Option Investor

Daily Newsletter, Sunday, 11/9/2014

Table of Contents

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

Leaps Trader Commentary

It's That Bullish Time Of Year

by James Brown

Click here to email James Brown

The best six months of the year is off to a decent start for the big cap indices. The markets digested a lot of big events like the U.S. midterm elections, the ECB meeting, and a jobs report miss. The S&P 500 and the Dow Industrials both hit new record highs. Financials and transportation stocks were showing relative strength while semiconductor and biotech stocks saw some profit taking. The small caps and the NASDAQ seemed to struggle but overall it was more of a sideways, consolidation week following the big gains in the second half of October.

The U.S. dollar continues to rally and the dollar index is at four-year highs, which is weighing on commodities. The dollar is at seven-year highs against the Japanese yen. Crude oil lost -2.7% and broke down under support near $80 to end the week at $78.43 a barrel. Brent crude settled at $83.60. Silver was off -1.8% at $15.81 an ounce. Gold managed a bounce of +0.5% and closed near $1,179 an ounce. The bond market bounced on Friday and the yield on the U.S. 10-year note dipped to 2.3%.

Economic Data

Economic data in the United States was mixed last week. The ISM manufacturing data rose from 56.6 to 59, which was better than expected. ISM services declined from 58.6 to 57.1 The Markit PMI number fell to multi-month lows at 55.9 versus estimates for 56.2. Yet all of these numbers are above the neutral line of 50.0 so they still signal economic growth.

The U.S. midterm election is not a pure economic event but it will influence future policy. The Republicans gained seven seats in the Senate, giving them a 52-seat majority. They also added ten more seats in the House of Representatives. It's assumed that a Republican led House and Senate will be more business friendly but they still face challenges from the Democrats who can filibuster in the Senate and President Obama who can veto any bill.

The jobs data last week was generally encouraging. The ADP employment change report said the U.S. added +230,000 private sector jobs in October, which is up from 225K in September. That set up bullish expectations for the nonfarm payroll (jobs) report on Friday. Economists were expecting +235,000 new jobs in October. The BLS nonfarm payroll report only showed +214,000. Normally a jobs miss of 20K would spark some selling pressure and stocks initially dipped on this report, especially since there were some whisper numbers in the 250K-to-300K range. Fortunately, there was no follow through on the initial market sell-off.

The August jobs report was revised higher (again) from +180,000 to +203,000, which is significant improvement from the original headline of +142,000 in August. The September report was revised higher from +248K to +256K. These revisions mean the U.S. has now added more than +200,000 jobs in the last nine months in a row. Reuters noted that we have not seen a streak that strong since a 19-month streak back in the 1993-1995 time frame. It is also the 49th consecutive month of job gains. That's a feat the country has not seen since the 1930s.

The U.S. unemployment rate fell from 5.9% to 5.8%. Meanwhile the labor force participation rate inched higher from a multi-decade low of 62.7% to 62.8%. The broader U6 unemployment rate improved from 11.8% to 11.5%, which is encouraging. Another improvement was the average workweek, which eked out a gain from 34.5 to 34.6 hours. If this trend continues, a rising number of hours works tends to precede strong job gains.

While the headline number was a miss the overall report was seen as a goldilocks number that wasn't too hot or too cold. The markets seemed to interpret the jobs data to mean the Fed will not feel rushed to raise rates since job growth remains steady and not too strong.

Overseas Economic Data

Some of the economic data overseas did see some improvement but the headlines were all about the European Central Bank meeting. Before the ECB meeting there were reports of a mutiny among the ECB members with many unhappy with ECB President Mario Draghi's leadership. Reuters reported that 10 out of 24 ECB members are not in favor of a European QE program. Yet this instability did not come up in the meeting.

The ECB left rates unchanged at 0.05%. Draghi continued to tease the markets that QE is coming. He suggested that the central bank is poised to start asset-backed purchases soon. Of course we all know he's talked a big game without any real action for a long time. It was over two years ago that Draghi made his "whatever it takes" statement. The ECB President did say he expects the central bank's balance sheet to grow back toward March 2012 levels, which would mean a additional one trillion euros from current levels (near 3 trillion euros).

The market seemed hopeful that the ECB will follow through this time but there are skeptics. Ben Bernanke, former U.S. Fed chairman, was quoted by Bloomberg saying the ECB is going to have a hard time implementing any QE. The ECB does not have the same structure that the U.S. or Japan has and thus the European Central bank faces multiple challenges, some of them legal issues, to buy government debt.

Looking at the economic data last week the Eurozone said their retail sales dropped -1.3%, which was worse than expected. The European Commission lowered their GDP forecast for Europe. They now expect 2014 GDP growth to be +0.8% versus prior estimates of +1.2%. They also lowered their 2015 GDP growth forecast from +1.7% down to +1.1%.

Germany reported improving trade data with imports up +5.4% and exports up +5.5%, way above expectations. German industrial production rose +1.4%, which was below estimates but up from the prior month's -3.1% decline. France said its industrial production was unchanged. Spain saw its industrial production rise +1.0%, up from +0.3% the prior month. Spain was also making headlines with its Catalonia region voting on independence.

The vote is controversial. Catalonia, an area of Spain that includes Barcelona, has been indicating they want to leave Spain for quite some time. Spain's Prime Minister Mariano Rajoy and the nation's constitutional court have called the vote illegal. In an effort to soften the blow Spain's leaders have chosen to let the vote occur as a non-binding exercise. The prime minister is calling it a "freedom of expression" event.

Economic data in Asia's two power houses was mostly negative. China's manufacturing PMI data fell from 51.1 to 50.8. The country's HSBC services PMI dropped from 53.5 to 52.9 when analysts were expecting a rise. Japan's manufacturing PMI dropped from 52.8 to 52.4. Numbers above 50.0 still suggest economic growth. If you recall a week ago the market was reacting to Japan's surprise announcement of a massive QE program. The BoJ's Governor Kuroda said they have no pre-set time limit on this QE program and will keep it in place until they achieve their inflation target. It sounds like Japan's "whatever it takes" moment.

Major Indices:

The S&P 500 index added another +0.7% last week, setting new record highs. The index is now up 211 points or 11.5% from its October 15th low just 17 trading days ago. It is very short-term overbought and nearing resistance at its trend line of higher highs (see chart).

While I expect the index to see some profit taking odds are there are plenty of investors ready to buy the dip. The 2,000 level could be short-term support. Below that I would look toward the 50-dma near 1970 as potential support.

Year to date the S&P 500 is now up +9.9%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ spent last week digesting its recent gains in a sideways consolidation. This is potentially bullish. Bears could argue that momentum has stalled. Bulls can argue there was no profit taking after such a big bounce from its October lows. The NASDAQ managed to hold above new support at 4600 it remains near 14-year highs. Personally I think a pullback would be healthy. The 4500 area should be decent support.

If the NASDAQ does breakout then it will probably see resistance about every 50 points (4700, 4750, etc.). 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 was also consolidating sideways last week. Lack of profit taking after such a big bounce from its October low is somewhat encouraging. It would be healthier to see the $RUT pullback first before hitting new relative highs. The 200-dma near 1150 would be a great spot to look for a bounce from support.

The early September high near 1185 is potential resistance. Beyond that the 1200 level and the all-time highs near 1213 are overhead resistance. Currently the $RUT is only up +0.9% for the year.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is relatively quiet for economic reports. Earnings season is still going although it's almost over. A few of the big names reporting their QE results this week are Wal-Mart (WMT), Cisco Systems (CSCO), JC Penney (JCP), Macy's (M), and Applied Materials (AMAT).

Thus far the Q3 earnings season has been pretty good. Of the 446 S&P companies that have reported their results about 77% have beaten Wall Street's earnings estimates. 60% have beaten the revenue estimate, which is encouraging. We haven't seen an earnings season this good since Q2-2010 when 79% of the S&P 500 beat their earnings estimate. Analysts were only expecting earnings growth of +4.5% but right now, based on the companies that have reported thus far, Q3 earnings have been up +7.6%.

Economic and Event Calendar

- Monday, November 10 -
Japan's trade data

- Tuesday, November 11 -
(nothing significant)

- Wednesday, November 12 -
Wholesale inventory data
Japan industrial production

- Thursday, November 13 -
Weekly Initial Jobless Claims
Wal-mart (WMT) earnings report

- Friday, November 14 -
Retail sales data from October (U.S.)
University of Michigan Consumer Sentiment survey

Additional Events to be aware of:

November 24: Iran nuclear deadline
November 27: U.S. market closed for Thanksgiving
December 17: FOMC meeting

Looking Ahead:

Looking ahead there are always concerns that can undermine the market. Overall the expectations for this coming holiday shopping season is pretty good. Yet there are a few companies that have voiced some concerns. Kate Spade (KATE) and Starbucks (SBUX) are both worried that mall traffic has been low this year and they do not expect to see much improvement in mall traffic during the holiday shopping season versus last year.

Another potential concern is investor sentiment. Are we too bullish? The latest American Association of Individual Investors (AAII) weekly survey shows 52.69% of investors are bullish. This is the highest reading we've seen all year. Contrarians will point at this above average bullish sentiment as a warning sign.

Growth problems persist. Europe continues to struggle. There region has wasted the last few years hoping for a recovery. They have failed to make the necessary changes and now their economies are slipping. Europe is on the verge of their third recession in the last six years. The region is facing deflation pressures. We could easily see the credit/financial crisis return with struggling countries like Greece, Italy, and Spain.

Japan is also facing deflation pressure again but they have pulled out their monetary policy bazooka to force inflation. This is short-term bullish for the Japanese market but potentially fatal long-term. Meanwhile China is growing at its slowest pace in the last five years.

On the geopolitical front we are approaching a major deadline of November 24th in the Iran nuclear talks. According to Secretary of State John Kerry, there are significant holes in these discussions and time is running out.

Russia also remains an issue. The violence in Eastern Ukraine is no longer on the front page but the fighting continues. Hundreds of people have died since the "ceasefire" in September. This past week there were new reports that Russia just sent 32 tanks, 16 artillery, and dozens of trucks with military supplies into Ukraine to help the rebels. It doesn't sound like Putin has any intention of leaving Ukraine alone.

Another challenge is Russia's economy, which is quickly spiraling downward. The Russian ruble (rouble) is plunging. The currency is down -10% in the last 48 hours and down -30% for the year. These are astronomical moves in the currency market. The Russian central bank has spent $30 billion trying to support the ruble in October. This was not enough to stop the ruble's slide. This past week Russia announced they would stop supporting their currency, which sparked the sharp decline.

Putin's war on Ukraine has sparked a major flight of investor capital out of the country. The combination of U.S. and European sanctions has also hurt. Pouring salt in the wound has been the 25% drop in crude oil prices to four-year lows. Crude oil is a major export for Russia and one of its main cash cows to support their government. The big drop in crude oil really hurts. All of these factors combined have ignited a big jump in inflation inside Russia. There are fears brewing that Russia could see another currency crisis similar to the one it saw in the 1990s. Further ruble weakness could cause a lot of trouble for Russian President Putin, which might make him even more belligerent.

The previous eight paragraphs were all about potential worry spots for the market and the world. Now we get to reasons why U.S. stocks should continue to climb.

The U.S. economy is growing at +3.5%, making it a bright spot among the major economies. Interest rates are still near record lows. Mortgage rates are still near record lows, which should support the residential real estate market. The U.S. Federal Reserve has kept the "considerable period" language in their statement suggesting the next interest rate hike is still a ways off. Officially QE3 is over but the Fed is still buying treasuries to replace the bonds that mature. You could call it stealth QE.

The strong dollar has pushed crude oil to four year lows. This has brought the price of gasoline to less than $3.00 a gallon. Gas now cost less than milk. This provides an extra $260 million a week to the U.S. consumer to spend on something else besides filling up their car. That's good news for retailers. The National Retail Federation expects holiday shopping to rise +4.1% this year versus +3.1% a year ago and above the 2.9% average. Forrester Research is estimating that online shopping will rise +13% this year to a record $89 billion.

The U.S. job market continues to slowly improvement. Bears will argue that the jobs we are adding are low-paying jobs, which is mostly true, but overall the trend is positive. It is the strongest job market we have seen in years, which impacts consumer sentiment. Speaking of consumer sentiment, the most recent surveys have put sentiment and consumer confidence at multi-year highs, which is bullish for the U.S. economy, which is 70% consumer spending.

The U.S. Federal Reserve has ended their QE program but Japan has picked up the baton and launched a massive new QE program that includes spending hundreds of billions of dollars on foreign equities, most of which will be in American companies. Now the ECB is hinting at asset-backed purchases, which could be announced next month.

Seasonally this is a strong period for stocks. November is the third best month of the year for stocks. Midterm election Novembers do even better with an average gain of +2.5%. We are also in the best six months of the year (November 1st - April 30th), which averages a +7.1% gain for the S&P 500. Yet midterm years are usually stronger and the performance for the best six months of the year is normally about +16%.

If you like those numbers then 2015 should be even better. Students of the presidential election cycle on the stock market have noted that 2015 is a pre-presidential election year. These tend to be the strongest of the four-year cycle. Number crunchers also argue that history says years that end in 5 (e.g. 2015) are also bullish for the stock market.

You don't have to believe all of these statistics to be bullish on the market. I'm just highlighting that the list of factors put the odds in favor of the bulls for the next few months. However, please note that these are big-picture issues. The U.S. market remains short-term overbought. We can alleviate this overbought condition with a pullback or the market can consolidate sideways for a while.

Believe it or not but we only have about 36 trading days left until 2015.


"We don’t beat the Reaper by living longer. We beat the Reaper by living well."
-Randy Pausch (1960-2008), The Last Lecture


Portfolio Update

by James Brown

Click here to email James Brown

Current Portfolio

Portfolio Comments:

Bulls remain in control but the broader market indices look tired. Some of our candidates experienced some volatility thanks to earnings results.

I have updated stop losses on FDX and HUM.

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

Big Caps Lead But Broader Market Stalls

by James Brown

Click here to email James Brown

- New Trades -

Editor's Note:

(November 09, 2014)

The stock market is little changed from last week. The big cap indices like the Dow Industrials and the S&P 500 managed to hit new highs but the broader market indices like the NASDAQ composite and the Russell 2000 were either flat or down.

Overall the trend is up but the market remains very short-term overbought with an extremely sharp bounce from the mid October low. Last week's mostly sideways consolidation was healthy but we're still overbought.

I listed a lot of reasons for the market to rally over the next few months in tonight's market commentary. Yet that does not mean stocks can't see a dip first.

In our watch list we have a few candidates that we can use to launch positions if the market sees a pullback (AAPL, CELG, GD, and GS), and we now have three candidates we can launch positions on if the market continues to rally (BAC, CHL, and DIS).

No new trades tonight. Use the watch list to launch new positions.

Play Updates

Earnings-Induced Volatility

by James Brown

Click here to email James Brown
Editor's Note:

Earnings-induced volatility hit two of our current trades on Friday. I am updating stop losses on both FDX and HUM.

Play Updates

Checkpoint Software Tech. - CHKP - close: 74.67

11/09/14: Shares of CHKP eked out a small gain for the week. Shares were bouncing along short-term support at the rising 10-dma. Now CHKP is poised to breakout past round-number resistance at the $75.00 level.

NOTE: 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 $1.95/2.10

- or -

OCT 27, 2014 - entry price on CHKP @ 72.56, option @ 4.80*
symbol: CHKP160115C80 2016 JAN $80 call - current bid/ask $5.20/5.50

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: 74.49

11/09/14: DVA reported earnings on Thursday night, November 6th. Wall Street was expecting a profit of $0.89 on revenues of $3.19 billion. DVA delivered $0.90 with revenues rising +8.4% to $3.25 billion. The quarter saw earnings up over 30% from a year ago.

The company narrowed its guidance, which may have been the excuse investors chose to take profits. Shares gapped down on Friday morning and dipped to $72.70 intraday. Shares closed with a -4.5% decline on the session and DVA is down about $3.50 for the week.

Our stop loss is at $71.40. More conservative traders may want to raise their stop toward Friday's low. I am not suggesting new positions at this time.

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 $3.60/6.50

11/07/14 DVA gapped down following earnings the night before
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: 171.22

11/09/14: The transportation stocks continued to climb last week and FDX is leading the charge. This stock managed to breakout past a multi-month trend line of higher highs on Thursday. Shares do look short-term overbought here with a $22 bounce from its October low.

A few days ago Forrester Research forecasted that online sales will surge +13% this holiday shopping season. That should be a good omen for package delivery companies like FDX.

Tonight we will raise our stop loss to $158.00.

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 $17.25/17.90

11/09/14 new stop @ $158.00
11/02/14 new stop @ $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: 158.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14

Humana Inc. - HUM - close: 130.58

11/09/14: Uh-oh! Friday was a painful session for shares of HUM. The stock plunged -6.6% with a drop from $140 to $130.58. The big decline was a reaction to HUM's earnings report Friday morning. I warned readers to expect some volatility but this was more than I expected.

Analysts were looking for HUM to report earnings of $2.00 a share on revenues of $12.35 billion. HUM only delivered $1.85 with revenues at $12.2 billion. Management blamed the earnings miss on higher costs and pointed to Gilead Sciences (GILD) $80,000 Sovaldi treatment for Hepatitis C as an example. HUM then lowered their full year 2014 guidance to a range of $7.40-7.60 versus Wall Street's estimate of $7.75.

While the earnings miss and lowered guidance was a surprise and raises concern the future still looks bright for HUM. The company expects their individual commercial memberships to double to one million customers thanks to Obamacare. The ACA will also help boost big enrollment gains for its Medicare Advantage plans, according to Forbes. The next couple of years should see revenues surge thanks to increased enrollments.

The profit taking on Friday was painful but the long-term trend is still up for HUM. I would hesitate to launch new positions. We will raise our stop loss to $124.00.

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 $ 9.60/13.50

11/09/14 new stop @ 124.00
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: 124.00
Play Entered on: 10/22/14
Originally listed on the Watch List: 10/19/14


Financials, Telecom, & Entertainment

by James Brown

Click here to email James Brown

New Watch List Entries

BAC - Bank of America

CHL - China Mobile Limited

DIS - The Walt Disney Company

Active Watch List Candidates

AAPL - Apple Inc.

CELG - Celgene Corp.

GD - General Dynamics

GS - Goldman Sachs

Dropped Watch List Entries

LLY has been removed.

New Watch List Candidates:

Bank of America - BAC - close: $17.36

Company Info

BAC is one of the biggest banks on the planet. They provide banking services to individuals, small business, big business, institutions, and governments. They have over 5,000 locations and over 16,000 ATMs.

The company's most recent earnings report was October 15th. They managed to beat Wall Street's estimates on both the top and bottom line with a loss of only $0.01 per share on revenues of $21.43 billion. The loss was due to a $5.3 billion settlement with the U.S. Department of Justice, part of the larger, record-breaking $16.7 billion settlement over the mortgage scandal dating back to Countrywide and the financial crisis of the last decade. BAC actually made $168 million for the quarter and that's including the huge $5 billion settlement payment but when you account for the $238 million it paid in dividends the final profit number was negative (-$0.01).

Legal issues have been a black cloud for the banking industry for years and a shadow over BAC but following the $16.7 billion settlement with the DoJ the worst is probably behind it for the big bank. While the industry may still see volatile headlines about future fiascos BAC management has been building up their litigation reserves to handle it.

Banking stocks as a group should help lead the market higher as the U.S. economy continues to improve. When the Federal Reserve finally starts raising interest rates next year it should also be another tailwind for the banks.

Tonight I am suggesting we wait for BAC to close above $17.55 and buy calls the next morning with a stop loss at $15.35. More conservative investors may want to wait for BAC to close above previous resistance at $18.00 as an alternative entry point.

trigger: Wait for BAC to close above $17.55 and then buy calls the next morning with a stop at $15.35.

BUY the 2016 Jan $20 call (BAC160115c20) current ask $0.88

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

Chart of BAC:

Originally listed on the Watch List: 11/09/14

China Mobile Limited - CHL - close: $62.15

Company Info

China Mobile (CHL) is the boasts both the largest mobile network on the planet and the biggest mobile customer base. At the end of the third quarter they had 799.1 million customers. Of that 244.4 million are 3G users and 40.9 million are new 4G users. That last number is significant since the Chinese government just approved 4G licenses this year. CHL had zero 4G customers at the start of 2014 and only 13.9 million at the end of the second quarter.

CHL reported earnings on October 20th and the results were worse than expected. Q3 revenues were down -2% from a year ago to 156.6 billion yuan. That was below analysts' estimates. Yet profits managed to beat expectations at 24.9 billion yuan. The company said that the big drop was due to a sharp decline in SMS (text message) usage. This is due to strong competition in the SMS market from other companies like Tencent's WeChat application. A new VAT tax that started in June also hurt results.

Investors seem to be ignoring CHL's recent earnings miss and focusing on their 4G growth. The company has been investing heavily in its 4G networking and it seems to be paying off. The shocking growth of CHL's 4G customer basis has analysts raising estimates. One firm was estimating 50 million 4G customers this year but have since raised that to 70 million. They also expect CHL will add another 130 million next year to end 2015 at 200 million new 4G customers. This should boost the company's profitability since 4G customers use more data.

The stock bounced near $56.60-57.00 last month, which was a 50% retracement of the July-September rally. The lows in October look like a bullish double bottom and the point & figure chart is bullish and forecasting a long-term target of $108.

Tonight I am suggesting we wait for CHL to close above $62.65 and buy calls the next morning with a stop loss at $56.40. However, I am suggesting we keep our position size small. CHL is a foreign company and its stock will gap open, up or down, every morning as it adjusts for trading in the Chinese markets.

trigger: *Small Positions*

Wait for CHL to close above $62.65 and then buy calls the next morning with a stop loss at $56.40.

BUY the 2016 Jan $70 call (CHL160115C70) current ask $3.30

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

Chart of CHL:

Originally listed on the Watch List: 11/09/14

The Walt Disney Company - DIS - close: $90.00

Company Info

DIS is considered a diversified entertainment company. The company with its subsidiaries is an international family entertainment giant. Their media networks division includes the Disney/ABC Television Group and ESPN Inc. Their Parks and Resorts business runs 11 theme parks and 44 resorts. Their studio business has been making movies for over 90 years. Their acquisition of Marvel Studios was a genius move and they recently purchased Lucasfilm which brought the Star Wars franchise into Disney's stable of intellectual property. DIS' consume products division makes everything from toys to books to fine art based on their massive library of content and characters.

The company has been a consistent winner in the earnings camp. DIS beat Wall Street's earnings estimates the last four quarters in a row. They've beaten on both the top and bottom line the last three quarters in a row. Their most recent earnings report was November 6th, which was DIS' fourth quarter result for 2014. According to DIS' CEO their fiscal 2014 was another record setting year for profits and marked their fourth year in a row of record performances.

DIS's results last year were driven by the studio division, which saw operating profits more than double. The company has seriously been knocking it out of the park with their movies. 2013 had some pretty big hits but Frozen, which came out n November 2013, is one of the biggest animated movies of all time and helped drive results well into 2014. Other big winners for the studio division were Capitan America: Winter Soldier, Maleficent, and the hit of the summer Guardians of the Galaxy. This weekend DIS' new animated movie Big Hero Six is already beating the competition and outpaced Interstellar in their opening weekend.

Next year should be another banner year for DIS' studio division with blockbusters like the next Avenger's movie, another Pixar film, and the next chapter in the Star Wars saga, episode seven (comes out in December 2015). All of these films help fuel business for Disney's theme parks, consumer products, and video games.

Wall Street was looking for DIS to report their Q4 earnings of $0.88 on revenues of $12.37 billion. The company beat estimates with a profit of $0.89 (+12%) and revenues rising +7.1% to $12.39 billion. Looking back over 2014 DIS said their earnings results were up 26% above 2013.

The stock is only a couple of points from all-time highs and the point & figure chart is bullish with a $119 long-term target. We recently concluded a successful trade on DIS back in October. We would like to hop on board again if shares can breakout past resistance at the $92 level.

Tonight I am suggesting a trigger to buy calls if DIS can close above $92.25. We'll start with a stop loss at $87.25.

Breakout trigger: Wait for DIS to close above $92.25
Then buy calls the next morning with a stop at $87.25

BUY the 2016 Jan $100 call (DIS160115c100) current ask $4.50

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

Chart of DIS:

Originally listed on the Watch List: 11/09/14

Active Watch List Candidates:

Apple Inc. - AAPL - close: 109.00

11/09/14: Shares of AAPL spent last week consolidating sideways. The stock did manage to add another dollar, which extends the rally to three up weeks in a row. Currently I am suggesting we buy calls on a pullback at $103.50. More aggressive investors may want to consider buying a breakout past $110 as a higher-risk entry point.

Earlier Comments: November 2, 2014:
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)

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

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

Celgene Corp. - CELG - close: 106.45

11/09/14: As a group the biotech stocks started to see some profit taking last week. CELG managed to find support near $105 and its simple 10-dma. I am still hesitant to chase it at current levels and I'm suggesting we wait for a pullback to buy calls at $100.00.

Earlier Comments: November 2, 2014:
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

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

General Dynamics - GD - close: 140.14

11/09/14: GD delivered another weekly gain although shares look like they are starting to pullback. The stock remains very overbought with a $25 bounce from its October lows. I am suggesting we buy calls on a dip at $132.00.

Earlier Comments: November 2, 2014:
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

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

The Goldman Sachs Group, Inc. - GS - close: $190.71

11/09/14: The financial stocks posted gains last week and GS added about a dollar to hit new multi-year highs. Yet shares spent most of last week consolidating sideways.

We still do not want to chase GS at current levels but we will move the buy-the-dip trigger from $183.50 to $185.00.

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 $185.00 with a stop at $174.50

BUY the 2016 Jan $200 call (GS160115c200)

11/09/14 adjust buy-the-dip trigger from $183.50 to $185.00
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: 66.60

11/09/14: The S&P 500 is hitting new all-time highs but LLY just can't seem to maintain its gains. Shares of LLY eked out another gain for the week but only by a very small margin.

Tonight I am removing LLY as an active candidate but I would keep it on your watch list. We may revisit it later.

Trade did not open.

11/09/14 removed from the watch list
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