Option Investor

Daily Newsletter, Saturday, 12/19/2015

Table of Contents

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

Market Wrap

Quadruple Flushing

by Jim Brown

Click here to email Jim Brown

December's quadruple witching option expiration turned into a quadruple flushing as all the S&P sectors sold off hard. Dow components Disney and Boeing received downgrades and Goldman Sachs crashed with a sector downgrade for a total of about -115 Dow points.

Market Statistics

Friday Statistics

The Force was not with the markets on Friday as key stocks collapsed and forecasts were lowered. In addition to analysts applying their Lightsabers to earnings and price targets the first Fed head since the FOMC decision came out to trash the market with his comments.

Richmond Fed president Jeffery Lacker said four rate hikes in 2016 "would be gradual" and the Fed could hike at any meeting. He also said the rate hike forecast was the sign of an improving economy but unfortunately that is not what the economic reports are saying.

Shortly after Lacker's comments the San Francisco Fed president John Williams said the Fed will hike gradually in 2016 but will not follow any predictable pattern. "Every meeting will be live in terms of adjusting policy one way or another." Also, "There was a value to having the first hike at a (quarterly) press conference meeting but in the future I don't think that is as much of an issue."

Analysts had been troubled by the multiple uses of the word gradual in the Fed statement but the implication of four hikes in the dot plots. Analysts thought the dots would move lower over 2016 to signal fewer rate hikes. The dots come from the individual expectations for interest rates from each of the FOMC members.

The dot plot today is showing an average estimate for 1.4% at the end of 2016. Ten of the 17 FOMC members are expecting 1.5% or higher by the end of 2016. The market is expecting slightly less than 1%.

The Lacker/Williams comments caused another wave of selling in the afternoon.

Bloomberg Chart

The economics on Friday continued the recent trend of weakness. The Kansas Fed Manufacturing Index for December declined from +1 to -9 and a four-month low. The rebound to positive territory in November was completely erased and we are back to the June lows.

Production declined from +3 to -8, new orders from +5 to -5 and inventories fell from -6 to -17. Employment declined from -8 to -17 and the eighth consecutive monthly decline. The only positive improvement was the backorders, which rose from -17 to -2 and a nine-month high even though it is still in contraction.

Moody's Chart

I do not understand how the Fed can claim the economy is improving when the economic reports are worsening. The Kansas manufacturing above is just one example. The Philly Fed manufacturing report on Thursday declined from +1.9 to -5.9 and to the lows for the year, down from a high of 15.2 in June. Industrial production for November on Wednesday fell from -0.2% to -0.6% and the steepest monthly drop in four years. Wholesale Trade declined from +0.5% to -0.1%.

The Atlanta Fed's real time GDPNow forecast for Q4 GPD is now predicting +1.9% growth and will probably be lowered when it is updated again on the 23rd.

Since 1948, the Fed has hiked rates 118 times. For 112 of those hikes the GDP was over 5.5%. Only 2 times was it below 4.5% growth. One of those was in 1982 when the Fed had to reverse course almost immediately because they hiked in a slowing economy.

They have never hiked rates with economic growth this low until now. There have been 55 meetings with no hikes since the rate was lowered to zero exactly seven years ago in December. It has been 11 years and 6 months since the prior series of rate hikes began. One out of five money managers in the business today has never managed money in a rate hike cycle.

The calendar for next week is headlined by the Q3-GDP revision. Analysts are expecting no change but I would be very surprised if that came to pass. This is the last revision for Q3 and large adjustments sometimes appear. We will get the first look at Q4 GDP on January 29th.

There are quite a few economic reports next week but nobody will be paying attention. With Christmas on Friday and the market closing early on Thursday, it creates a long holiday weekend for traders. Normally they will try to extend it even further by taking the first three days off as well. This is going to create a very low volume environment and volatility could either be extreme or nonexistent.

Nike, Ensign Group and Empire Resorts will all split on December 23rd. Of the three, the only one I would buy after the event would be Nike. They also report earnings after the close on Tuesday.

For the full split calendar click here.

Disney (DIS) shares crashed despite the record setting news about ticket sales for Star Wars. Rich Greenfield of BTIG moved to the dark side of the force and downgraded Disney to a SELL rating with a $90 price target. His downgrade was clearly scheduled to take advantage of any sell the news event on the day Star Wars opened. He said the trouble with ESPN cord cutters would linger and Disney's cable business that includes ESPN makes up 45% of their revenue.

Multiple analysts came out to rebut the BTIG view but it did not help the shares. Rosenblatt Securities provided a conflicting outlook with a buy rating and price target of $130.

Star Wars ticket sales for Thursday previews broke a record at $57 million. The previous record was $43.5 million for Harry Potter Deathly Hallows part 2. Globally the previews totaled $130 million and also a record. Tickets for this weekend are sold out and they are selling for as much as $200 online. The faithful have been lining up by the tens of thousands at theaters around the country to score a good seat when their ticketed show arrives. Analysts believe the opening weekend receipts will easily exceed $200 million. The current record is $208.8 million for Jurassic World.

One company with 800 employees chartered 19 buses, rented 10 screens at one multiplex, and took everyone to see the movie.

The Rotten Tomatoes review site has a near perfect 95% score with many fans calling it the best film in the series since the 1983 Return of the Jedi. That would not be hard since the 3 prequels were not serious movies.

I still believe any sell off is a buying opportunity on Disney. The company has more than 30 movies on the calendar over the next three years and that includes two more Star Wars installments. They will open Shanghai Disney this spring and the cruises are still selling out. The ESPN problems will be resolved when people resubscribe ahead of the Olympics in 2016.

Invest with the Force and add some Disney shares to your long-term portfolio. At Friday's close of $107.56 there is risk to $98 but there is also upside potential to $130. Disney paid $1.37 in dividends in 2015.

Shares declined -$4.29 to knock about 30 points off the Dow.

Boeing (BA) was downgraded from outperform to market perform at Wells Fargo. The analyst said Boeing might lower guidance when it reports earnings in January. Investors should be aware of price cuts on 777s and weak demand for 747s. Higher interest rates will also make leasing the planes more expensive. Boeing is also in the design phase of a 757 replacement and that could boost R&D spending through 2018 and "crowd out share buyback programs" according to Wells Fargo. Shares declined -$6 to knock about 45 points off the Dow.

Dow component Goldman Sachs declined on general weakness in the banking sector. Shares have been declining for over a month despite expectations for a rate hike. The major banks have announced increased loan loss reserves because the drop in oil prices has severely weakened the credit quality in the energy sector. Add in the high yield problem from last week and the huge withdrawals from the bond market and Q4 earnings are likely to be under pressure. Shares declined more than $7 to knock about 50 points off the Dow.

One stock overcoming Friday's market volatility was Darden Restaurants (DRI). The company posted earnings of 54 cents compared to estimates for 42 cents. They raised guidance for the full year to $3.35 and up from a prior estimate at $3.30. Same store sales are now expected to be +3% compared to prior estimates for +2.5%. They said Olive Garden customers are spending more money on the newly invigorated menu that includes a new line of "breadstick sandwiches." Shares rallied $4 on the news.

Homebuilder Lennar (LEN) posted earnings of $1.21 that beat estimates by 10 cents. Revenue rose +16% to $2.95 billion. Home deliveries rose +10% to 7,657 homes. New orders also rose +10% to 6,053 homes. The order backlog rose +14% to 6,646 with a value of $2.48 billion. The average home price rose +6%. For the full year, Lennar earned $3.46 on revenue of $9.47 billion. Shares fell on the news in a bad market.

Remember BlackBerry (BBRY)? The company had nearly faded from view after it fell to penny stock status back in October. Shares rallied +10% after the company reported a loss of only 3 cents compared to estimates for a 14-cent loss. Revenue of $548 million rose +12% quarter to quarter after nine consecutive quarterly declines. Software revenue more than doubled and device sales rose for the first time in four quarters. BlackBerry has a new secure Android phone called the Priv. They sold 700,000 in the quarter with the average price rising from $240 to $315. It is not often that you see the price of a smartphone go up. CEO Chen said this was the turnaround quarter with the Priv hitting over 30 countries this quarter.

CarMax (KMX) dropped more than -6% after the company posted earnings of 63 cents compared to estimates for 68 cents. Revenue of $3.54 billion also missed estimates for $3.63 billion. Revenue rose +4.1% and the slowest since the quarter ended on May 2012. In the year ago quarter sales rose +7.4%. They could not blame it on the weather with the warmest October on record and November not much colder. They blamed the earnings miss on higher advertising expenses in a "challenging quarter."

Fossil Group (FOSL) was downgraded by Goldman to a "sell" from hold. Goldman put a $26 price target on the stock with a close at $37 today. The bank lowered earnings estimates -20% to $2.86 for 2016 and -28% to $2.47 for 2017. Goldman said organic sales growth would decline to mid-single digits over the next two years. The flurry of new watches from competitors including Apple is going to depress prices in general.

Apple shares cannot catch a break. Jabil Circuit (JBL) reported lowered guidance for the current quarter. Jabil manufactures the casings for iPhones and gets about 25% of its revenue from Apple. Stifel Nicolas warned that Apple sales were probably behind the lowered guidance. RBC analyst, Amit Daryanani also pointed to the Jabil warnings when he cut Apple earnings estimates for the March quarter from $2.59 to $2.37 and lowered the price target from $150 to $140.

In the last couple of weeks Raymond James, Bank of America, Baird Equity Research, Needham and Morgan Stanley have cut estimates for iPhone shipments citing reductions in build rates from Asian suppliers.

Apple shares closed below support at $107.50 on Friday with a -$2.95 drop to $106 and putting the stock in a bear market. The high close was exactly $133 and Friday's close was a 27-point decline or -20.3%.

Apple has lost more than $160 billion in market cap since the highs. That decline is larger than 477 companies in the S&P-500. Currently Apple's market cap if $591 billion and it is still the largest company.

Amazon (AMZN) continues to expand its reach and capabilities. News broke on Friday the company was in talks to lease 20 Boeing 767 jets that would be added to its existing fleet of 5 that I wrote about a couple weeks ago. Apparently, that test run for those five over the last several months has worked out for the retailer. Baird analyst said Amazon would eventually create its own logistics service and have excess capacity they could sell during non-peak seasons. Amazon would not comment directly but they have a policy of not disclosing news until the deals are done.

The current five planes are being managed by Air Transport Services (ATSG) out of an old DHL facility in Wilmington Ohio. Amazon is not licensed to operate aircraft on commercial routes so they have to contract with a third party. Amazon is increasing their capabilities because FedEx and UPS cannot keep up. A Bizrate study found that on-time deliveries had fallen from 93.3% on Dec 1st to 89.9% on Dec 15th. One percent equates to 300,000 packages out of the 30 million UPS has been delivering each day in December. Since FDX and UPS have added capacity each year in an effort to keep up with the growth of online shopping it appears they are not keeping up. That is an opportunity for Amazon to develop its own infrastructure capacity and depend on UPS and USPS only for the local deliveries.

I reported a couple weeks ago that Amazon said it was building a fleet of "several thousand" trucks to ship between warehouses and hubs in 69 U.S. cities. They are starting to show up in public and they are labeled "Amazon Prime" for obvious advertising reasons.

Slice Intelligence said Amazon captured 39.3% of e-commerce spending from November 1st through December 6th. That was up from 37.9% in the same period in 2014. That is more than the next 21 retailers combined including Walmart, Target, best Buy, Macys, Home Depot, Nordstrom and Costco.

Forrester Research said online spending was on track to rise +11% in November and December to $95.5 billion. More than 2,900 merchants that use Channel Advisor software to sell their products on Amazon saw sales rise +19.5% in the second week of December. That was more than the overall e-commerce growth rate of 15% in the same period.

Crude oil closed at $34.55 after dipping intraday to $34.29 and a 12-year low close on a weekly basis. Inventories rebounded +4.8 million barrels after "supposedly" dropping -3.6 million the prior week. I seriously doubt the prior week number was correct since refinery utilization declined -1.4% to 93.1% and refiner inputs of oil declined -150,000 bpd while imports rose +257,000 bpd for that week. I suspect it was an error in the numbers and somewhere in the hundreds of reports that are submitted one was overlooked. That error was corrected this week when the new weekly data was collected and that caused the spike in inventories.

The rise in inventories weighed on prices all week. On Friday, we were facing the expiration of the January contract on Monday and anyone holding a long position needed to close it.

There was a bump in mid-afternoon when the active rig counts were reported from Baker Hughes. You may remember active rigs declined -23 the prior week. This week they were flat overall but there was some number confusion here as well. Oil rigs rose +17 and active gas rigs declined -17 while the total remained flat at 709. Does that strike anyone else as strange that after seeing oil rigs decline -21 last week that they would suddenly shoot back up +17 this week while gas rigs plunged -17? While I cannot prove it, I suspect some of the classifications were messed up the prior week and corrected this week. This is another weekly collection of hundreds of documents and the numbers tallied and reported. It would have been very easy to accidently categorize some oil rigs as gas rigs and when the new reports were collected this week that was magically reversed.

The intraday spike in oil prices on this data was quickly sold as I expect other astute investors assumed the same number confusion.

The gain in crude inventories to 490.7 million puts the total only -212,000 barrels below a historic high. The inventory levels are expected to continue higher over the low demand winter months.

Natural gas declined to $1.76 for the week and a 16-year low. With gas prices this low and warm weather still with us because of El Nino the outlook for prices is grim. Some analysts believe we could see $1.50 in the coming months. This is a very good reason why active gas rigs are falling and are now at an 18 year low. The shares of gas producers are also at post recession lows.

Swift Energy (SFY) traded as high as $68 in 2008 and the company was delisted last week at 16 cents. The company is in talks with bondholders after it skipped an $8.9 million interest payment on December 1st. Normally a company does a reverse split to lift its stock price to avoid being delisted. Swift Energy appears to have given up or maybe they wanted the large number of outstanding shares to trade for debt forgiveness. Many energy companies are now doing that is order to get some breathing room. The short story is that shareholders, that have hung on are now going to be wiped out in any debt/share exchange.

The December quadruple witching options expiration is the strongest of the four quarters. Investors and fund managers have positions that took them to year-end and now they either have to be exercised or closed. Volume across all the exchanges was the second strongest of the year at 12.65 billion shares, second only to the 14.2 billion on August 24th. That was about 3:1 declining volume over advancing volume while declining stocks were 2:1 over advancers. New 52-week lows were 494 compared to 1,073 on Monday. Stocks rebounded during the week and many did not return to their lows in the Thr/Fri sell off.

In the unbelievable column, the yield on the ten-year treasury declined to 2.19% after topping out at 2.33% after the Fed announcement. This is even more surprising because outflows from bond funds were at near record highs ahead of the Fed meeting. Something changed minds after Wednesday's close and suddenly treasuries were being bought in significant volume, probably as a safe haven investment since the Fed is not expected to hike again until March or April.

The market should have gotten a boost from the stimulus moves in Japan overnight. The BOJ added 300 billion yen to its program to purchase equity ETFs. That is roughly $2.5 billion in dollars with the yen at 121.29 to the dollar at Friday's close. The Dollar Index closed down on Friday after a sharp spike on Thursday as a result of the Fed move. The Friday decline was probably due to anticipation it would be at least three months before the Fed hiked again. The dollar was up strongly for the week so there was some profit taking involved as well.

The global economy is not likely to improve soon because the Baltic Dry Shipping Index closed at a historic low at 477. That is down from 2,337 in 2014 and 11,793 high in 2008 before the global recession. This indicates the cost to ship dry goods along the various ocean shipping lanes. The index declines when there are more empty ships bidding on the next cargo and rises when there is more cargo than ships. Closing at a historic low suggests the volume of goods being shipped around the world is also at a multi year low.

The CRB Commodity Index ($CRB) closed at 172.16 and a 41 year low. Commodities have not been this cheap since 1973 and I am sure quite a few people reading this commentary were not even born in 1973 and the vast majority were not investing in 1973. This is another indicator of the weakening global economy and another reason why the Fed should not have hiked rates. The Fed claims the commodity deflation is transitory but it looks pretty pronounced to me. Prices are already well below the 2009 recession lows.

Over the last ten years the global GDP has risen from $28 trillion to $78 trillion (+178%) Over the same period, the total global debt has risen from $40 trillion to $225 trillion (+462%). Comstock said not only is this not sustainable but it is why global growth is so slow. Debt requires payments that reduce the amount of money available to grow. Corporate debt issuance in the U.S. rose more than $1 trillion in just the first nine months of 2015. Comstock also said the global deflation in commodities is screaming a warning of a global recession ahead. Comstock Article

Historically commodities and the equity markets tended to trade relatively in tandem. Since the beginning of 2013 that has changed. Equities rose and commodities crashed. That relationship must return and that means either the stock market will crash or commodities are about to experience a huge rally. Since commodities are not going to rally until the global economy recovers that is not good news for the equity markets.

The Dow Transports ($TRAN) closed at a two year low. This is the worst performance outside of a recession and could be a signal that one is coming. The railroads, airlines and trucking companies have all warned about slowing traffic. The airlines have plenty of traffic but they have to discount the prices so low their revenue per passenger mile is falling. Some are bringing back snacks in an effort to entice passengers to use them instead of another carrier. Low oil prices should help them but most are not benefitting from the drop. They hedged the high prices a year ago and now they are suffering from hedges that are twice the current price of oil.


The S&P is down -2.6% for the year with eight trading days to go. To close in the green for the year it has to close over 2,059. We were there last week but Friday's flush could mean we are going to have a tough time regaining that level.

Personally, I think Friday was mostly options expiration, post Fed portfolio adjustments and some end of year exits. Literally tens of thousands of traders have now closed up shop until after Christmas. Expiration Friday was the punctuation to a year of tough trading. 2015 has seen the worst performance for mutual fund returns since 1998. Fourteen of the last 16 days have seen triple digit moves on the Dow in mostly alternating directions.

To confirm my idea that the downdraft was mostly options related the S&P-500 SPY ETF traded 46 million shares in the last 30 min and closed exactly at $200. This would have been the max pain trade. We have not talked about that much in recent years because of the increased volume in options and in high-frequency trading. Some 48% of the volume in December has been high-frequency trading.

There were 165,737 Dec $200 calls traded on Friday and 314,338 Dec $200 puts. That was the highest volume strike on both puts and calls. It was the strike where the most options above and below that level expired worthless. However, because of the sharp decline there were a lot of higher puts that expired in the money.

SPY December Calls

SPY December Puts

Unfortunately, the S&P-500 chart has confirmed another lower high and lower low and that is negative regardless of what caused it. The 2,020 support failed again and we could easily retest the strong support at 1985-1990.

The chart is negative and even if we do get a Santa Claus rally, the overhead resistance becomes stronger on every lower high. With the very low volume expected for next week, I think it will be very difficult to overcome the negative chart.

Support is 1985-1990 and resistance 2,060.

The Dow had only one stock in positive territory and that was Caterpillar. Why it was positive is a puzzler. They said before the open that total global machine sales were down -11% in November. Global resource industries sales were down -28% and global construction industry sales were down -7%. Shares dipped on the news to a two-month low but rebounded later in the day. The minor 32-cent gain did little to offset the major losses from Goldman, Boeing, Disney and others.

The last three declines saw the Dow stop on the 100-day average, currently 17,151. The sell on close orders pushed it slightly lower to 17,128 but close enough for our purposes. This is a two-month low. Horizontal support at 17,130 caught the falling knife.

Support at 17,050 and psychological support at 17,000 will be the defensive levels for monday. Any break below 17,050 will likely signal a major washout in progress and we could be headed back to the September lows at 16,000.

While I do not expect a move below 17,000, I did not expect this two-day -670 point crash from 17,800 either. The market is not behaving rationally and that makes it dangerous. When indexes move slowly either up or down investors have a chance to form opinions and strategize about new plays. When the Dow plunges nearly 700 points in two days there is no strategy other than sell fast to preserve profits and limit losses.

The Nasdaq Composite declined -79 points or -1.6% compared to the -2.1% on the Dow and -1.3% on the Russell 2000. Tech sentiment was supported by the Biotech sector with the $BTK losing only .7% and finishing the week with a gain of +3.5%. The BTK had two days of major gains on Tue/Wed and gave back very little on Thr/Fri. This kept the Nasdaq from joining its brethren at two month lows.

Apple's -7 point drop for the week was a major weight on the Nasdaq and the losses accelerated as the week progressed. With so many analysts cutting estimates it is not likely to improve significantly next week.

The Nasdaq came close to strong support at 4,900 with a close at 4,923. The intraday decline on Monday dipped to 4,871 but rebounded instantly. That 4888-4900 support level should be decent but with any material negative volume we could see a collapse.

The Russell 2000 did not give back all its gains since the Monday low but it came close. The +36 point two day rally was followed by a -31 point decline. That makes Monday's support low at 1,112 the level to watch this week. Since the next two weeks are supposed to be dominated by small cap buying, ANY further decline below 1,112 would be a sell signal. The seasonal norms for December have been trashed and the lack of any small cap buying next week would be market negative.

The NYSE Composite closed at a two month low. The NYSE did dip below this level on Monday but did not close here. The NYSE appears destined to retest 9500-9600 from the August/September crash. With a high percentage of commodity and energy stocks, the index is fighting an uphill battle.

The S&P-400 Midcap Index ($MID) is also at a two month low and very close to the 1,350 support that appeared in the Aug/Sep crash. Midcaps have been performing worse than small caps and I would not be surprised to see this support retested.

While I believe the majority of the selling on Thr/Fri was related to quadruple witching, it may be wishful thinking to expect a rebound next week. Monster declines like those we have had for the last two weeks produce confusion and timidity. Investors are afraid to go back into the market because there is no trend and they are still in pain from being knocked out of their positions.

Add in the low volume from most traders being away from the market and it can cause even more volatility OR no volatility at all. With fund managers now out of the market for the rest of the year, their volume is also missing. I would be cautious about launching new positions in either direction until a trend develops.

Despite the volatility, the analyst community is not backing off their estimates for yearend 2016. Cannacord is the highest at 2,350 followed by RBC Capital at 2,300, Bank America at 2,250, Wells Fargo at 2,245 and Morgan Stanley at 2,175. Just because they put out an estimate does not mean that is where the market is going. I will publish On January 1st the results from the 2015 estimate contest and the majority missed their targets by a mile.

The S&P has not been down two years in a row since 1980-1981. That means it has been 34 years since we had a back-to-back loss and the odds are good 2016 will finish higher. Typically, when we have a down year the following year is positive.

A survey of multiple strategists by Barron's suggests the equity markets will rise about 10% in 2016. The strategists gave their reasons in an article last week. David Kostin, Goldman's chief strategist believes the Fed will hike 4 times in 2016 to raise rates to 1.25% to 1.5%. His comments echo the feelings of the majority of analysts. Full Article

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Random Thoughts

Billionaire investor Sam Zell said "I think the economy is closer to falling over than it is to going up. I think there is a high probability we are looking at a recession in the next 12 months."

Last week I reported that JP Morgan said there was a 76% chance of a recession within the next three years and 55% over the next 12 months. Former fund manager Raoul Pal said the odds were 65% there will be a global recession. Citigroup also forecast a recession over the next 12 months.

Chinese officials finally admitted they faked the economic data. However, they claim they are not faking it now but did so in years past. They say that is why the current numbers are falling so sharply because the big numbers in the past were faked. So, do we believe them now or not? Some numbers were reported at levels that were twice the actual activity level. One county in the Liaoning province reported economic activity that was 127% higher than actual. They reported a GDP of 9.5% compared to the first three quarters of 2015 at 2.7%. Fortune Article

This year is on track to be the first losing pre-election year for the Dow since 1939. With the Dow down -3.9% for the year it will take about a 700-point rebound to return to positive territory. Santa needs to show up in a hurry with a sleigh full of bullish investors. "If Santa Claus should fail to call, bears may come to Broad and Wall." The Santa rally was defined by Yale Hirsch in 1972 as the seven-day trading period that covers the last five trading days of the year and the first two days of the New Year. Stock Trader's Almanac

While that "Santa failing to call adage" has been around for a long time it is not accurate. There is no evidence that it is true and actually some decent evidence to the contrary. Santa Adage Fails

More people shop on Dec 26th than shop on Black Friday according to American Express. As many as 66% of Americans will shop on the 26th compared to 45% on Black Friday and 47% on Cyber Monday. In a survey from Ebiquity 38% of Dec 26th shoppers will be shopping for themselves to take advantage of discounts. Some 25% said they will be using gift cards they received for Christmas. The survey also found that 76% of respondents think re-gifting is acceptable and 57% plan to do it this holiday season.

With the announced Dow-DuPont merger and the plan to split into three separate companies, we could see DuPont removed from the Dow 30. Amazon has been pegged as the next addition to the Dow with Alphabet also a potential candidate. However, Amazon would have to announce a major stock split of 6:1 or even 8:1 to be included. Since the Dow is a price weighted index they would never add Amazon at $665 but a $110 price after a 6:1 split would be acceptable. Apple split 7:1 before it was included in the Dow. Google at $750 would need an 8:1 split to be eligible for inclusion. However, with Google's dual share status (GOOG, GOOGL) they might not be included until one class is eliminated. Berkshire Hathaway (BRK.B) is another possibility but that dual share class problem exists there we well. They split the B class shares 50:1 several years ago so they could be included in the S&P-500.

There have only been 60 changes to the Dow since it was started on May 26th, 1896. Its longest stretch without a change was 17 years between 1939 and 1956.

There were 257 hedge funds closed in Q3, up from 200 in Q2. The total for the first nine months of 2015 is 674, compared to 661 in the same period in 2014. Decreasing investor risk tolerance was blamed for the two-year flood of closures. Money managers have been crushed by the market and geopolitical events like the 4% devaluation of the Chinese yuan in August. Hedge fund assets fell by $95 billion in Q3 to end at $2.87 trillion. That is the biggest decline since 2008-Q4 when $314.4 billion was withdrawn as the markets collapsed.

However, there were 269 new hedge funds opened in Q3 compared to 252 in Q2 and 785 for the first nine months of 2015. Bloomberg Report

Star Wars is grabbing all the headlines this weekend so it is not a surprise that the political cartoonists are merging politics and the movie theme. Cartoons


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If you do not take an interest in the affairs of your government, then you are doomed to live under the rule of fools."



Index Wrap

Deeper Correction, Part 2

by Leigh Stevens

Click here to email Leigh Stevens

Early in the week the Market seemed in a run toward prior highs again such as SPX 2100. Instead, renewed selling took the Indexes to Closes below the last downswing, suggesting a second deeper pullback.

The theory that is common and commonly 'fits' what happens in corrections within a primary up trend takes the form of a down-up-down pattern; an 'a-b-c' correction in 'wave' terms. This where the second down leg 'c' is greater than the first 'a' leg decline and the second longer downswing has a Fibonacci relationship to the first; e.g., a second decline is 1.38, 1.5, 1.62 greater than the first pullback.

A recent example of this kind of relationship of a second down leg to the first, is seen in the Russell 2000 (RUT): After an October rally, RUT hit a peak at 1200 and then declined to 1141 (11/16/15) before rebounding. RUT's first down 'leg' carried 59 points. RUT then rallied to a slightly higher high in early-December at 1205, then proceeded to fall again to a lower low at 1109 (12/14), for a peak to trough decline of 96 points. The second downleg 'c' of 96 points is a Fibonacci 1.62 times greater than the fist ('a') decline of 59 points within an 'a-b-c', down-up-down, corrective pattern.

I made the point last week that the break below the S&P 500 prior low suggested that this same dynamic might be in play, where the a SECOND downswing would likely be greater than the first. I'll show again the simple math here as to what was, and still is, possible downside targets in SPX on a second decline:

Fibonacci 1.38: From the SPX peak at 2104 a second longer down leg IF at 1.38 times the first is 134 points, suggesting potential to 1970; i.e., 2104 - 134 = 1970.

If the second longer downswing implied by a down-up-down ('a-b-c') correction carried a distance equal to a Fibonacci 1.5 X the first SPX decline of 97 points, a potential objective is to 1959; i.e., 2104 - 145 = 1959. A still-deeper correction, of a second bigger decline of a Fibonacci 1.62 times the first sell off, sets up a possible target near 1950; i.e., 2104 - 156 = 1948.

I'd also note that bullish trader 'sentiment' increased substantially after the Fed acted and, sure enough so to speak, another sharp pullback started by mid-week (12/16). It's rarely surprising to me that predominant trader (bullish or bearish) sentiment is often not a winning bet.

[My usual chart highlights for resistance levels are red down arrows; my highlights for support areas are the green up arrows.]



The S&P 500 (SPX) continues bearish in its short to intermediate term pattern as the rally again stalled around resistance implied by the 21-day moving average. Follow that with a bearish new low Close putting SPX below its prior down leg. If this isn't a one-day 'fluke' the chart suggests a second down 'leg' carries farther than the first decline such as into the 1970-1950 zone.

I outline in my initial bottom line commentary above how possible downside targets could be calculated in SPX if a second decline was 1.3 to 1.6 times the first down leg. My more bearish expectations currently, assuming this decline gathers steam is to the 1950 area but more likely to around 1960 as a 'maximum' downside target. The foregoing assumes that the 2000 area doesn't hold up as a key support but momentum is down currently.

Key near resistance comes in around 2070, extending to 2100. Pivotal near support is at 2000-1995, with next lower support implied by a deeper 62% retracement of the prior advance, at 1965. Fairly major support begins at 1950.

Bullish trader sentiment popped back up this past week as seen below with my CPRATIO indicator. Bullishness rose right into the mid-week peak which wasn't surprising to such a long-time follower of contrary opinion. The Relative Strength Index is headed lower again nearing a 'neutral' 40; below RSI 30 WITH reversal price action, suggests good bullish rebound potential.


The S&P 100 (OEX) continues bearish short to intermediate term given the extended, although not severe, pullback from the double top of recent months; i.e., with highs ranging from 1947 in July, 2015 to 944 in early-November (2015).

886 represent potential support at a 50% retracement of OEX's October rally and is often a give-back amount seen in a 'normal' correction. While this Market looks jittery at times, it is undergoing a fairly moderate correction to date. Next lower support starts around 880 and extends to 872; 872 represents a Fibonacci 62% retracement of the strong October advance.

Near resistance is down to 910 in OEX given the recent end of week selloff rout. Pivotal next higher resistance comes in the 930 area, where the Index topped this past week.

OEX is at a new Closing low for this move. Yet to see is if the Index also dips below its recent 890 intraday low; if so, there's further downside potential to the 880 area. If such price action is seen, I assume the Relative Strength Index (13-day) will be 'fully' oversold and also suggest high-potential for an upside rebound. Stay tuned.


The Dow 30 (INDU) continues bearish in its pattern as it saw another week below the important 200-day moving average. The rally failed again at resistance seen before around 17800. INDU then went on to fall to a new intraday AND Closing low for the current slow-moving sideways to lower correction.

I see better than even odds that the Dow falls back to support in the 17 thousand area; 16960 represents support implied by a 50% 1-half retracement of its sizable advance from the 16000 area up to within a hair's breath (17978) of 18 thousand.

Given the number of Dow stocks in prolonged sideways to lower trends (20 of 30 stocks) accounts for the failure of INDU to make new highs; instead we see a pattern of LOWER rally Dow peaks. INDU is the major indexes that I could see making a deeper retracement than 50% such as in a Fibonacci 62% give back by a dipping to 16800-16720. Stay tuned on that.

Near technical resistance comes in at 17550-17600 but I'd also pay attention to whether INDU could regain and mostly stay above 17200, action which would suggest possible basing or bottoming action. 17800 begins fairly major resistance, which then extends to the 18000 area.


The Nasdaq Composite (COMP) has been trending sideways to lower so the chart is bearish. In the indexes, trending below the 21-day moving average shows declining momentum per the current chart; conversely, a trend that's above this key 'centered' moving average is evidence of upside momentum.

The decisive break below 'milestone' 5000 support is suggested accelerating downside momentum. The rally ran out of steam around the 21-moving average, then broke sharply below 5000, which is now seen as resistance; support, once penetrated, 'becoming' subsequent resistance. COMP made a new Closing low for the current move. A dip, especially a Close below 4900 would suggest a potential next target to 4850-4830.

A continued drop in price such as to below 4900 support would suggest a continued decline in bullish trader sentiment and a continued drop in the RSI. Into 'oversold' territory for these two indicators would 'support' an upside reversal. Price wise, if COMP sold down to the 4800 area, bullish bets could be evaluated.


The Nasdaq 100 (NDX) like the broad Composite also showing declining momentum as NDX broke key support at 4600 and what had been the low/support end of a trading range. NDX made a new low Close for this move. Next up perhaps: a test of pivotal support in the 4500-4470 zone. 4400 is currently my lowermost downside target for the big cap tech index and if seen, could be a bottom for the current correction. My trading style is more to anticipate areas of likely/potential bottoms more than trend 'following'. In options, best prices come BEFORE the obvious reversals.

Pivotal resistance is at 4600 and NDX's most recent 'breakdown' point. A Close back above 4600, then to above the 21-day moving Average, would initiate a turn in momentum to UP. Pivotal resistance is then at 4700; NDX could not previously manage consistent Closes above this level.

Some records that stand for ages can come as a surprise. With NDX, the record high at 4816 to date goes back 15 years to March 2000. It's telling that our tech big cap Index has gotten this close to the record but NOT hit new all-time highs; seems like even modest inflation would see NDX in the 5000 area. Psychologically, current levels near the 2000 price peak may be a REMINDER of tech bubbles! There's some talk of bubble like signs in tech here and there.

The NASDAQ 100 Tracking Stock (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock's (QQQ) chart has gone from mixed to bearish as the stock failed to maintain upside momentum above the key 21-day average. 114 proved to be resistance after mid-week and still is per our down arrow highlight. The key breakdown was seen in the sharp downside penetration of 112; a support which now becomes pivotal near resistance. A sustained move above 112 is needed to suggest renewed upside momentum.

Pivotal near support in QQQ comes in at the 110 to 109.4 zone. I've highlighted support at 109.2 as representing the 38% Fibonacci retracement, which is often about the deepest pullback seen in a previously strong Index trend. Next support is 108, then at the 50% retracement level at 107.2. I'd call key must hold support for the bulls as 108-107.2

Judging from daily volume (per the volume 'bars' seen below the chart), the bulls are not in panic exit mode; not yet anyway. A decisive break of 109-108 should up the anxiety ante in being long the stock; likely we'd then see some 'panic' type selling as would show up with a spike(s) in daily trade volume.


The Russell 2000 Index (RUT) is bearish in its pattern. RUT has had greater downside volatility than upside which is visually well seen in the Index as its rallies have advanced to or near 2.5 percent above its 'centered' 21-day moving average VERSUS levels at or near 5% BELOW the 21-day average.

RUT hasn't fallen to a new Closing low yet so watch these levels: the recent prior low Close at 1115 AND intraday low at 1108.

Key support begins in the 1100 area and extends to 1080, where I'd turn around from bearish positions and play for an upside rebound. RUT has been an index that has had favorable reward potential if bought at RSI low extremes and shorted at upside extremes per the chart highlights of 'typical' high and low extremes.

Near RUT resistance is highlighted at 1150, with pivotal next resistance seen at 1170; the 21-day average, currently intersecting at 1164 isn't noted as resistance, but pretty much always assume that continued trade back ABOVE this key average suggest further upside potential.


New Option Plays

Soaring Above Its Rivals

by James Brown

Click here to email James Brown


Ryanair Holdings - RYAAY - close: 84.75 change: +0.95

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 406 thousand
Entry on December -- at $---.--
Listed on December 19, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: Yes, see below

Company Description

Trade Description:
Airline stocks as a group have had a rough year in 2015. The XAL airline index is down -15% year to date and looks poised to accelerate lower. RYAAY is an exception. The stock is up +16% in 2015 and is about to break out to new highs.

The company benefits from several factors. RYAAY is based in Ireland and right now Ireland is the strongest growing economy in the Eurozone. Meanwhile the European Central Bank has embarked on a huge quantitative easing program that should boost the broader economy. If that wasn't enough we have crude oil down to six-year lows and likely headed lower. Jet fuel is a major expense for the airlines to the drop in oil prices is a huge tailwind for profits.

If you're not familiar with RYAAY they are in the services sector. According to the company, "Ryanair is Europe's favorite airline, operating more than 1,800 daily flights from 76 bases, connecting 200 destinations in 31 countries on a fleet of over 300 Boeing 737 aircraft. Ryanair has orders for a further 380 new Boeing 737 aircraft, which will enable Ryanair to lower fares and grow traffic from 105 million this year to 180 million p.a. in FY24. Ryanair has a team of more than 10,000 highly skilled aviation professionals delivering Europe's No.1 on-time performance, and has an industry leading 30-year safety record."

Back in September RYAAY raised their full-year earnings guidance by +25%. The stock reacted with a surge to new highs. The company's October traffic grew +15% from a year ago with their load factor, the percentage of seats sold, up +5% to 94%. The strong trend continued in November with RYAAY announcing traffic was up +21% from a year ago. Again their load factor was up 5% to 93%.

Earlier this month the International Air Transport Association (IATA) issued a press release on industry profits for 2015 and 2016. The IATA raised their estimate on airline industry profits in 2015 from $29.3 billion to $33 billion with a net profit margin of 4.6%. They expect that to improve in 2016 with a forecast for industry profits of $36.3 billion on a net profit margin of 5.1%. Most of this is driven by rising passenger travel in spite of the recent terrorist attack in Paris.

Technically shares of RYAAY have been outperforming both its rivals in the airline industry and the broader market. The stock is up three weeks in a row. It's also poised to breakout from its $76.00-85.00 trading range. A rally above $86.00 will produce a new buy signal on the point & figure chart. Tonight we are suggesting a trigger to buy calls at $85.65.

Trigger @ $85.65

- Suggested Positions -

Buy the MAR $90 CALL (RYAAY160318C90) current ask $2.50

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Collapse On Quad-Witching Friday

by James Brown

Click here to email James Brown

Editor's Note:

Friday was a rough day for stocks. It was one of the highest volume days of the year thanks to quadruple-witching option and futures expiration. It was also one of the worst one-day declines in months for the U.S. market.

The pre-FOMC rally and rate-hike announcement surge has been completely erased.

EXPE and BG hit our stop losses on Friday.

Current Portfolio:

CALL Play Updates

AmerisourceBergen Corp. - ABC - close: 101.88 change: -0.46

Stop Loss: 99.85
Target(s): To Be Determined
Current Option Gain/Loss: -29.0%
Average Daily Volume = 2.2 million
Entry on December 15 at $103.02
Listed on December 12, 2015
Time Frame: Exit PRIOR to earnings in late January
New Positions: see below

12/19/15: Friday was a rough day for stocks. The S&P 500 index plunged -1.7%. ABC managed to fare better only falling -0.4% on the session after bouncing near its 10-dma.

ABC's overall trend is still higher but shares seem stuck in the $101-103 zone. No new positions at this time.

Trade Description: December 12, 2015:
Stocks had a rough week but ABC has been showing relative strength. Shares of ABC are now up three out of the last four weeks and up six sessions in a row. Considering how ugly the stock market was last week, ABC looks pretty attractive.

ABC is in the services sector. According to the company, "AmerisourceBergen is one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. With services ranging from drug distribution and niche premium logistics to reimbursement and pharmaceutical consulting services, AmerisourceBergen delivers innovative programs and solutions across the pharmaceutical supply channel in human and animal health. With over $135 billion in annual revenue, AmerisourceBergen is headquartered in Valley Forge, PA, and employs approximately 18,000 people. AmerisourceBergen is ranked #16 on the Fortune 500 list."

The company reported their 2015 Q3 results on July 23rd. They beat Wall Street estimates on both the top and bottom line. Revenues were up +12.8%. Management forecasted full-year 2015 income growth in the 20-to-22% range.

Fast-forward to late October and ABC reported another strong quarter. The company announced their 2015 Q4 results on Oct. 29th. Wall Street was expecting a profit of $1.18 a share on revenues of $34.5 billion. ABC beat estimates again with a profit of $1.21 a share. Revenues were up +12.3% to $35.47 billion. Management raised their 2016 earnings and revenue guidance above analysts' estimates. They're now forecasting 2016 revenue growth of +8% to +10%.

Last month ABC raised their dividend by 17% to $0.34 a share. Normally raising the dividend is a sign of confidence by management. Meanwhile Citigroup analyst Robert Buckland recently listed ABC as one of his top 28 value stocks in the U.S. market (for 2016).

Technically shares bottomed in October after a three-month plunge from resistance in the $115 area. Now ABC has a bullish trend of higher lows. The last few days have seen ABC produce a technical breakout past round-number resistance at $100 and technical resistance at its 100-dma. The point & figure chart is bullish and forecasting at $122 target. Tonight we are suggesting at trigger to launch bullish positions at $102.85.

- Suggested Positions -

Long FEB $105 CALL (ABC160219C105) entry $3.10

12/16/15 new stop @ 99.85
12/15/15 Caution - ABC has produced a bearish engulfing candlestick reversal pattern
12/15/15 triggered on gap higher at $103.02, trigger was $102.85
Option Format: symbol-year-month-day-call-strike


Becton, Dickinson and Company - BDX - close: 153.12 change: -2.79

Stop Loss: 150.85
Target(s): To Be Determined
Current Option Gain/Loss: -29.7%
Average Daily Volume = 1.0 million
Entry on December 17 at $156.35
Listed on December 16, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

12/19/15: BDX held up reasonably well on Thursday during the market's decline. It was no so lucky on Friday. Shares fell -1.7%, which was in-line with the S&P 500's -1.7% plunge. BDX should find support in the $151.00 area. Unfortunately the action over the last two days does look like a potential bearish reversal.

No new positions at this time.

Trade Description: December 16, 2015:
The stock market's big bounce this week has lifted the S&P 500 index back into positive territory for the year (currently up +0.7%). Healthcare stocks have outperformed with the XLV healthcare ETF up +6% year to date. BDX has doubled that with a +12% gain this year.

BDX is part of the healthcare sector. They are in the medical instruments and supply industry. According to the company, "BD is a leading medical technology company that partners with customers and stakeholders to address many of the world's most pressing and evolving health needs. Our innovative solutions are focused on improving medication management and patient safety; supporting infection prevention practices; equipping surgical and interventional procedures; improving drug delivery; aiding anesthesiology and respiratory care; advancing cellular research and applications; enhancing the diagnosis of infectious diseases and cancers; and supporting the management of diabetes. We are more than 45,000 associates in 50 countries who strive to fulfill our purpose of 'Helping all people live healthy lives' by advancing the quality, accessibility, safety and affordability of healthcare around the world. In 2015, BD welcomed CareFusion and its products into the BD family of solutions."

Their acquisition of CareFusion was a big deal. According to JP Morgan, they believe that BDX's purchase of CareFusion should transform the company into one that will "comfortably hit double-digit EPS growth over the next three to four years." The last couple of quarterly earnings report are definitely seeing the impact of the acquisition.

BDX's Q3 report, announced in early August, saw the company beat EPS estimates. Revenues were up +44.6% from a year ago. They raised 2015 guidance above Wall Street estimates into the $7.08-7.12 range. BDX also guided revenue growth in the +21-21.5% range.

The strong results continued in their fourth quarter. BDX announced its Q4 on November 4th. Analysts were looking for a profit of $1.90 a share on revenues of $3.03 billion. BDX beat both estimates. Earnings were $1.94 a share. Revenues were up +38.9% to $3.06 billion. Management guided for 2016 with earnings estimates in the $8.37-8.44 a share range. That's about +18% earnings growth over 2015. They expect revenues to grow +23-23.5% for the year.

The stock soared on its earnings report. BDX then spent the next few weeks consolidating gains. Now it looks like the bullish trend has resumed. The point & figure chart is very bullish and forecasting a long-term target at $209.00. Shares have been building on a bullish pattern of higher lows. Today's rally pushed BDX above resistance at $155.00. We see the breakout as an entry point. Tonight we are suggesting a trigger to buy calls at $156.35. Plan on exiting prior to earnings in February.

- Suggested Positions -

Long MAR $160 CALL (BDX160318C160) entry $3.84

12/17/15 triggered @ $156.35
Option Format: symbol-year-month-day-call-strike


Clovis Oncology - CLVS - close: 32.80 change: -0.56

Stop Loss: 30.75
Target(s): To Be Determined
Current Option Gain/Loss: -39.7%
Average Daily Volume = 1.4 million
Entry on December 01 at $32.55
Listed on November 28, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

12/19/15: CLVS underperformed its peers on Friday with a -1.6% decline. That was in-line with the NASDAQ composite's -1.6% decline but worse than the IBB biotech ETF's -0.18% dip on Friday.

More conservative traders may want to raise their stop loss again. The rally in CLVS failed at resistance near $36.00 (see chart).

No new positions at this time.

Trade Description: November 28, 2015:
After a -70% plunge all the bad news might be priced in for this biotech stock.

CLVS is in the healthcare sector. According to the company, "Clovis Oncology is a biopharmaceutical company focused on acquiring, developing and commercializing cancer treatments in the United States, Europe and other international markets. Our product development programs target specific subsets of cancer, and we seek to simultaneously develop, with partners, companion diagnostics that direct our product candidates to the patients most likely to benefit from their use. We believe this approach to personalized medicine - to deliver the right drug to the right patient at the right time - represents the future of cancer therapy."

The company has three product candidates in their pipeline. They are rociletinib, rucaparib, and lucitanib. Right now the market is reacting to news on its rociletinib clinical trials, where the drug is being tested on non-small-cell lung cancer.

Several days ago the company issued an update on their Rociletinib NDA filing. CLVS held their regularly scheduled mid-cycle communication meeting with the U.S. Food and Drug Administration (FDA). The current data on the Rociletinib clinical trials was not good enough. The FDA is asking for more data to prove the treatment's efficacy. This will likely push back the time frame on any approval. Investors were expecting a potential approval in the March-April 2016 time frame.

The delay in Rociletinib approval is a serious setback. Rival biotech firm AstraZeneca just got FDA approval for a competing drug, Tagrisso. By the time Rociletinib is approved (if it's approved), it will face serious competition from an already established treatment.

CLVS is a perfect example of why biotech stocks can be high-risk trades. On November 13, 2015 the stock closed at $99.43. The next trading day, Nov. 16th, shares gapped down at $29.27 and closed near $30. The stock traded down to $24.50 on November 23rd and started to reverse higher. CLVS' stock is now up three days in a row.

The current rally could be a combination of short covering and investors bargain hunting. It has been a full two weeks since the sell-off. If investors were going to sell they probably did so already. We think this rebound has a lot further to go but make no mistake CLVS is still a higher-risk trade. Tonight we are suggesting a trigger to buy calls at $32.55.

- Suggested Positions -

Long JAN $35 CALL (CLVS160115C35) entry $2.90

12/14/15 new stop @ 30.75
12/05/15 new stop @ 29.65
12/01/15 triggered @ $32.55
Option Format: symbol-year-month-day-call-strike


Charles River Labs. Intl. - CRL - close: 77.82 change: -1.56

Stop Loss: 77.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 426 thousand
Entry on December -- at $---.--
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: Yes, see below

12/19/15: I'm not super surprised to see CRL pullback on Friday but shares did slip a bit further than expected. The stock gave up -1.9%. On Thursday night I suggested more aggressive traders consider buying calls on a dip near $78.00-78.50. If you're feeling nimble I would be tempted to buy calls on a new rally above $78.50. Officially the newsletter is suggesting an entry trigger at $80.40, which would be a new multi-month high.

Trade Description: December 17, 2015:
Non-insurance healthcare stocks have been showing relative strength. CRL is up nearly +33% from its early October low. It's also up +24.7% for the year when the S&P 500 is now down -0.8% for 2015.

According to the company, "Charles River provides essential products and services to help pharmaceutical and biotechnology companies, government agencies and leading academic institutions around the globe accelerate their research and drug development efforts. Our dedicated employees are focused on providing clients with exactly what they need to improve and expedite the discovery, early-stage development and safe manufacture of new therapies for the patients who need them."

The earnings picture has been improving. CRL reported Q2 results on July 30th. They missed estimates by a penny but management raised their 2015 guidance above Wall Street estimates.

Their performance improved in the third quarter. CRL announced their Q3 results on November 4th. Analysts were expecting $0.94 a share on revenues of $340 million. CRL beat on both counts. Earnings were $1.03 a share, a +16% improvement from a year ago. Revenues were up +6.7% to $349.5 million. If you back out negative foreign currency headwinds then CRL's Q3 revenues were up +12.2%. Management raised their full-year guidance above analysts' estimates again.

You can see on the daily chart how shares of CRL rallied on its Q3 report and optimistic outlook. Since then investors have been buying the dips near support. This week the stock has broken out to new eight-month highs. Shares are flirting with a bullish breakout past round-number resistance at $80.00. Tonight we are suggesting a trigger to buy calls at $80.40 with an initial stop loss at $77.75. More nimble traders may want to wait for a possible dip and buy calls in the $78.00-78.50 region instead. Officially our entry trigger is $80.40.

Trigger @ $80.40

- Suggested Positions -

Buy the FEB $85 CALL (CRL160219C85)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Dr Pepper Snapple Group - DPS - close: 91.64 change: -1.39

Stop Loss: 89.85
Target(s): To Be Determined
Current Option Gain/Loss: -43.0%
Average Daily Volume = 1.2 million
Entry on December 16 at $94.05
Listed on December 15, 2015
Time Frame: Exit PRIOR to earnings in February
New Positions: see below

12/19/15: DPS was not immune to the market's sharp sell-off on Friday. The stock gave up -1.5% and closed below its 10-dma. I do expect DPS to find support in the $90-91 zone. Wait for the stock to bounce before considering new bullish positions.

Trade Description: December 15, 2015:
Huge beverage companies like Coca-Cola (KO) and Pepsi (PEP) used to be considered safe haven trades because consumers would continue to buy soft drinks no matter what the economy was doing. Things have changed. Now more and more consumers are avoiding high-calorie cola drinks. These companies have been forced to expand into non-cola product lines. KO and PEP are also suffering from the impact of the strong dollar, which makes their products more expensive overseas. Year to date KO is up +2% and PEP is up +5%. Smaller rival DPS is up +30% this year.

DPS is in the consumer goods sector. According to the company, "Dr Pepper Snapple Group is a leading producer of flavored beverages in North America and the Caribbean. Our success is fueled by more than 50 brands that are synonymous with refreshment, fun and flavor. We have 6 of the top 10 non-cola soft drinks, and 13 of our 14 leading brands are No. 1 or No. 2 in their flavor categories. In addition to our flagship Dr Pepper and Snapple brands, our portfolio includes 7UP, A&W, Canada Dry, Clamato, Crush, Hawaiian Punch, Mott's, Mr & Mrs T mixers, Penafiel, Rose's, Schweppes, Squirt and Sunkist soda."

One reason DPS is outperforming its peers is the company's focus on the U.S. Almost 90% of DPS' revenues are from the United States, which means the strong dollar doesn't really affect it very much. It doesn't hurt that business has been steadily growing. DPS has beaten Wall Street earnings estimates the last three quarters in a row. Their most recent earnings report was October 22nd. DPS announced their Q3 results with earnings of $1.08 a share. That was five cents above expectations. Revenues rose +3% to $1.63 billion, also above estimates. Management then raised their full year guidance above analysts' estimates.

The market reacted to its strong Q3 report and bullish guidance by launching DPS shares to new all-time highs. There was some normal post-earnings profit taking but investors have started consistently buying the dips in DPS' stock. Now shares are breaking out to new all-time highs again. Meanwhile Wall Street analysts have been raising their earnings estimates on the company, which is normally bullish.

Technically the stock is showing significant relative strength this year. The point & figure chart is bullish and forecasting at $124.00 target. Traders just bought the dip at round-number support near $90.00. DPS could benefit from some window dressing before the quarter ends on December 31st. If the Fed raises rates the dollar should rally. Investors looking to avoid the impact of the dollar might also see DPS as a buy. Today's intraday high was $93.84. I'm suggesting a trigger to buy calls at $94.05.

- Suggested Positions -

Long FEB $95 CALL (DPS160219C95) entry $2.98

12/16/15 triggered @ $94.05
Option Format: symbol-year-month-day-call-strike


Netflix, Inc. - NFLX - close: 118.02 change: -4.49

Stop Loss: 114.45
Target(s): To Be Determined
Current Option Gain/Loss: -38.4%
Average Daily Volume = 20.4 million
Entry on December 15 at $122.05
Listed on December 14, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

12/19/15: We knew NFLX was a volatile stock but the market's sharp declines are not helping. Shares of NFLX lost -3.6% on Friday. If this market weakness continues we could see NFLX test short-term support near $115.00 soon.

No new positions at this time.

Trade Description: December 14, 2015:
If at first you don't succeed, try, try again.

Last week's surge in market volatility shook us out of our bullish NFLX trade. Today we want to try again.

Here is an updated play description:
Netflix has come a long way from its late 1990s roots as a DVD-rental-by-mail business. Today it is one of the largest online streaming video-on-demand businesses. The company's most recent earnings report was disappointing but failed to derail enthusiasm for the stock.

NFLX is part of the services sector. According to the company, "Netflix is the world's leading Internet television network with over 69 million members in over 60 countries enjoying more than 100 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments."

Traditional media giants have been struggling with a massive change in consumer viewing habits. More and more people are "cutting the cord" with traditional cable television subscription packages. Case in point, Time Warner (TWX) just reported earnings this week and lowered their guidance as they expect more pay-TV subscribers to leave. That's because there are too many online streaming video options that are more competitive than regular cable services. NFLX has been a significant winner as people cut the cord.

NFLX is one of the market's best performers this year with a +167% gain year to date. Yet NFLX is not invincible. Doubts have been growing about NFLX's ability to keep growing and its rising costs. Their most recent earnings report is a good example.

NFLX announced their Q3 earnings results on October 14th. They missed Wall Street estimates on both the top and bottom line. Analysts were expecting a profit of $0.08 a share on revenues of $1.75 billion. NFLX delivered $0.07 a share. Revenues were up +23% to $1.74 billion. It wasn't a big miss but it was a miss. Furthermore NFLX management lowered their Q4 guidance below estimates. They now see Q4 earnings at $0.02 a share compared to estimates at $0.03.

One of the biggest disappointments was domestic subscriber growth. NFLX added 3.62 million subscribers globally. 2.74 million where international subscribers. The rest, 880,000 subs, were U.S. subscribers. That was significantly below analysts' estimates at 1.25 million.

NFLX partially blamed this subscriber miss on the credit card industry, which has been issuing new, more sophisticated credit cards with security chips in them. Essentially subscribers needed to update their billing info with the new card and that didn't happen, which produced more customer "churn". At least that is the story from NFLX. Credit card experts think this story is baloney and just a scapegoat for NFLX's poor growth.

Another challenge facing NFLX is growing competition. Amazon.com tries to dominate every market they are in. Their Amazon.com video streaming service is $99.00 a year (about $8.25/month) but this hasn't stopped NFLX's growth. Hulu has been a competitor in the online streaming video industry for years. They just launched a new ad free subscription service at $11.99 a month. According to Hulu, the customer response has been awesome but they are not releasing any numbers on how many people have signed up. Hulu's advantage over NFLX is being able to watch current season TV on their service. Yet another competitor for NFLX is YouTube. YouTube is launching a paid subscription service called YouTube Red for $9.99 a month. In spite of all the competition NFLX remains the dominant player and they continue to expand both in the U.S. and overseas. (FYI: new subscribers pay $9.99 a month for NFLX)

If missing earnings estimates and lowering guidance wasn't bad enough NFLX also told investors that they plan to raise additional capital next year (2016) to help "fund our continued content investments". That means more debt and could mean more stock (which dilutes shareholders). One of NFLX critics biggest arguments has been the company's rising expenses. Yet in spite of all these challenges NFLX's stock continues to perform. The point & figure chart is bullish and forecasting at $148 target.

In summary, the growth story for NFLX seems a little bruised with their missed subscriber numbers. They continue to spend a ton of money on content and expansion. Investors don't seem to care. The consumer trend of switching from traditional cable to streaming services is not going to reverse and that benefits NFLX.

I want to remind readers that NFLX has proven over and over that it is a very volatile stock. This can make it difficult to trade. I am suggesting small positions to limit risk.

Today saw shares of NFLX spike down toward its previous highs (prior resistance) and now new support in the $115.00 area. The stock bounced and shares rebounded back into positive territory. Technically this rebound looks like a short-term bottom. We are suggesting a trigger to buy calls at $122.05. We will start with a stop loss just below today's low.

- Suggested Positions -

Long JAN $130 CALL (NFLX160115C130) entry $3.75

12/15/15 triggered @ $122.05
Option Format: symbol-year-month-day-call-strike


PUT Play Updates

Currently we do not have any active put trades.


Expedia Inc. - EXPE - close: 125.36 change: -3.31

Stop Loss: 127.85
Target(s): To Be Determined
Current Option Gain/Loss: -2.6%
Average Daily Volume = 2.2 million
Entry on December 09 at $126.75
Listed on December 08, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

12/19/15: After EXPE's big rally midweek we raised our stop loss to reduce our risk. The market's sharp two-day sell-off shaved off more than $6.00 for EXPE. The stock hit our stop at $127.85 today.

Keep an eye on the simple 100-dma for support. Nimble traders could buy calls on another bounce off the 100-dma.

- Suggested Positions -

JAN $130 CALL (EXPE160115C130) entry $3.80 exit $3.70 (-2.6%)

12/18/15 stopped out
12/15/15 new stop @ 127.85
12/09/15 triggered @ $126.75
Option Format: symbol-year-month-day-call-strike



Bunge Limited - BG - close: 66.10 change: +2.06

Stop Loss: 64.65
Target(s): To Be Determined
Current Option Gain/Loss: -23.9%
Average Daily Volume = 1.0 million
Entry on December 03 at $64.85
Listed on November 21, 2015
Time Frame: Exit PRIOR January option expiration
New Positions: see below

12/19/15: A sharp decline in the U.S. dollar on Friday fueled a big bounce in oversold commodities. This fueled a rebound in BG. When shares cleared resistance near $64 the stock surged and hit our stop loss at $64.65.

- Suggested Positions -

JAN $65 PUT (BG160115P65) entry $2.30 exit $1.75 (-23.9%)

12/18/15 stopped out
12/12/15 new stop @ 64.65
12/05/15 new stop @ 67.05
12/03/15 triggered @ $64.85
Option Format: symbol-year-month-day-call-strike