend levels of resistance that could cause trouble. One of them is 18,140 and that is exactly where the Dow stopped at the close. The next level is 18,212 followed by 18,325. I would love to see each of those tested next week.

I view the narrow range over the last week as a consolidation phase that built a higher base and could give us a launch point for future gains. The earnings from Dow stocks are now behind us and events like the -$4 drop by Walmart are hopefully in the past.

Support 17,950 and resistance 18,140 and 18,212.

The Nasdaq bulls have been charging higher with the index adding another +62 points to the +149 last week and +109 the week before. The tech stocks are on fire but this week most of the power came from the biotech sector.

Of the +207 points gained by the Nasdaq since December 31st, 106 of those points were due to Apple's gains.

It is even more impressive that the Nasdaq tacked on big gains with GOOG/GOOGL both losing ground for the last four days. That was a huge drag on the index but the Nasdaq was still up for the last eight consecutive days.

However, in the process of looking for plays for the various newsletters I scan between 500-800 charts every weekend. There were a huge number of charts this weekend that contained very large spikes over the last several days. I can't conceive a scenario where these rocket stocks don't pause for several days for profit taking. An example would be Charles River Labs (CRL) and yes I know it is not a Nasdaq stock but it is just an example. Another would be Cognizant Tech (CTSH). The gains on these stocks are begging for a week of profit taking.

The Nasdaq did break through uptrend resistance at 4,929 and did it with authority. However, in order to make it to the 5,132 high set on March 10th, 2000 it will need to rest and eventually build a base at a higher level. I seriously doubt we are sprint another 200 points without profit taking.

There is no clearly defined resistance in our path but 5,000 would be a huge psychological hurdle. Support is 4,890.

The S&P-400 Mid-Cap has spiked well beyond prior resistance and surged to a big new high. The Russell 2000 has not moved as strongly but it still closed at a historic high with a gain of +4 points. I would be perfectly happy if the Russell continued to gain 4-5 points every day. Slow and steady wins the race. However, we could be reaching the point where traders are forced to decide if they are going to catch a shooting star or be left holding a bag of cash on the sidelines.

Now that the Dow has broken out and the uncertainty has eased we could see the small cap stocks accelerate.

The Transports are still fighting an uphill battle but succeeding one step at a time. Until they close over 9,150 it is still a lower high. The old high at 9,217 is the next target with stiff resistance at 9,230. We need the Transports to make a new high to confirm the Dow Industrials high.

Even the NYSE Composite closed at a new high on Friday. The close at 11,108.67 barely eclipsed the old high close at 11,104.72 but it is still a record. The energy stocks and financials have been holding back the NYSE.

The new highs all around and the temporary resolution of the Greek bailout should provide some bullish sentiment for the market. However, our next hurdle will be the Yellen testimony on Tuesday. Yellen has been strongly dovish in the past and you can bet she does not want to trip up this rally. A strong stock market lifts economic sentiment and she needs the economy to be strengthened. She will probably make her token comments about future rate hikes but emphasize the Fed needs to be patient. With the severe winter weather causing analysts to cut their Q1 GDP forecasts and the memory of Q1-2014 hopefully she will maintain her dovish posture.

Random Thoughts

Goldman Sachs has already cut their estimates for GDP for Q1 as a result of the weather. If it continues as expected over the next two weeks they may cut it even further. They reduced their estimate from +3.0% to +2.8%. It was not a big cut but it is the direction that matters. Add in the $2 billion a day impact from the dockworker problem on the west coast and we could lose a few more points. Add in the dramatic decline in activity in the energy sector and we lose another couple of points. It will be really interesting to see how Q1 really ends up but that final number is 5 months from now.

This time they are calling the waves of severe cold the Siberian Express because they are coming straight over the pole and through the middle of Canada into our Midwest as shown in the NOAA chart below.

The China Business Cycle Index is a composite index of 10 "official" government indicators. Most are probably fictitious to some extent but the composite of all the indicators still gives us a clue to the direction of China's economy. If you consider that some or most of the individual indicators have probably been "adjusted" to show a more favorable outlook yet the overall picture is still bad then imagine how bad it really would be if the data was not adjusted.

The Chinese economy is back at the level of the 2009 financial crisis and the Nasdaq crash in 2001. If we had the real data it would probably show the economy to be back at the Asian crisis levels in 1998 and the low on the chart.

The U.S. markets just made new highs across the board but look at the earnings estimates for 2015 from Morgan Stanley. The S&P forecast has crashed from nearly $135 to $120.62 and some analysts are projecting it could even come in below 2014 levels. Why is the market so bullish when earnings growth could actually be negative in 2015?

The following is an interesting chart from Gerard Minack of Minack Advisors. The Fed is adverse to raising rates unless wage growth is rising. Wages have been flat lining since 2011 and without a jump in wages the Fed is unlikely to hike rates. There are still analysts that believe the U.S. economy is declining rather than growing and expect no rates hikes and QE4 in 2016. (Simon Hunt) Different viewpoints make a market.

Following on that same thought here is a chart from the St Louis Fed showing the falling unemployment rate in blue and wages in red. Since 1985 falling unemployment has been met with rising wage growth. Note the absence of wage growth in the current cycle. Hiking interest rates would be even more damaging to wages.

The FOMC minutes on Wednesday actually showed the Fed may be inclined to be even more patient in considering future rate increases. The Fed said bond yields fell again not only in the U.S. but other sovereign nations. "These moves were attributed in part to a deterioration in market sentiment associated with downward pressure on inflation, increased concern about the global economic outlook, and announced and anticipated foreign central bank policies. The Fed also said "financial uncertainty" in Greece, as well as geopolitical instability in the Middle East and Ukraine, remained as risks to the international outlook. The minutes showed the Fed is inclined to keep rates near zero for longer. On its outlook for raising rates, the minutes indicate that a number of FOMC members saw the risks as weighted towards raising rates too early, with at least one FOMC member recommending more not less monetary policy accommodation

How stable can the world economy be when 90% of the industrialized world economy is anchored by near-zero or negative short term rates? David Rosenberg, chief economist at Gluskin Sheff, believes "worry over global deflation with interest rates at zero is certainly not a confidence builder."

Sam Stovall, chief equity strategist at S&P, put together this table of market moves since 1946 in the six months before and after the first Fed rate hike. Nineteen times the market declined more than 5%. Obviously any accounting for 12 months periods in the market is going to show a 5% drop or more in most years. However, the before column is still telling.

Matt O'Brien published an article in the Washington Post last week showing that global inflation is dead. This is related to a drop in global demand and buying power. Commodities are crashing and interest rates are zero. This chart alone is a very visual case that deflation could be the common enemy in the next world war in the very near future.

MarketWatch posted a series of charts that show the market diverging significantly from the economic fundamentals. The 7 charts are too big to repost here so follow this LINK

After the close on Friday Moody's downgraded Russia's sovereign debt to junk at Ba1 with a negative outlook. The agency cited the falling oil prices, currency issues, the crisis in Ukraine and the potential for additional sanctions. Moody's said, "Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016." Also, "The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service."

The fighting in the Ukraine did not cease and Russia was seen sending additional tanks and artillery into Ukraine as Putin tries to seize more of Ukraine in order to secure a land bridge to the deepwater naval port in Crimea. I am sure nobody actually thought Putin would honor the agreement he signed with Merkel and Hollande the prior week.

The "swag bags" for the 2015 Oscars have risen in value to $167,000 in goodies. The 21 actors/actresses that don't win a best or supporting Oscar will have this year's swag bag delivered to their door on Monday. Included in the bag is a three-night stay at a resort in Tuscany valued at $1,500; a luxury train ride through the Canadian Rockies worth more than $14,500; natural French Mediterranean sea salts worth $1,500; a custom silver necklace inscribed with the latitude and longitude coordinates of the Dolby Theater from Lat & Lo at $150; a "glamping" trip valued at $12,500; a $800 gift certificate for a custom candy and dessert buffet; a $250 Haze vaporizer; a $250 Afterglow personal laser vibrator; a Wellness 360 gift pack worth $1,200; a year's worth of all-Audi A4 car rental from Silvercar valued at $20,000; a Reset Yourself lifestyle makeover package worth more than $14,200; and so much more. The most highly valued item in this year's bag, according to the press release from Distinctive Assets, the bag's creator, is a $20,000 gift certificate to have Enigma Life founder Olessia Kantor fly out to meet with each nominee "to discuss their 2015 horoscope, analyze dreams and teach them mind control techniques."

The CEO of Vice Media, Shane Smith, paid $300,000 to take 11 associates to dinner in Las Vegas in early January. The meal was at Bellagio's Prime Steakhouse and there were $21,000 bottles of wine.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Things may come to those who wait, but only the things left by those who hustle."

Abraham Lincoln



Index Wrap

Upside Break Out Moves All Around

by Leigh Stevens

Click here to email Leigh Stevens

The S&P 100 and the Dow 30 joined the S&P 500 in breaking out above the top of prior trading ranges. It wasn't rocket science to figure that the S&P/Dow would join the Nasdaq in moves to new highs given Nasdaq's upside 'break out' back on 2/12.

Of course, since many or most traders assume that events 'determine' trends AFTER bullish news comes out, I could spend forever trying to convince that trend tendencies are seen AHEAD of such actual 'break out' confirmations. If you want to have the edge that professional traders I hold that it's necessary to study chart patterns.

In index options especially, if you buy index calls at the time of, or ON, obvious breakouts, you are going to be obviously wrong cost wise as the sellers will make you pay up for those options but good. Don't pay more than you should. Anticipate moves ahead of time. Yeah, easier said than done and it took me years of watching how prices move to convince me of buying when nobody wants em, shorting when everyone did!

Select Options Volume Watch:

VIX traded 426,000 (rounded to nearest 1000) options on Friday, down by a 100,000 from the prior week, befitting the gradual drop in volatility. As usual, VIX options volume comes in second to the S&P 500 (SPX) options at 917,000. The Russell 2000 (RUT) traded 49,000 options contracts, with the iShares (IWM) trading 85,000.

I've taken an increasing interest in trading VIX options, as well as buying RUT calls on dips as I think the longer range outlook for RUT is favorable technically over the coming weeks and months. RUT stocks are out of favor currently as they've been in relatively narrow trading range for the past year more or less. I don't anticipate we'll see the Russell Index LEAD the Market anytime soon however. Out of favor means that buyers aren't yet drawn to a good enough (i.e., bullish) story yet on the smaller cap sector.

I wrote a recent Trader's Corner (2/16/15) on the Russell 2000 (RUT) chart/technical aspects I see as bullish on both daily and longer-term weekly charts. I refer you to my bullish technical take on RUT if you didn't see it previously, clickable on the LINK above.

The S&P 500 Volatility Index (VIX) DAILY chart:

I generally use a VIX Close-only 'line' DAILY chart. Intraday VIX fluctuations can be extreme and a visual distraction in terms of analysis on a day to day, week to week basis.

My take on the current VIX and it tends to trade very 'technically' so to speak, was stated by me previously in anticipating a gradual VIX decline back the 14 area. I consider the 14 to 12 zone to be a type of VIX 'mean', versus VIX extremes above 22.

This past week saw VIX drift down to near 14 and I anticipate better than even likelihood of the Index dipping below 14 again. Generally, in the 12 area, risk in buying VIX calls is relatively low. The trick and the key is 'timing' such a trade, since VIX can have lengthily periods when volatility remains relatively low, without reversing what may be a lengthily sideways trend, without a sustained upside reversal. Selling puts in the 12 area may be attractive for this reason.

I've highlighted VIX daily chart resistance on a Closing basis is highlighted in the 16 area, extending to 18. Support is suggested at 14, extending to 12 where fairly major support begins.

The S&P 500 Volatility Index (VIX) HOURLY chart:

The extended hourly VIX chart seen next provides a closer-in view of the past few weeks' action but there's a lot of added information to be gleaned with the hourly chart except that the Index looks to heading again into a 'typical' oversold zone according to the 21-hour Relative Strength Index (RSI). This doesn't mean that VIX will rebound soon but does suggest not overstaying in puts; if you got a few, exiting half seems prudent.

On an hourly chart basis, support is also noted at 14, extending to 13. Resistance is noted at 16.8-17, with next resistance coming in around 18.



The S&P 500 (SPX) chart continues bullish with the dip to, then a rebound from, an up trendline connecting the early-February low. The primary chart consideration is the daily and weekly Close with some more distance above prior resistance in the 2095-2100 area.

A next upside target could take SPX to 2133-2150. A move to this area is my current 'maximum' upside objective for SPX before corrective action sets such as sideways price action or a pullback such as to the low-2100 area.

Technical support is highlighted at 2060, both chart support and that implied by the current intersection of the 21-day moving average. Technical support then extends to 2040 and my lowest expectation currently for a pullback.

Bullish sentiment, as seen with the CPRATIO line at the bottom of the chart, has climbed further this past week and is starting to flash caution about not getting overly bullish. I envision a gradual climb higher but not a major leg up from 2100, or a sustained move above 2150. I favored buying SPX calls on dips below 2000 but I'm not a raging bull if over 2130.


The S&P 100 (OEX) chart has joined SPX in breaking out above its prior trading range. OEX is lagging the broader S&P 500 in climbing about ITS prior line of resistance but Friday's action was bullish. Next resistance looks to be in the 930 area, extending to 938-940. I don't see an extended move above 940 currently.

Support is highlighted in the 910 area, then back at 900.

OEX will move into its 'overbought' zone according to the RSI in short order if the Index continues higher in the near-term. If the 13-day Relative Strength Index gets up into the 'overbought' zone and near 940, I'd favor exiting bullish positions, a least partially. I'm still seeing possible OEX trading ranges, just with the upper end of such a range as a notch higher than in past weeks.


The Dow 30 (INDU) Average has achieved a minor bullish breakout above its prior top in the 18100 area. Next resistance looks like 18200, extending to 18350.

Support is seen in the 17800 area and just under at the 21-day moving average (17730), with next support extending to 17600.

Dow stocks that preformed well or at least didn't hurt the bullish cause included BA, CSCO, DD, DIS, HD, IBM (rebounding some) MMM, PFE, TRV, UNH, UTX, and V. From last week's mentions, WMT fell away as did CVX. IBM rebounded some and BA and UTX saw accelerated moves higher.

Most all the bullish INDU stocks mentioned were the same ones I shouted out from last week. Not a huge change in the lineup and no powerhouse team for the bulls. I'm bullish but I don't see huge further upside without more of the 30 stocks participating.


The Nasdaq Composite (COMP) is strongly bullish in its pattern as the Index continued higher and is tracking an up trendline that's pointed strongly higher. Near support is now up to 4900 and next support under is 4820-4800.

It's been my projection for some time that 5000, a major 'milestone' number, is an objective for COMP. This target is certainly closer to being achieved currently and 5000 is highlighted as next resistance. Fairly major resistance is projected at 5100-5120.

COMP has gotten (just) into its 'typical' overbought zone in terms of the 13-day RSI. Bullish sentiment is growing; enough so to cause me to look for an out on bullish Nasdaq positions. Above 5000 and overbought by these two key indicators means higher risk of a shakeout. Be bullish when you got little company, exit when you got too much!


NDX is in a very strong move after piercing the top end of its prior 2-month plus trading range. I was looking for 4500 last week as a major target-objective and that looks even more possible after this past week's continued strong advance. I've noted resistance in the 4460-4500 zone.

Support is seen back at the prior line of resistance at 4347; support extends to 4300 and a bit lower at 4273; at the current 21-day moving average.

The Nasdaq 100 volatility index, VXN, continues to drift toward 14, which is a typical low reading in a strongly trending NDX. If VXN again spent an extended period in the 14 area and under, coupled with an overbought RSI, this is could be a warning of at least a minor pullback. If in bullish strategies such as long NDX calls bought at the low end of the recent NDX trading range, the recent rally has been good to you. Don't risk giving back much.


The QQQ trend is strongly up like the underlying NDX of course. The latest rally has been on relatively low volume, but that's the way of it with the Q's. On Balance Volume is pointed higher but wait until there's a shakeout and to see big bumps in daily trade volume. I'd quietly exit QQQ before that and not get caught in a lemming like exit.

Resistance is seen ahead at 109, then at 110. QQQ support comes in at 106, then in the 104 area.

I don't tend to trust 'straight up' moves but the big cap Nasdaq gets its share of them and I won't get bearish in terms of shorting the stock, buying puts, but am ok to exit with good gains when they come. The October-November rally extended from around 92 to 106 for a gain of 14. The current rally is from 100 to just over 108 so far. Maybe QQQ is headed to 114 over time but I'd be out at 110 if seen in terms of a trading turn. At least if long the stock I don't have to worry about eroding option premiums given a stretched out move!


Last week I noted that the "Russell chart pattern is slightly better (more bullish) than the other indexes after RUT traced out a symmetrical triangle that was followed by the Index's breakout above the upper trendline, suggesting upside potential to 1260 or higher." That's still my view. Next resistance on a daily chart basis is seen at 1240, then at 1260.

Longer-term, RUT might have potential to 1400 or even to 1500 but that's looking much farther out than I normally predict. Just saying as a contrarian bull; RUT stock group isn't the flavor of the day, week or month currently.

Near support is seen at 1220, extending to 1205-1200 currently.

It seems worth repeating that once the RSI indicator reaches an overbought extreme, this has often been a harbinger for a pullback; e.g., RUT hits 1250-1260 and is at a high (overbought) RSI reading and proceeds to pull back to 1220-1215 or even 1200 support again before resuming a further rise.


New Option Plays

Accelerating Revenue Growth

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas)


Mallinckrodt - MNK - close: 117.58 change: +0.68

Stop Loss: 113.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.4 million
Entry on February -- at $---.--
Listed on February 21, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Healthcare and biotech stocks were big performers last year and that outperformance appears to be continuing into 2015. One stock that is really outperforming its peers is MNK. Shares delivered a +89% gain in 2014 and they're already up +18% in 2015.

MNK describes itself as "Mallinckrodt is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents. Areas of focus include therapeutic drugs for autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology along with analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities. The company's Specialty Brands segment includes branded medicines such as OFIRMEV and Acthar; its Specialty Generics segment includes specialty generic drugs, active pharmaceutical ingredients and external manufacturing; and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has approximately 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2014 revenue totaled $2.54 billion."

MNK's global medical imaging business has fallen from about one third of the company's sales to about a quarter as the specialty pharmaceuticals business continues to grow. One reason for the growth is MNK's acquisition strategy. Last year they purchased Cadence Pharmaceuticals for $1.3 billion, which added Ofirmev to MNK's stable of therapies. MNK also spent $5.6 billion to acquire Questcor Pharmaceuticals. This added Questcor's Acthar gel to MNK's drug business.

MNK has been really delivering on the earnings front. Last August they reported their Q3 2014 numbers with revenues up +14.6% and earnings of $1.20, which was $0.35 above expectations. Management also raised their 2014 guidance. In October 2014 they raised their 2015 guidance. Then in November MNK announced their Q4 2014 results with revenues up +44.8%, above expectations, and earnings of $1.68 per share, which was $0.27 higher than estimated.

The revenue and earnings parade continued when MNK reported their Q1 2015 numbers on February 3rd. The company's profit more than doubled with earnings up +109% to $1.84 per share. That beat Wall Street's estimate by 26 cents. Revenues accelerated as well with +60% improvement to $866.3 million. However, this time analysts had ratcheted up their estimates to $885 million. MNK said their gross profit margin improved to 50.6% from 47.3% a year ago. MNK is currently forecasting 2015 numbers of $6.70-7.20 a share on revenues in the $3.65-3.75 billion range.

Mark Trudeau, Chief Executive Officer and President of Mallinckrodt, commented on their recent results,

"Mallinckrodt is off to a good start in fiscal 2015 driven by strong performance across all of our businesses. We achieved meaningful top- and bottom-line growth particularly in the Specialty Brands and Specialty Generics segments, increasing the proportion of total company net sales from specialty pharmaceuticals to over 75% in the quarter. The strategies we have pursued have gone far toward transforming us into a leading specialty biopharmaceutical company, and we are highly focused on maintaining momentum and expanding our portfolio to provide durable, sustained growth."
Investors appear to believe in MNK's growth story. The stock has a steady trend of higher lows and higher highs. Shares are currently hovering at all-time highs in the $115-118 range. We are suggesting a trigger to buy calls at $118.15.

Trigger @ $118.15

- Suggested Positions -

Buy the APR $120 CALL (MNK150417C120) current ask $4.20

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

30-minute Chart:

Daily Chart:

In Play Updates and Reviews

Locking In Potential Gains On VRX

by James Brown

Click here to email James Brown

Editor's Note:

The market's widespread rally sparked a lot of new highs. We exited our bullish trade on Valeant Pharmaceuticals (VRX) at the close on Friday. Shares are up eight weeks in a row.

Current Portfolio:

CALL Play Updates

Hanesbrand Inc. - HBI - close: 121.85 change: +3.89

Stop Loss: 114.85
Target(s): To Be Determined
Current Option Gain/Loss: +99.4%
Average Daily Volume = 800 thousand
Entry on February 03 at $114.14
Listed on February 29, 2015
Time Frame: Exit PRIOR to HBI's stock split on March 4th
New Positions: see below

02/21/15: HBI displayed significant strength on Friday. Before the bell the stock received bullish analyst comments and a new price target at $150 per share. That helped start HBI on a strong note and shares soared past potential resistance at $120.00 and close with a +3.8% gain.

We only have a few days left. We will likely exit this trade late next week (probably Friday) to avoid holding positions over HBI's 4-for-1 split on March 4th.

Earlier Comments: February 2, 2015
How many stocks can you name that are up +400% in the last three years? HBI is in the consumer goods sector. They make apparel under a variety of brand names. Shares of HBI have been a big performer the last few years, outperforming the broader market.

According to the company, "HanesBrands, based in Winston-Salem, N.C., is a socially responsible leading marketer of everyday basic apparel under some of the world's strongest apparel brands in the Americas, Asia and Europe, including Hanes, Champion, Playtex, DIM, Bali, Maidenform, Flexees, JMS/Just My Size, Wonderbra, Nur Die, Lovable and Gear for Sports. The company sells T-shirts, bras, panties, shapewear, men's underwear, children's underwear, socks, hosiery, and activewear produced in the company’s low-cost global supply chain."

A good reason shares have been rising so consistently has been HBI's bullish guidance. Last year the company raised its earnings guidance three quarters in a row. Their most recent earnings report was January 29th (last week). HBI's Q4 results were $1.46 a share with revenues surging +20% to $1.55 billion. The bottom line number was two cents above estimates while revenues met estimates.

HBI said that 2014 was its second consecutive year of record results. Net sales rose +15% while its profit grew +28% and adjusted EPS soared +45%. Hanes Chairman and CEO Richard A. Noll commented on their results saying,

"We had another outstanding year in 2014, generating significant shareholder value and again achieving record results for sales, operating profit and EPS. We are in the midst of a multiyear period of strong growth supported by our powerful company-owned global supply chain, Innovate-to-Elevate product platforms, and acquisitions. Our guidance for 2015 translates into another year of double-digit EPS growth and what would be another record year for sales, profit and EPS, despite the challenges of currency exchange rates."

HBI's new guidance sees 2015 revenues in the $5.77-5.82 billion range. That's +9% growth but a little bit below Wall Street's estimates. HBI is forecasting earnings in the $6.30-6.50 range, which equals about +11% to +15% growth.

Management also raised its cash dividend +33% to $0.40 a share. On top of that they issued a 4-for-1 stock split. The split is coming up soon. HBI will start trading split adjusted on March 4th, 2015. We think HBI could see an old-fashioned split run.

Tonight we are listing a trigger to buy calls at $114.10. We'll start this trade with a stop at $109.90. Plan on exiting before the March 4th stock split date.

- Suggested Positions -

Long MAR $115 CALL (HBI150320C115) entry $3.21

02/17/15 new stop @ 114.85
02/12/15 new stop @ 112.40
02/03/15 triggered @ 114.14 on an intraday gap higher. Suggested entry was $114.10
Option Format: symbol-year-month-day-call-strike


Honeywell Intl. - HON - close: 105.36 change: +0.66

Stop Loss: 101.65
Target(s): To Be Determined
Current Option Gain/Loss: +16.1%
Average Daily Volume = 3.0 million
Entry on February 12 at $103.05
Listed on February 10, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: HON was initially weak on Friday morning but traders bought the dip, twice, near short-term support around its rising 10-dma. HON rebounded to close at a new high. The close above potential resistance at $105.00 is a good sign if you're bullish.

Earlier Comments: February 10, 2015
HON is in the industrial goods sector. Shares have managed to outperform its peers. The Dow Jones Industrial Average is up +0.26% this year. The XLI industrial ETF is -0.3% for 2015. Yet HON is up +2.5% so far. That's not bad and it's not counting the stock's 2% dividend yield.

According to the company, "Honeywell (www.honeywell.com) is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes, and industry; turbochargers; and performance materials."

Earnings have been somewhat mediocre. Back in December HON lowered expectations for their fourth quarter results. When they finally reported Q4 results in January they managed to beat estimates by one cent with a profit of $1.43 a share, which is a +15% improvement from the year ago period. Revenues dropped -1.2% year over year at $10.27 billion but that still beat Wall Street's revenue estimate of $10.17 billion. HON's Q4 results were hurt by a -6% slowdown in their aerospace business but management is bullish that this segment will see strong growth going forward.

HON's Chairman and CEO Dave Cote commented on his company's results,

"In the fourth quarter, Honeywell delivered 4% organic sales growth and achieved 15% earnings per share growth (excluding the pension mark-to-market adjustment), exceeding the high end of our guidance range and capping off another year of terrific performance in 2014... Strong execution in our businesses and continued momentum across the portfolio throughout the year helped us to deliver on our aggressive 2014 sales, margin, and EPS targets. We achieved significant margin expansion in 2014 with benefits from our key process and productivity initiatives, and increased organic growth
Discussing their 2015 outlook the company said, "We remain cautious in our planning with regard to the global economy, but are confident that our balanced portfolio mix of short- and long-cycle businesses is well-positioned to deliver on our 2015 commitments that include higher organic sales, continued margin expansion, and double-digit earnings growth."

In an interview with Bloomberg, Mr. Cote sounded optimistic. He said, "For the first time in five years, I'm actually a little more bullish on where the global economy is going than economic forecasters are." Discussing the impact of crude oil on the economy, he said, "impact of lower oil prices is causing this major redistribution from oil-producing to oil-using economies, and those oil-using economies are quite large."

The market seemed unfazed by the company's cautious outlook. The stock actually rallied on its report. HON's recent strength has pushed shares to new all-time highs. The point & figure chart is already bullish and forecasting at $135.00 target. The P&F chart is also on the verge of a new triple-top breakout buy signal. Tonight we are suggesting a trigger to buy calls at $103.05

- Suggested Positions -

Long JUN $105 CALL (HON150619F105) entry $3.10

02/17/15 new stop @ 101.65
02/12/15 triggered @ 103.05
Option Format: symbol-year-month-day-call-strike


Humana Inc. - HUM - close: 156.12 change: +2.84

Stop Loss: 149.50
Target(s): To Be Determined
Current Option Gain/Loss: -1.6%
Average Daily Volume = 1.1 million
Entry on February 20 at $155.75
Listed on February 17, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: Healthcare stocks were in rally mode on Friday. Most of the big healthcare names displayed relative strength (HUM, UNH, ANTM, CAH, CI). Shares of HUM dipped toward short-term technical support at the 10-dma first and then bounced to a new record high. Our suggested entry point to buy calls was hit at $155.75.

Earlier Comments: February 17, 2015:
The big healthcare names have been showing relative strength. HUM is one of the biggest health care plan providers in the U.S. What makes the healthcare names so attractive is the government's Affordable Care Act (a.k.a. Obamacare). This new program has generated millions of new customers. It should. Currently the law states that if you don't have healthcare insurance you have to play a penalty. It was 1% of your income last year. This year the penalty rises to 2% of your income.

The ACA just completed its latest enrollment period and over 11 million people signed up, which was above expectations. This is a bullish tailwind for the industry as a whole and fuels investor optimism that business will continue to improve for the big health care providers.

HUM describes itself as "Humana Inc., headquartered in Louisville, Ky., 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."

Earnings were definitely mixed last year. Q3 results announced last November were a miss on the bottom line while revenues were up +18% for the quarter. HUM lowered their full year 2014 guidance at that time. Their most recent earnings report (Q4) was announced on February 4th. Earnings were $1.09 a share, a +36% improvement from a year ago. Yet they still missed Wall Street estimates by six cents. Revenues rose +21% to $12.33 billion but that missed estimates as well. HUM is reporting definite improvement and it feels like Wall Street analysts have just been too optimistic.

Shares of HUM are not seeing any sell-off based on the earnings miss. Management reaffirmed their prior guidance of $8.50-9.00 per share for 2015 compared to consensus estimates of $8.86. Another positive for HUM stock is a massive $2 billion buyback program the company announced last September. The expiration for this repurchase program is December 31st, 2016. However, it is worth noting they may not spend it all. They had barely spent 20% of their last stock buyback program before announcing the newest one.

Investors don't seem to care about HUM's earnings miss. The expectation is that the ACA will continue to generate a steady supply of new business for the industry. Thus investors have been buying the dips in HUM. The stock has a bullish trend of higher lows and higher highs. Today the stock is breaking out past resistance near $155.00. The point & figure chart is bullish with a long-term target of $173.00. Tonight we are suggesting a trigger to buy calls at $155.75.

- Suggested Positions -

Long MAY $160 CALL (HUM150515C160) entry $6.40

02/20/15 triggered @ 155.75
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 122.38 change: +0.33

Stop Loss: 119.65
Target(s): To Be Determined
Current Option Gain/Loss: -6.8%
Average Daily Volume = 41 million
Entry on February 13 at $121.55
Listed on February 12, 2015
Time Frame: 10 to 12 weeks
New Positions: see below

02/21/15: The U.S. stock market started Friday on weakness. Investors were worried that Greece and the EU may not reach an agreement. Fortunately, by the end of the trading day, Greece had managed get a new loan extension from its creditors. That helped stocks power to new highs.

The IWM dipped toward short-term technical support at its 10-dma on Friday morning and then bounced to another all-time high. I would consider new positions at current levels.

Earlier Comments: February 12, 2015:
The IWM is the iShares exchange traded fund (ETF) on the small cap Russell 2000 index. The market rally in 2014 was mostly a large-cap affair. The S&P 500 index delivered a +11% gain and the small caps lagged behind with a +3.6% gain for 2014. That could change this year.

Small caps tend to see bigger moves, both up and down, than their larger-cap rivals. Right now the small caps are poised to breakout higher.

Many people look to the small cap index as a sentiment indicator for the broader market. The small cap Russell index has (about) 2,000 stocks. Compared to 500 in the S&P large cap index and only 30 stocks in the Dow Industrials.

Small cap companies in the Russell 2000 tend to be more U.S. focused so they're not encumbered by the strong dollar as much as the large cap global companies can be.

Right now the IWM is on the verge of breaking out past its all-time highs set in December (in the $121.40 area). Tonight we are suggesting a trigger to buy calls if the IWM can trade at $121.55.

We are not setting a target tonight but I will note that the IWM's point & figure chart is forecasting a long-term target of $154.00.

- Suggested Positions -

Long MAY $125 CALL (IWM150515C125) entry $2.50

02/17/15 new stop @ 119.65
02/13/15 triggered @ 121.55
Option Format: symbol-year-month-day-call-strike


L-3 Communications - LLL - close: 132.87 change: +1.69

Stop Loss: 126.20
Target(s): To Be Determined
Current Option Gain/Loss: +2.3%
Average Daily Volume = 925 thousand
Entry on February 20 at $131.50
Listed on February 19, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: Defense-related stocks continued to show relative strength on Friday. Shares of LLL added another +1.28% on top of yesterday's bullish breakout past resistance at $130.00. The stock hit our suggested entry point to buy calls at $131.50.

Earlier Comments: February 19, 2015:
Last year the S&P 500 index gained about +11%. Shares of LLL managed to outperform the big cap index with a +18% gain in 2014. That's in spite of the rocky earnings performance in recent quarters.

LLL describes itself as "Headquartered in New York City, L-3 employs approximately 48,000 people worldwide and is a prime contractor in aerospace systems and national security solutions. L-3 is also a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. The company reported 2013 (revised) sales of $12.6 billion." They operate four business segments: aerospace systems, electronic systems, communication systems, and national security solutions.

In May 2014 the company reported mediocre earnings but raised their 2014 guidance. Results changed with their July 31st report. They missed the bottom line by 5 cents while revenues beat expectations. Yet LLL management lowered their guidance. The stock collapsed. You can see the big spike down as a result. After a choppy third quarter performance LLL reported earnings on October 30th. They barely beat the bottom line estimate by a penny while revenues missed. Management lowered guidance again but shares rallied in spite of the news.

Since that October report shares of LLL have been churning higher with a bullish trend of higher lows and higher highs. Their Q4 earnings results seem came in relatively healthy. Earnings were in-line with expectations at $2.27 a share. Revenues were down -0.8% from a year ago but their $3.21 billion in sales did come in above expectations. Slower sales to the U.S. were partially offset by rising sales to international clients. This is a significant trend in the defense industry as contractors try to replace sales they're losing with the U.S. government with international sales. Management offered cautious guidance for 2015 with earnings estimates in the $7.35-7.65 range, which is essentially in-line with Wall Street. However, LLL is forecasting revenues of $11.75-11.95 billion, which is above analysts' expectations.

The last several weeks have seen some bullish headlines for LLL. In early December the company announced an additional $1.5 billion stock buyback program through June 30, 2017. On February 10th LLL raised their quarterly dividend from $0.60 to $0.65.

Earlier this morning Bloomberg ran an article discussing the potential for M&A in the defense space. The U.S. defense budget peaked in 2010 and has been shrinking ever since. As more contractors fight for the same dollars it could spark some mergers. The Bloomberg article suggested that LLL could make some acquisitions and also suggested that LLL is a potential target from its larger rivals. Lately Wall Street loves all the M&A headlines with stocks soaring on these stories.

Another story this month is how the U.S. government is opening the door for more international sales of military drones to its allies. This is a opportunity for LLL. They make the satellite communication equipment necessary for the drones. LLL also makes the training simulators to operate drones.

Technically shares have been consolidating sideways under resistance at $130.00 for more than two weeks. Today's display of relative strength is also a bullish breakout past resistance. The point & figure chart is already bullish and forecasting a long-term target of $174.00. Tonight I am suggesting a trigger to buy calls at $131.50.

- Suggested Positions -

Long APR $135 CALL (LLL150417C135) entry $2.20

02/20/15 triggered @ 131.50
Option Format: symbol-year-month-day-call-strike


ServiceNow, Inc. - NOW - close: 79.06 change: +0.90

Stop Loss: 73.90
Target(s): To Be Determined
Current Option Gain/Loss: +22.1%
Average Daily Volume = 1.1 million
Entry on February 05 at $75.15
Listed on February 04, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: I want to caution readers about our NOW trade. The stock is up seven out of the last eight trading days. It's also up five weeks in a row. I'm concerned that NOW is starting to look overbought and it's nearing what could be round-number resistance at $80.00. If shares do see some profit taking the nearest support could be the 10-dma near $76.00.

I'm not suggesting new positions at this time.

Earlier Comments: February 4, 2015:
Tonight we are looking at a company that saw its sales grow more than 60% last year. They're forecasting more than 40% growth in 2015. That company is cloud-based services ServiceNow.

NOW describes itself as "ServiceNow is changing the way people work. With a service-orientation toward the activities, tasks and processes that make up day-to-day work life, we help the modern enterprise operate faster and be more scalable than ever before. Customers use our service model to define, structure and automate the flow of work, removing dependencies on email and spreadsheets to transform the delivery and management of services for the enterprise. ServiceNow provides service management for every department in the enterprise including IT, human resources, facilities, field service and more. We deliver a 'lights-out, light-speed' experience through our enterprise cloud – built to manage everything as a service."

This company has been consistently guiding their earnings forecast higher. They've done it at least the last four earnings reports in a row. Their most recent earnings report was January 28th. NOW reported their Q4 results of $0.03 a share compared to a loss of 2 cents a year ago. Analysts were expecting a profit of 2 cents a share. Q4 revenues soared +58% to $198 million, which was above expectations.

Some of the highlights from their fourth quarter include billings up +62% year over year and up +34% quarter over quarter. Deferred revenues were up +20% for the quarter. NOW added 211 net new customers, bumping their total to 2,725. Their customer renewal rate was 97%.

NOW said their 2014 revenues soared +61% compared to 2013. Their backlog at the end of 2014 hit $1.4 billion. That's a +57% jump from a year ago. NOW's President and CEO Frank Slootman said, "We finished 2014 with strong metrics across the board, maintaining consistently high year-over-year growth rates. In addition to a growing list of new customers that now includes more than 25% of the Global 2000, we continue to see existing customers expand their relationship with us, resulting in the highest quarterly upsell rate since our IPO." NOW's CFO Michael Scarpelli said, "Within the Global 2000, annualized contract value per customer has increased 40% year-over-year. These expanding contracts have helped us grow our combined backlog and deferred revenue 57% year-over-year."

NOW offered bullish guidance. They expected Q1 revenues to grow +50% in the $207-212 million range compared to Wall Street's estimates of $202.4 million. NOW's 2015 guidance is forecasting revenue growth in the +41% to +47% range in the $960-1,000 million zone versus analysts' estimates of $948 million.

These strong numbers and the consistent growth makes them a popular candidate among Wall Street analysts. After NOW's most recent earnings report several analyst firms raised their price target on NOW's stock.

Technically shares have just recently broken out through major resistance near $70.00. The point & figure chart is bullish and forecasting a long-term target of $97.00. The last few days have seen shares consolidating sideways in the $70-75 range. Tonight we are suggesting a trigger to buy calls at $75.15.

- Suggested Positions -

Long MAY $80 CALL (NOW150515C80) entry $3.93

02/17/15 new stop @ 73.90
02/12/15 new stop @ 71.90
02/05/15 triggered @ 75.15
Option Format: symbol-year-month-day-call-strike


NXP Semiconductors - NXPI - close: 84.66 change: -1.01

Stop Loss: 83.25
Target(s): To Be Determined
Current Option Gain/Loss: -15.3%
Average Daily Volume = 3.7 million
Entry on February 12 at $84.15
Listed on February 11, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: NXPI saw its rally momentum slow down last week. Shares remain near all-time highs but NXPI essentially churned sideways near $85.00. We are going to turn more defensive and raise the stop loss up to $83.25.

Earlier Comments: February 11, 2015:
According to Apple Inc. CEO Tim Cook 2015 will be the year of Apple Pay. That's good news for NXPI. Apple launched its Apple Pay mobile payment system last September. In just the last four months it has taken off. About 8% of retailers already support it and estimates suggest that 38% of retailers will support Apple Pay by year end.

Tim Cook discussed the growth of Apple Pay in his company's recent conference call. Every $3 spent using mobile payments with Visa, Mastercard, and American Express, about $2 of that is used through Apple Pay. Panera Bread said that 80% of its mobile payment usage is through Apple Pay. Whole Foods noted that customers using mobile payments surged +400% once Apple Pay started.

All of this is good news for NXPI because they make the key chips necessary for Apple Pay to work.

The company describes itself as "NXP Semiconductors N.V. (NXPI) creates solutions that enable secure connections for a smarter world. Building on its expertise in High Performance Mixed Signal electronics, NXP is driving innovation in the automotive, identification and mobile industries, and in application areas including wireless infrastructure, lighting, healthcare, industrial, consumer tech and computing. NXP has operations in more than 25 countries, and posted revenue of $4.82 billion in 2013."

Earnings have been good. NXPI managed to beat Wall Street's estimates on both the top and bottom line the last five quarters in a row. Back in July NXPI raised their guidance. Influential hedge fund manager David Tepper, who runs Appaloosa Management, launched a new position in NXPI back in the third quarter of 2014. In early December shares of NXPI were upgraded with a $100 price target by Oppenheimer.

NXPI's most recent earnings report as February 5th. Revenues surged +18.9%. Management delivered bullish earnings guidance for the first quarter. Since this report at least four analyst firms have raised their price targets on NXPI (most of them into the mid $90s).

Today NXPI just hit all-time highs. The stock had been consolidating sideways in at $75-82.50 trading range. This breakout looks like an entry point. I'm suggesting a trigger at $84.15 to buy calls.

- Suggested Positions -

Long Apr $90 CALL (NXPI150417C90) entry $2.36

02/21/15 new stop @ 83.25
02/17/15 new stop @ 80.35
02/12/15 triggered @ 84.15
Option Format: symbol-year-month-day-call-strike


Starbucks Corp. - SBUX - close: 93.51 change: +0.34

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: +73.8%
Average Daily Volume = 5.1 million
Entry on February 10 at $90.25
Listed on February 05, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: The post-earnings rally in SBUX continued last week with a string of new highs. Shares are starting to look overbought with SBUX up three weeks in a row. Tonight we'll raise the stop loss up to $89.40. More conservative traders may want to raise their stop even higher. If shares do see a pullback we can look for potential support near $92 and then near $90.00.

Earlier Comments: February 5, 2015:
The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. The good news is that looks the consolidation is over.

Five-Year Plan

Late last year SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX is having a pretty good 2015 so far with the stock up +8.1%, outperforming the broader market. A lot of this gain was thanks to a post-earnings pop. SBUX reported its Q1 2015 results on January 22nd. Adjusted earnings, backing out one-time charges, were $0.80 a share. That's in-line with estimates. Revenues were up +13.3% to $4.8 billion, also in-line with estimates. Investors applauded the news anyway and sent SBUX soaring to new all-time highs the next day.

SBUX said their worldwide comparable store sales rose +5% while traffic only rose +2%. It was the 20th consecutive period that same-store sales were up +5% or more. It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX's guidance was pretty lackluster but Wall Street didn't care. The company actually guided down for the Q2 2015 (current quarter) as they expect earnings in the $0.64-0.65 range. Analysts' were expecting $0.68 a share. SBUX also provided 2015 guidance of $3.09-3.13 versus Wall Street's estimate of $3.12. The company is still projecting 2015 sales growth of 16% to 18% as they see sales ramping up in the second half of 2015. They also updated their outlook on China as they plan to add 3,400 stores by 2019.

Investor sentiment on SBUX is bullish. Shares have not seen barely any profit taking following its post-earnings pop. Now, after two weeks of digesting gains, the stock is pushing higher and poised to breakout past resistance at $90.00. The point & figure chart is bullish and forecasting at $104.00 target.

Tonight we are suggesting a trigger to buy calls at $90.25 with an initial stop loss at $85.80.

- Suggested Positions -

Long Apr $95 CALL (SBUX150417C95) entry $1.03

02/21/15 new stop @ 89.40
02/12/15 new stop @ 87.85
02/10/15 triggered @ 90.25
Option Format: symbol-year-month-day-call-strike


Synaptics Inc. - SYNA - close: 82.23 change: +1.27

Stop Loss: 75.90
Target(s): To Be Determined
Current Option Gain/Loss: +7.6%
Average Daily Volume = 1.0 million
Entry on February 18 at $80.25
Listed on February 17, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: SYNA displayed relative strength on Friday with a +1.5% gain versus the NASDAQ's +0.6% rise. Odds of a dip in SYNA are growing. Shares are up eight days in a row. That doesn't happen very often. Broken resistance in the $79.50-80.00 area should be support. I am not suggesting new positions at this time.

Earlier Comments: February 17, 2015:
Technology stocks have taken a leadership role in the market this year. One tech stock that is showing relative strength is SYNA with a gain of +14.6% year to date. The company is a leading developer in the human interface solutions industry. Many consider the company a dominant force in the touch, display ICs and finger print sensing.

According to SYNA's marketing material, "Synaptics is the pioneer and leader of the human interface revolution, bringing innovative and intuitive user experiences to intelligent devices. Synaptics' broad portfolio of touch, display, and biometrics products is built on the company's rich R&D and supply chain capabilities. With solutions designed for mobile, PC and automotive industries, Synaptics combines ease of use, functionality and aesthetics to enable products that help make our digital lives more productive, secure and enjoyable."

SYNA had a roll in Apple Inc's (AAPL) iPhone 6 success. SYNA recently bought Renesas, the company that makes the LCD drivers for AAPL's iPhone 6 and 6+. Thus the tens of millions of iPhone 6s sold is a win for SYNA. We can see the impact in SYNA's earnings. The fourth quarter was HUGE for iPhone 6 sales.

In early December SYNA raised their revenue guidance for the fourth quarter (their 2015 Q2) from $415-450 million to $440-460 million. When SYNA reported earnings in late January they beat these raised expectations. Wall Street was looking for Q4 results of $1.22 a share on revenues of $449 million. SYNA delivered $1.46 a share with revenues soaring +125% to $463.7 million.

If that wasn't good enough SYNA management then raised their Q1 (their Q3) revenue estimates to $450-490 million compared to analysts' estimates of $422 million. Several analyst firms upgraded their price target on SYNA follow these results.

Traders should be aware that SYNA's relationship with AAPL might be in danger. A story surfaced on February 6th that AAPL was looking for other suppliers to fill LCD drivers to reduce their dependence on SYNA (and their Renesas business) as the only provider. Rumor has that rivals Himax, Novatek, and Parade Technologies are all vying for Apple's business.

Thus far shares of SYNA are not seeing much reaction to this rumor. Traders have been consistently buying the dips at SYNA's rising 10-dma. Now the stock is poised to breakout past resistance at the $80.00 level. The point & figure chart is bullish and forecasting a long-term target of $117.00. Tonight we are suggesting a trigger to buy calls at $80.25.

- Suggested Positions -

Long JUN $85 CALL (SYNA150619C85) entry $5.95

02/18/15 triggered @ $80.25
Option Format: symbol-year-month-day-call-strike


UnitedHealth Group - UNH - close: 112.62 change: +2.59

Stop Loss: 107.75
Target(s): To Be Determined
Current Option Gain/Loss: +60.6%
Average Daily Volume = 4.2 million
Entry on February 04 at $108.25
Listed on February 03, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: Big healthcare stocks were popular on Friday. Many of them ended the week at new all-time highs. UNH did not but it's getting close. Shares surged +2.35% and is only a couple of points away from its record high set last month.

Tonight we'll adjust the stop loss to $107.75.

Earlier Comments: February 3, 2015
Healthcare stocks have been consistent winners for investors over the last couple of years. Just check out a long-term chart of the IHF or XLV healthcare ETFs. Helping the group lead that charge is UNH, one of the biggest names in healthcare. The company's various businesses serve more than 85 million people around the world. The company is ranked No. 14 on the Fortune 500 list.

UNH has two different business segments. They have their UnitedHealthcare business and their Optum business. UnitedHealthcare provides health benefit products and services. Their Optum business is a health management services company.

The Affordable Care Act (ACA, or Obamacare) had a rough start but now the system is clearly seen as a huge benefit for the health insurance companies. According to Bloomberg the ACA has added millions of new customers to the healthcare industry. UNH recently joined the public exchanges and added more than 400,000 new individuals. UNH did say they are paying significantly more fees and taxes due to the ACA but thus far their increase in customers and better operating efficiency in 2014 have kept the costs manageable.

The results are showing up in the company's earnings growth. In July 2014 the company beat estimates and raised their guidance. In October 2014 they beat estimates and raised their guidance. In early December UNH reaffirmed their 2014 guidance and offered a 2015 forecast that was in-line with Wall Street estimates.

Their most recent earnings report was January 21st. The results were slightly ahead of expectations with profits up +10% from a year ago to $1.55 per share with revenues rising +7.4% to $33.43 billion. That was enough to surpass estimates of $1.50 a share on revenues of $33.15 billion.

UNH's CEO Stephen Hemsley commented on their business saying, "We enter 2015 with a positive outlook and rising business momentum. Steady innovation and year by year advances in the quality, breadth and value of our services to employers, government sponsors, consumers and care providers are creating opportunities for revenue and earnings growth in traditional and new markets."

Management offered 2015 guidance that was in-line with prior estimates. They expect earnings to grow about +7.4% in the $6.00-6.25 range. Revenues are expected to rise +8.0% in the $140.5-to-141.5 billion range.

The stock exploded higher on its better than expected Q4 numbers. Since the post-earnings rally peaked the stock has seen a nice correction. Traders just bought the dip yesterday near support at $105.00. We want to hop on board this healthcare train and buy the rebound. There appears to be short-term resistance near $108.00. Tonight we're suggesting a trigger to buy calls at $108.25.

- Suggested Positions -

Long MAR $110 CALL (UNH150320C110) entry $2.46

02/21/15 new stop @ 107.75
02/17/15 new stop @ 106.85
02/04/15 triggered @ 108.25
Option Format: symbol-year-month-day-call-strike


Zimmer Holdings - ZMH - close: 121.59 change: +1.39

Stop Loss: 117.75
Target(s): To Be Determined
Current Option Gain/Loss: +4.5%
Average Daily Volume = 1.0 million
Entry on February 20 at $120.75
Listed on February 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/21/15: The stock market's widespread rally on Friday gave ZMH just enough of a nudge that shares broke through resistance and surged to new highs. Our trigger to buy calls was hit at $120.75.

Earlier Comments: February 14, 2015:
A large chunk of the developed world is old and getting older. The demographics in the United States, Europe and Japan show an aging population. Even China is seeing a rise in its older citizens. This means big business for the orthopedic market, especially for products like hip and knee replacements. ZMH is poised to become the number one player in hip and knee medical devices with its current merger plans to Biomet.

ZMH is part of the healthcare sector. The company describes itself as "Founded in 1927, and headquartered in Warsaw, Indiana, Zimmer designs, develops, manufactures and markets orthopedic reconstructive, spinal and trauma devices, dental implants, and related surgical products. Zimmer has operations in more than 25 countries around the world and sells products in more than 100 countries. Zimmer's 2014 sales were approximately $4.7 billion. Zimmer is supported by the efforts of more than 9,000 employees worldwide."

Looking at last year's earnings ZMH's performance was mixed but they seemed to be improving. The company beat expectations in both the third and fourth quarter. ZMH reported its Q4 results on January 29th. Earnings per share hit $1.71, which was one cent above estimates. Revenues were down -1.4% to $1.22 billion. That missed estimates of $1.24 billion. Part of that miss was due to currency fluctuations. One the plus side ZMH did say gross margins improved 188 basis points to 74.4% in the fourth quarter.

ZMH management also raised their Q1 guidance. Wall Street was expecting 2015 Q1 earnings of $1.52 a share. ZMH just guided to $1.58-1.60 a share. Following its Q4 report and new and improved guidance several analyst firms have either upgraded or raised their outlook on ZMH. Many of the new price targets are in the $130-150 range. FYI: the point & figure chart is forecasting a long-term target of $169.00.

Right now the focus for ZMH is its merger with Biomet, a private company in the orthopedic space. Biomet was going to go public again last year but in April 2014 they agreed to a merger deal with ZMH. Shares of ZMH soared on the news. The deal is valued at $13.35 billion. It's the fifth largest medical device merger in the last ten years.

This merger is important to ZMH because competition is heating up in the $45 billion orthopedic market. The cost savings of the merger are expected to save $135 million the first year and hit $270 million by the third year. The deal is also accretive to ZMH. Biomet saw strong sales last quarter in its spine and bone-healing business.

The combined company will have about 40% of the hip replacement market and about 33% of the knee implant market. That puts them at the top of the list for these two niches. Overall the post-merger ZMH will be second in the orthopedic market behind Johnson & Johnson (JNJ).

It's important to note that this deal has not yet been approved by regulators. The European Union antitrust committee just announced they will render a decision by May 26th. ZMH believes the deal will be approved in the first quarter of 2015.

Technically shares of ZMH have a long-term bullish trend of higher lows and higher highs. The stock just had a mini-correction with a pullback from $120 to $111 in January. Shares have since recovered. Now ZMH is breaking out past short-term resistance near $118 and is headed for its all-time highs set last month in the $120.70 area. We are suggesting a trigger to buy calls at $120.75.

- Suggested Positions -

Long JUN $125 CALL (ZMH150619C125) entry $4.40

02/20/15 triggered @ 120.75
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Currently we do not have any active put trades.


Valeant Pharmaceuticals - VRX - close: 173.26 change: +4.13

Stop Loss: 164.90
Target(s): To Be Determined
Current Option Gain/Loss: +47.9%
Average Daily Volume = 2.5 million
Entry on January 26 at $160.55
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings on February 24th
New Positions: see below

02/21/15: VRX was kind enough to cooperate with our exit strategy. Our plan was to exit this trade on Friday, at the closing bell. Shares of VRX surged +2.4% on news it was closing in on a deal to buy Salix Pharmaceuticals. The stock rallied past resistance near $170 to close at record highs. VRX appears to be up eight weeks in a row and very overbought. I would be concerned that VRX could see some profit taking after they report earnings on February 24th.

- Suggested Positions -

MAR $170 CALL (VRX150320C170) entry $4.80 exit $7.10 (+47.9%)

02/20/15 planned exit at the closing bell
02/19/15 new stop @ 164.90, prepare to exit this trade tomorrow at the closing bell.
02/17/15 new stop @ 162.45
02/12/15 new stop $159.45
02/03/15 News that VRX is interesting in buying SLXP
01/26/15 triggered @ 160.55
Option Format: symbol-year-month-day-call-strike