Option Investor

Daily Newsletter, Sunday, 11/2/2014

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Japan Stomps On The QE Gas Pedal

by James Brown

Click here to email James Brown

The Bank of Japan has launched their own version of Operation Shock and Awe with massive amounts of new stimulus to try and revive their country. The combination of this new QE from Japan and the end of the fiscal year for many funds on Friday, October 31st, helped fuel another big surge for U.S. equities. Two weeks ago the S&P 500 delivered their best weekly performance of the year with a +4.1% gain. This past week the big cap index followed that performance with a +2.7% gain. The NASDAQ followed the prior week's +5.2% rally with a +3.2% gain last week. The Dow Industrials surged +3.4% and the small cap Russell 2000 index added +4.89%.

The last four days of October are normally pretty strong and this year did not disappoint. Most hedge funds and mutual funds have been underperforming their benchmarks and a good portion of this incredible bounce from the October low has probably been window dressing and performance chasing. Some of the market's best performers last week were the financials (+3.9%), the semiconductor index (+4.7%), and the Dow transportation average (+2.1%). The Transports ended the week at a new all-time weekly high.

The BoJ's decision to inflate their stimulus program sent the Japanese yen plunging. The value of the yen collapsed with a -2.76% drop against the U.S. dollar. That doesn't sound like much to an equity trader but it's a massive move in the currency market. The yen ended the week at a new seven-year low against the dollar. This dollar "strength" is weighing heavily on commodities, since they're all traded in dollars. The combined dollar index is now at a four-year high. It's no surprised that gold and silver are sitting at four-year lows. Gold had a rough week with a -4.85% drop and silver plunged -6.3%.

The price of crude oil, also traded in dollars, is at a four-year low. Brent crude saw its largest monthly drop in two years. U.S. crude oil flirted with a breakdown under $80.00 a barrel several times last week. Crude eventually settled at $80.54 a barrel. Brent crude closed at $85.86 a barrel. Meanwhile U.S. bonds continued to sink, now down two weeks in a row. The yield on the U.S. 10-year note ended at 2.33%.

Japan's QE Announcement

The main story on Friday was Japan's central bank announcement to boost their current QE program. The country has been struggling with deflation for years and their recent decision to raise taxes has hurt economic growth. Japan's latest GDP number showed growth falling -1.7% and inflation had dropped back to +1%. The BoJ wants to see inflation at 2%. In a move that completely shocked the world they announced significantly more asset purchases.

Now the BoJ will increase their bond-buying from 50 trillion yen a year to 80 trillion. That's about $712 billion worth. The amount of ETFs and REITs the bank will buy has been boosted from 1 trillion yen to 3 trillion yen a year. The BoJ also announced that the country's $1.26 trillion Government Pension Investment Fund (GPIF), which is the world's largest of its kind, will reduce its holdings of Japanese government bonds from 60% to 35%. They will double the amount of domestic and foreign equity ETFs and REITs from 12% to 25% each.

The combined purchases of the BoJ and the GPIF will be about $414 billion in bonds and equity ETFs. The U.S. market could be a huge beneficiary of this move since we're the largest and most liquid market for equities and bonds. Some analysts are estimating Japan could buy $200 billion worth of additional U.S. securities.

This surprise announcement sparked a widespread rally across the globe. The Japanese NIKKEI index was up more than +1,000 points intraday and closed with a +755 point gain. This is a +4.8% move and the NIKKEI closed at levels not seen since November 2007.

This decision by the BoJ is bullish for stocks but it's not without its critics. The decision itself was split with a 5-4 vote by Bank of Japan members. Analysts at Bloomberg have noted that it should help the Japanese economy but the program can't fix Japan all by itself. The biggest worry is the sheer size of the program. The BoJ's new QE, relative to the size of Japan's economy, is three times bigger than the U.S. Federal Reserve's QE program was. Prior to this decision by Japan the country's debt was already twice the country's GDP and over one quadrillion yen. There is absolutely no way that Japan will ever pay off its debt. Everyone knows this is a house of cards but no one knows when it will finally tumble. There was some speculation among Wall Street traders and analysts on Friday that this new QE program is a major warning sign on the longer-term health of Japan.

Economic Data

There was plenty of economic data last week. One of the biggest events was the two-day FOMC meeting. As expected Fed Chairman Janet Yellen announced that the Fed would begin their final taper of $15 billion a month to eliminate the central bank's asset purchases. Yellen also decided to leave the "considerable time" language in the Fed's statement, which suggest they will keep the fed funds rate unchanged (near zero) for the foreseeable future. Most are estimating that means at least six more months.

We also got a look at U.S. economic activity. The advanced estimate on Q3 GDP came in at +3.5%. That's down from Q2's +4.6% rate but above economists' estimates for only +3.0% growth. One of the biggest surprises was +1.8% increase in residential investment and a +1% jump in the real final sales component from 3.2% to 4.2%. We also saw government spending spike to +4.6%, which is the biggest increase since mid 2009.

The Richmond Federal Reserve manufacturing survey hit 20 when analysts were only expecting a reading of 11. The Chicago PMI data soared to a 12-month high with a rise from 60.5 to 66.2. Analysts were expecting a dip to 60.0. The U.S. Employment Cost Index (ECI) rose +0.7% in the third quarter. The wage component rose +0.8% following a +0.6% improvement in the second quarter.

The durable goods orders for September dropped -1.3% and the core rate fell -0.2% versus estimates for +0.5% growth. Pending home sales in September rose +0.3% versus a drop of -1.0% the prior month. The Case-Shiller 20-city Home Price index said prices rose +5.6% in August, down from the +6.7% increase in July.

Consumer sentiment and confidence has been rising. The Conference Board's Consumer Confidence index rallied from an upwardly revised 89.0 (previously 86.0) to a new seven-year high at 94.5 in October. Meanwhile the final revision on consumer sentiment saw the October reading adjusted from 86.4 to 86.9, which is the highest level since July 2007.

Overseas Economic Data

The pace of data slowed overseas. The Eurozone said their CPI inched up from +0.3% to +0.4%. The region's unemployment rate was unchanged at 11.5%. Yet Italy's unemployment slipped from 12.5% to 12.6%. Germany saw its inflation drop to 0.7% year over year and the country's retail sales plunged -3.2% for the month, which was significantly worse than expected.

In Asia nearly all the data was from Japan. Japan's industrial production came in better than expected with a rise from 1.9% to 2.7%. Japan's retail sales also improved from +1.2% to +2.3%. Yet the country's unemployment hit 17-year highs at 3.6%.

Major Indices:

The S&P 500 has seen an incredible bounce from its October intraday low of 1,820 on October 15th to set a new all-time closing high at 2,018 on Friday. That's almost 200 points or +10.8% in just 12 trading days. Without a doubt we are short-term overbought.

On a short-term basis the 2,020 level is resistance. Beyond that I would look to the 2040-2050 area as likely resistance. The nearest support is probably the 1960-1980 area. The index's 2014 gain now sits at +9.2%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The rebound in the NASDAQ has been equally impressive. From the October 15th low of 4,116 the index is now up more than 500 points. This tech-heavy index has soared +12.48% in the last 12 trading days. Technically the breakout past resistance near 4,600 should be bullish but it's very overbought.

I'd watch the 4,500 area for support. The 4,700 level is potential resistance. The NASDAQ's all-time high of 5,132 is only another 500 points away. Year to date the NASDAQ is up +10.9%.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index

The small cap Russell 2000 index has seen one of the most dramatic reversals higher. The bounce from its October 15th low near 1,040 has produced a +12.7% gain. The $RUT has sliced through every obstacle put in front of it and now the index is back in positive territory for the year (+0.8%).

Broken resistance in the 1140-1150 area might be short-term support. The next hurdle is likely the early September high near 1,184. Beyond that the 1,200 level and the all-time highs near 1,210 are overhead resistance.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

It's the first week of a new month and that means lots of economic reports. We'll see both the ISM manufacturing and ISM services in the U.S. The biggest report will be Friday's nonfarm payroll data. Yet all of these could be overshadowed by the European Central Bank's decision on interest rates and the ECB President's press conference on Thursday.

We will also continue to hear corporate results. The peak of earnings season has past but there will still be dozens of reports. Thus far earnings results have been relatively good. Corporate guidance has been somewhat better than normal, which is a good thing for the market.

Economic and Event Calendar

- Monday, November 03 -
U.S. construction spending
U.S. ISM manufacturing index
U.S. vehicle sales
Eurozone PMI data

- Tuesday, November 04 -
Eurozone Producer Price Index (PPI)
New York ISM data
U.S. Factory Orders

- Wednesday, November 05 -
ADP Employment Change Report
U.S. ISM Non-manufacturing (services) index

- Thursday, November 06 -
Weekly Initial Jobless Claims
Bank of England interest rate decision
European Central Bank interest rate decision
ECB President Mario Draghi press conference

- Friday, November 07 -
Unemployment rate
Nonfarm payrolls (jobs) report

Additional Events to be aware of:

December 17: FOMC meeting

Looking Ahead:

As we look ahead the outlook should be bullish for stocks. November launches the best six months of the year for stock performance. Historically the month of November is the third best month for the S&P 500 and the Dow Industrials since 1950. Over the last 30 years or so it has also been the third best month for both the small cap Russell 2000 and the NASDAQ composite.

Market performance after a midterm election also tends to be positive. The S&P 500 has rallied 12 out of the last 16 midterm Novembers with an average gain of +2.5%. Don't forget to vote on Tuesday, November 4th.

It is important to note that while seasonally the market bias should be up we are very short-term overbought. Just as the rally could have been fueled by some last minute window dressing by fund managers we could see some "undressing" this week. The good news is that investors will likely buy any dip but that doesn't mean we can't see a -2% to -3% pullback before moving higher.

Globally the world is facing a slowdown in China, Japan, and Europe. Japan will likely get a pass since the Bank of Japan has just launched a massive new QE program. China is growing at its slowest pace in five years but it is still growing at more than 7% a year. Europe is the biggest challenge for the market and that's why investors will be keenly focused on the ECB meeting and Mario Draghi's press conference this coming Thursday to see how the ECB plans to stop the economic decline. Draghi's last press conference was a significant disappointment.

The U.S. market looks like the most attractive bet for investors around the world. The U.S. is growing at +3.5%. The Federal Reserve has kept their "considerable period" language in their statement. The next rate hike is probably six months away. Gasoline prices in the U.S. are at their lowest level in four years, which is bullish for consumer spending, especially as we near the critical holiday shopping season.

The world appears to have gotten over its Ebola fears. The outbreak remains a terrible event in West Africa but the developed nations will likely remain unaffected.

On top of it all the headlines on Friday prove that central banks will continue to support equity prices. The U.S. Federal Reserve has ended its asset-backed purchases and in the same week Japan's central bank has tripled theirs. Now eyes turn towards Europe to see if the ECB will join the QE party.


“Those who don't know history are destined to repeat it.”
― Edmund Burke


Portfolio Update

by James Brown

Click here to email James Brown

Current Portfolio

Portfolio Comments:

The market's rebound has turned into a full-fledged rally. Now the major U.S. indices are at or near record highs. Bulls remain in control.

I have updated stop losses on DVA and FDX.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.

New Plays

Oversold to Overbought In 12 Days

by James Brown

Click here to email James Brown

- New Trades -

Editor's Note:

(November 02, 2014)

The stock market rebound has surely surpassed all expectations. The market has gone nearly straight up. Depending on the index you look at the stocks are up +10% to +12% in just the last twelve trading days. We've gone from oversold to overbought. The major U.S. indices are at or near new all-time highs or in the NASDAQ's case, a new 14-year high.

The market's strength is without a doubt encouraging if you're bullish on stocks. Yet that does not mean we want to launch new bullish positions tomorrow. LEAPS investors need to be patient. That means we also need to be patient with our entry points.

We just entered the best six months of the year. The U.S. remains the most attractive investment as money around the globe looks for safety and growth. That's good news for us.

I am not adding any new trades tonight be we are adding buy-the-dip entry points on AAPL, CELG, and GD in tonight's watch list. We do want to take advantage of the market's next pullback.

Play Updates

Another Round Of New Highs

by James Brown

Click here to email James Brown

Closed Plays

None. No closed plays this week.

Play Updates

Checkpoint Software Tech. - CHKP - close: 74.25

11/02/14: Our new play on CHKP is off to a strong start. The market's surge higher has lifted CHKP to multi-year highs. On a short-term basis CHKP is looking a little overbought. I would expect a dip. The $72.00 could be short-term support.

NOTE: Keep in mind the 2015 January calls only have about three months left.

Earlier Comments: September 14, 2014:
CHKP is another technology stock and it is similar to AKAM in that both have beaten earnings estimates every quarter this year and both are trading near 14-year highs. While AKAM facilitates Internet traffic, CHKP seeks to guard its clients against Internet hazards.

The company describes itself as, "the worldwide leader in securing the Internet, provides customers with uncompromised protection against all types of threats, reduces security complexity and lowers total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology."

"Today, Check Point continues to develop new innovations based on the Software Blade Architecture, providing customers with flexible and simple solutions that can be fully customized to meet the exact security needs of any organization. Check Point is the only vendor to go beyond technology and define security as a business process. Check Point 3D Security uniquely combines policy, people and enforcement for greater protection of information assets and helps organizations implement a blueprint for security that aligns with business needs. Customers include tens of thousands of organizations of all sizes, including all Fortune and Global 100 companies. Check Point's award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft."

It feels like a week doesn't go by that we don't hear about another major hacking scandal in the business world. It's not going away and corporations have to constantly update their cyber defense. CHKP has been working cyber security since 1993.

Shares of CHKP spent much of this year consolidating gains from 2013. However, the last week of August produced a crucial breakout past resistance near $70.00. Tonight I am suggesting a trigger to buy calls if CHKP can close above $72.50. We'll start with a stop at $69.45. The point & figure chart is bullish and currently forecasting an $89.00 target. We'll start with a long-term target in the $95-100 zone (our target to exit the 2015 calls will be lower).

- Suggested Positions -
OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 1.35*
symbol: CHKP150117C75 2015 JAN $75 call - current bid/ask $1.85/1.95

- or -

OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 4.80*
symbol: CHKP160115C80 2016 JAN $80 call - current bid/ask $5.00/5.30

10/27/14 trade begins. CHKP opens at $72.56
10/24/14 CHKP meets our entry point requirement with a close at $72.70. Trigger was a close above $72.50
10/05/14 Friday's move might signal the end of the pullback.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Current Target: CHKP @ 95.00-100.00 zone
Current Stop loss: 69.45
Play Entered on: 10/27/14
Originally listed on the Watch List: 09/14/14

DaVita Healthcare Partners - DVA - close: 78.07

11/02/14: DVA has delivered an impressive run from its October lows but I'm expecting a pullback. The company is scheduled to report earnings on November 6th. Odds are good that DVA could see some profit taking no matter what they announce. Broken resistance near $75.00 should be new support.

Tonight we'll move the stop loss to $71.40, just below the October low.

Earlier Comments: June 1, 2014:
DVA is in the healthcare sector. The company provides kidney dialysis services and related lab services. The most recent earnings report was lackluster but DVA did report revenue growth above Wall Street estimates. Management has been buying up smaller domestic rivals and expanding overseas into countries like China, Columbia, Germany, India, Malaysia, Portugal, Saudi Arabia, and Taiwan. In the U.S. DVA has about 35% of the outpatient dialysis market.

Bears on this stock would argue the company is at risk for pricing pressures from Medicare. About 90% of its total U.S. dialysis patients are on some form of government-assisted program. Nearly 80% of are part of Medicare. The latest rules from Medicare said there would be no price changes in 2014 and 2015 but there could be reimbursement reductions in 2016 and 2017.

This pressure from Medicare has not stopped Warren Buffet's Berkshire Hathaway from raising its stake in DVA. Berkshire started investing in DVA back in Q4 2011. They have been slowly building a position and this past quarter (Q1 2014) Berkshire added another 1.1 million shares. Their total position is now 37.6 million shares worth about $2.6 billion. Berkshire tends to be a long-term investors, longer than our timeframe but it is still a vote of confidence for DVA.

- Suggested Positions -
(Closed on October 16, 2014)
JUN 04, 2014 - entry price on DVA @ 71.44, option @ 2.65*
symbol: DVA150117C75 2015 JAN $75 call - exit $1.65** (-37.7%)

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $5.10/6.40

11/02/14 new stop @ 71.40
10/16/14 DVA hit our stop at $71.75 to close our 2015 calls.
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 adjusting stop loss strategy:
Use a stop at $71.75 for the 2015 calls.
Use a stop at $69.85 for the 2016 calls.
08/24/14 new stop at $69.85
07/31/14 DVA reports better than expected bottom and top line results
07/20/14 new stop @ 69.00
06/04/14 trade begins. DVA opens at $71.44
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/03/14 DVA closed at $71.47, above our trigger of $71.25
Option Format: symbol-year-month-day-call-strike

Current Target: DVA @ 85.00
Current Stop loss: 71.40 for the 2016 calls,
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14

FedEx Corp. - FDX - close: 167.40

11/02/14: Transportation stocks have been some of the market's best performers. The Dow Transportation average ended the week at a new all-time high. FDX also hit new record highs this past week.

Shares are currently testing multi-month resistance at a trend line of higher highs. FDX has failed at this resistance several times since July this year. I would expect the stock to retreat but should find support in the $155-160 area.

Tonight we are adjusting the stop loss to $154.00.

I am not suggesting new positions at this time.

Earlier Comments: October 19, 2014:
FDX is one of the largest package delivery companies in the world. The company's most recent earnings report showed improvement. FDX beat Wall Street's estimates on both the top and bottom line. Profits were up +24% from a year ago and it was the second quarter in a row that FDX beat estimates.

Management said their 2015 fiscal year was off to a great start. The company has enough demand they have recently raised prices on some services.

The plunge in crude oil and fuel prices is a huge tailwind for FDX. As a transportation company the cost of fuel is a major expense. With oil at four-year lows it should be a boost to FDX margins.

FDX should also benefit from the growth in online shopping. Last year there was a huge last minute surge in Christmas sales that needed to be delivered quickly by companies like UPS and FDX. This year online shopping is expected to grow +17%. That's another bonus for FDX.

The stock has been volatile thanks to the market's big swings but FDX is still respecting its long-term bullish trend of higher lows.

Tonight I am suggesting we wait for a close above $158.00 and buy calls the next morning with a stop loss at $148.50.

- Suggested Positions -
OCT 22, 2014 - entry price on FDX @ 160.74, option @ 12.65*
symbol: FDX160115C170 2016 JAN $170 call - current bid/ask $15.55/15.95

11/02/14 new stop at $154.00
10/22/14 trade begins. FDX opens at $160.74
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered with a close at $159.88, above our trigger of $158.00
Option Format: symbol-year-month-day-call-strike

Current Target: FDX @ TBD
Current Stop loss: 154.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14

Humana Inc. - HUM - close: 138.85

11/02/14: HUM is another stock that has rallied to record highs within the broader market surge higher. HUM tested potential round-number resistance at $140 on Friday. With a bounce from $121 just 12 days ago I do expect HUM to pullback.

I am not suggesting new positions at this time.

FYI: HUM is scheduled to report earnings on November 7th. The stock will likely see some volatility that morning (this coming Friday). After such a big move higher already HUM could see some profit taking on its report.

Earlier Comments: October 19, 2014:
HUM is in the healthcare sector. The company offer health insurance. Right now that's a good spot to be as the system irons out the kinks in the Affordable Care Act (a.k.a. Obamacare). Thus far Obamacare has been a boon to insurers as more and more Americans sign up for health insurance.

Shares of HUM did see a pullback from its recent highs near $136 down to $121 (a -11% correction) but now HUM is on the rebound. Even with the pullback HUM still has a long-term bullish trend of higher lows. The point & figure chart is bullish and suggesting a long-term target of $173.00.

Tonight I am suggesting we wait for HUM to close above $130.25 and then buy calls the next morning with a stop loss at $119.75. I do want to warn you that HUM is scheduled to report earnings on November 7th but several of its peers (AET, CI, and WLP) will report earnings in the next two weeks (before the end of October). Their quarterly results and guidance (good or bad) could influence shares of HUM.

- Suggested Positions -
OCT 22, 2014 - entry price on HUM @ 133.75, option @ 13.25*
symbol: HUM160115C140 2016 JAN $140 call - current bid/ask $14.80/16.40

10/22/14 trade begins. HUM opens at $133.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
10/21/14 triggered. HUM closed @ 133.27, above our suggested entry above $130.25
Option Format: symbol-year-month-day-call-strike

Current Target: HUM @ TBD
Current Stop loss: 119.75
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Ready For A Pullback

by James Brown

Click here to email James Brown

New Watch List Entries

AAPL - Apple Inc.

CELG - Celgene Corp.

GD - General Dynamics

Active Watch List Candidates

GS - Goldman Sachs

LLY - Eli Lilly & Co

New Watch List Candidates:

Apple Inc. - AAPL - close: 108.00

Company Info

Love it or hate it AAPL always has Wall Street's attention. It has a cult-like following. The company's success has turned AAPL's stock into the biggest big cap in the U.S. markets with a current valuation of more than $633 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

The company's latest earnings report was super strong. AAPL reported its Q4 (calendar Q3) results on October 20th. Wall Street was expecting a profit of $1.31 a share on revenues of $39.84 billion. The company delivered a profit f $1.42 a share with revenues up +12.4% to $42.12 billion. The EPS number was a +20% improvement from a year ago. Gross margins were up +1% from a year ago to 38%. International sales were 60% of the company's revenues.

AAPL's iPhone sales exceeded estimates at 39.27 million in the quarter and up nearly 16% from a year ago. The only soft spot in their ecosystem seems to be iPad sales, which have declined several quarters in a row. The company hopes to rejuvenate its tablet sales with a refresh of the iPad models. More importantly AAPL management raised their Q1 (calendar Q4) guidance as they expect revenues in the $63.5-66.5 billion in the quarter. Recent news would suggest that AAPL might deliver an incredible 50 million iPhone 6s in 2014. That's not counting their new iPhone 6+.

The better than expected results and bullish guidance sent the stock to new highs. The rally has created a quadruple top breakout buy signal on its point & figure chart that is currently forecasting at $133 target. Yet we do not want to chase AAPL here. The stock is up $12 from its October low. We do want to be ready if shares see a pullback.

Tonight I am suggesting a buy-the-dip trigger to buy calls at $103.50 with a stop loss at $98.90.

Buy-the-dip trigger @ $103.50, stop loss @ 98.90

BUY the 2016 Jan. $115 call (AAPL160115c115) current ask $9.25

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

Chart of AAPL:

Originally listed on the Watch List: 11/02/14

Celgene Corp. - CELG - close: 107.09

Company Info

We previously had CELG on our LEAPStrader newsletter but got stopped out during the market's extreme volatility and correction in the first half of October. The bullish story on CELG has not changed. We'd like to reopen bullish positions again. However, CELG is extremely short-term overbought. The biotechs have been showing major relative strength and soaring to new highs. I'm suggesting a buy-the-dip trigger at $100.00 with a stop loss at $94.90.

I am listing our previous play description below with an update on its most recent earnings report.

(Earlier play description)
If you're looking for opportunity it's hard to beat some of the biotech names. CELG is one of the strongest. According to their press release, "Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation."

What makes CELG so attractive is the company's pipeline. Developing drugs is an expensive business. A lot of older firms are buying other companies for their pipeline. Meanwhile CELG is developing a very strong pipeline. You can view the company's current progress on this webpage.

CELG is also growing earnings. The company's Q2 report was July 24th. Wall Street was looking for a profit of 89 cents a share on revenues of $1.84 billion. CELG beat estimates with a profit of 90 cents and revenues rising +17.1% to $1.87 billion. Earnings per share are up +18% from a year ago. Management raised their guidance for 2014. Wall Street was a little disappointed with the guidance because analysts are more optimistic.

The latest earnings report was October 23rd. Analysts were looking for a profit of $0.94 on revenues of $1.95 billion. CELG beat estimates with $0.97 as revenues grew +18.4% to $1.98 billion. Management then raised their EPS and revenue guidance above Wall Street's estimates.

Multiple firms raised their price target on CELG following the Q3 results and the P&F chart is now forecasting at $157 target. We do not want to buy calls here. Wait for a pullback.

Buy-the-dip trigger @ $100.00, stop loss @ 94.75

BUY the 2016 Jan. $120 call (CELG160115c120)

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

Chart of CELG:

Originally listed on the Watch List: 11/02/14

General Dynamics - GD - close: 139.76

Company Info

GD is another really strong stock that we got stopped out of during the sharp market pullback in the first half of October. Since then shares of GD have not only recovered but have sprinted to new highs.

GD is considered part of the industrial goods sector. The company is a huge aerospace and defense company. They have four significant segments: aerospace, combat systems, information systems, and marine systems (ships and submarines). The defense industry in the U.S. has been saddled with significant budget cuts due to the 2011 sequestration deal that will shave $500 billion from U.S. defense spending from 2012 through 2021. The industry has managed to thrive in spite of these budget cuts.

GD has beaten Wall Street's earnings estimates five quarters in a row. The company is also seeing margin improvement. Their Q2 report was on July 23rd and it not only beat analysts' estimates but management raised their EPS and revenue guidance for 2014. Multiple analysts raised their price target on GD following this announcement.

We see a similar trend with the latest earnings report on October 22nd. GD reported their Q3 results with a profit of $2.05 per share. That beat analysts' estimates by 14 cents. Margins continued to improve, up 50 basis points from the same quarter a year ago. GD's backlog of orders soared +56% to $74.4 billion in the quarter. Management then raised their 2014 earnings guidance above Wall Street's estimate (again).

The stock has been in rocket-mode with shares in a non-stop rally from $115 to $140. We do not want to buy calls here. GD is very short-term overbought. Tonight I am suggesting patience and a buy-the-dip trigger at $132.00 with a stop loss at $124.75.

Buy-the-dip trigger @ $132.00, stop loss @ 124.75

BUY the 2016 Jan. $140 call (GD160115c140)

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

Chart of GD:

Originally listed on the Watch List: 11/02/14

Active Watch List Candidates:

The Goldman Sachs Group, Inc. - GS - close: $189.99

11/02/14: Wow! We were bullish on GS but we were hoping for a pullback first. The plan was to buy calls on a dip at $180.50. Instead shares of GS surged from $183.35 to $189.99. This is a new multi-year high and GS is testing potential round-number resistance at $190.00.

This stock is now up over 18 points from its October low (just over +10%). We do not want to chase it here. Tonight we will move our buy-the-dip trigger from $180.50 to $183.50.

Earlier Comments: October 26, 2014:
Goldman is in the financial sector. They are considered part of the national investment brokerage industry. Goldman was founded in the year 1869 and is headquartered in New York. The company provides investment banking and management services to corporations, other financial institutions, governments and high-net-worth individuals. The lion share of their business is institutional client services where GS makes markets in fixed income, equities, currencies, and commodities.

The company's recent earnings report was strong. GS announced its Q3 results on October 16th. As of the first nine months of 2014 their revenues were up $1.4 billion above the same period a year ago. Management has managed to boost profits by reducing costs. A strong mergers and acquisitions market in 2014 has helped drive GS' results as the company is gaining market share.

Looking at their recent results Wall Street expected a profit of $3.21 per share on revenues of $7.8 billion for the quarter. GS delivered $4.57 per shares, a +59% increase from a year ago. Revenues soared +25% to $8.4 billion. GS saw $20 billion in net inflows bumping client assets to $1.15 trillion.

The company does have a habit of crushing analysts' earnings estimates so the market wasn't that surprised. The stock actually sank on these results but the initial weakness is over and GS is rebounding.

The stock experienced a -10% correction from its early October high to the mid October low. The recent breakout past resistance near $180 and all of its key moving averages is encouraging. I would be tempted to buy calls right now. However, I suspect the market might see some mild profit taking after last week's big rally.

Tonight I am suggesting a buy-the-dip entry point at $180.50 with a stop loss at $174.50. Our long-term target is the $220-230 zone.

Buy-a-dip at $183.50 with a stop at $174.50

BUY the 2016 Jan $200 call (GS160115c200)

11/02/14 adjust buy-the-dip trigger from $180.50 to $183.50
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 10/26/14

Eli Lilly & Co - LLY - close: 66.33

11/02/14: The stock market's surge on Friday pushed LLY above resistance near $67.00 and the stock tagged new 10-year highs. Yet the rally didn't last. LLY underperformed the major indices on Friday with a -0.7% decline.

Friday's intraday high was $67.43. We will adjust our entry trigger from a close above $67.25 to a close above $67.50. However, nimble traders may want to consider buying a dip. A 50% retracement of the October bounce from $60.50 to $67.40 would be about $64.75. A dip near $65 or better yet a dip to and then a bounce from $65.00 might be an alternative bullish entry point.

I'm crossing my fingers that LLY does see a pullback and we can adjust our entry point again and take advantage of any profit taking. For now we'll move the trigger to a close above $67.50.

Earlier Comments: October 5, 2014:
You may have noticed that stocks have turned a bit more volatile recently. That could be a new trend after as investors try to look ahead into 2015 and ponder a market environment without a QE program by the Federal Reserve. That's why tonight we're looking at a stock like LLY, which is traditionally considered a more safe haven trade.

LLY has been building on its longer-term trend of higher lows. Plus the company has seen some good news. The U.S. FDA recently approved LLY's new once-a-week injectable diabetes drug for adults with type 2 diabetes. This new treatment, Trulicity, helps improve the patients' blood sugar levels. There are an estimated 26 million Americans who suffer with type 2 diabetes. LLY is also teaming up with AstraZeneca to work on a Alzheimer's treatment.

The two-week pullback in shares of LLY was pretty mild and investors are already buying the dip. We want to hop on board if this rebound continues. Tonight we are suggesting investors wait for LLY to close above $66.25 and then buy calls the next morning with a stop loss at $61.90.

trigger: Wait for LLY to close above $67.50
Then buy calls the next morning with a stop at $61.90

BUY the 2016 $70 call (LLY160115c70)

11/02/14 adjust entry trigger. Wait for a close above $67.50
10/26/14 adjust entry point strategy. Move trigger from $66.25 to a close above $67.00. Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 10/05/14