Option Investor

Daily Newsletter, Saturday, 11/8/2014

Table of Contents

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

Market Wrap

No News is Good News

by Jim Brown

Click here to email Jim Brown

This could have been a summer Friday. Other than the jobs report nothing happened and the market reflected that lack of headlines.

Market Statistics

You would have thought it was Halloween Friday and everyone took off early to go trick or treating. Trading was lackluster and the results reflected the lack of interest. There was a small burst of buy orders at the close that offset a few market on close sell orders so the indexes closed about where they started the day.

We needed a week to decompress from the October rebound and that is what we got. The Dow Industrials and the Dow Transports were the only real gainers with the Nasdaq, S&P and Russell 2000 averaging about a .6% gain. That is nothing to write home about but considering the potential for a decent bout of profit taking I think everyone is glad to score any gain for the week.

The Nonfarm Payroll report was applauded and cussed depending on your viewpoint. The headline number was a gain of +214,000 jobs compared to the consensus estimates of +235,000. However, there were some huge whisper numbers with some as high as +300,000 so there were a lot of disappointed analysts. The indexes dropped sharply at the open on the headline miss.

However, the September number was revised up from +248,000 to +256,000 and the August number was revised up from +180,000 to +203,000. Remember, the August number came in at +142,000 when it was first released and caused all kinds of panic about the assumed end of decent job gains. Now it has been revised back over 200,000 and that means the last nine months have now seen gains over 200,000 and that has not happened since 1995. This was also the 49th consecutive month of gains and that has not happened since the 1930s.

It did break the trend from the prior six months for average gains over +250,000 and that was part of the disappointment factor. Look for future revisions to potentially remedy that.

The job gains may have been a little lighter than some hoped but it was one more Goldilocks number that is likely to be revised higher over the next two months. June was the last month that had a lower revision so the trend is definitely higher. June started out at +288K and ended up at +267K so we really can't complain.

This may have been the best report ever for October. Say what? If you back out the seasonal adjustments there were 1.064 million net jobs created according to the BLS. This is a record. The prior high for October was 980,000 in 2004. The seasonal adjustments for October were unexpectedly high and no reason was given for the rise. If they had used the same adjustment numbers as last October the headline number would have shown a gain of +373,000 jobs. The BLS is under investigation by multiple committees for falsifying data. Expect that to heat up when the newly elected take their seats in January.

The unemployment rate fell one point from 5.9% to 5.8% and for the right reasons. More than 416,000 people joined the workforce instead of the trend towards people dropping out in frustration. The labor force participation rate actually rose a point from a 30+ year low at 62.7% to 62.8%. Also, in the separate Household Survey there was a gain of +683,000 jobs. That is huge but it is overlooked by the crowd doing the sound bites on TV. The civilian labor force hit 156.3 million and a post crisis high.

The broader U6 unemployment rate fell from 11.8% to 11.5% and a post recession low.

Unfortunately the job gains were strongly tilted to low dollar jobs and part time employment. Restaurants added 42,000 jobs, retail trade +37,000, healthcare +25,000, hospitality services +52,000 and part time +15,000. Manufacturing added +15,000 after being flat for the prior two months and construction added +12,000.

The average workweek rose from 34.5 to 34.6 hours, the first gain in eight months and a post crisis high. Hourly earnings rose only +0.1% and the same lethargic pace of the last year.

One thing the Republican win will change is the 30 hour workweek as mandated by the Affordable Care Act. One of the first things they will change is to raise that to 40 hours so everyone can go back to working full time instead of part time. That will result in some workers being terminated and the ones that go back to full time will probably give up their second jobs. Nobody knows how that fix will come about but it is on the do list for 2015. Many employers cut hours to less than 30 in order to avoid having to give employees health insurance under the law. How that insurance rule will be modified is the key.

I believe the job market is strengthening. However, we have to get past the end of the year and see if the strength holds in 2015. Much of what we are seeing now could be related to temporary workers hired for the holiday season and people taking second jobs to raise some holiday cash.

The calendar for next week is truly bland. There are no market moving reports and very few reports in total. With the Q3 earnings cycle drawing to a close there may be a shortage of headlines to feed the market. When left to its own devices the market sometimes does unexpected things.

No new split announcements this week.

Split Calendar

(Be sure to check the bottom of this commentary for a special offer.)

In stock news there were some serious declines in the biotech sector. Intercept Pharmaceuticals (ICPT) declined -30% or -$74 after missing on earnings. For Q3 the company lost -$1.69 compared to estimates for a loss of -1.10. Revenue of $445,000 matched estimates. Shares of ICPT have more than quadrupled over the last 12 months. They also noted a trial of OCA in the medical journal Lancet, which called for long-term follow-up studies before approval from the FDA. Nobody likes to hear the terms "long-term follow-up studies" when they are trying to bring a drug to market.

Salix Pharmaceuticals (SLXP) fell -34% after reporting earnings of $1.53 compared to estimates for $1.56. The real problem was the resignation of the CFO and a guidance warning. They cut full year estimates from $6.16 to $5.20 and revenue is expected to fall from $1.6 billion to $1.4 billion. The CFO, Adam Derbyshire, resigned suddenly and there were concerns he had been carrying some inventory on the books improperly. The CFO quit suddenly during an audit by the board of inventory levels and values. The implication was the potential for dishonest numbers. The company has repeatedly told analysts there was 10-12 weeks of the drug Xifaxan in inventory. With this report they restated that to 9 months of inventory on hand. They would not answer questions on the change.

Sears Holdings (SHLD) spiked +31% on news the retailer said it was considering the sale and leaseback of 200-300 stores. The plan has the retailer creating a real estate investment trust (REIT) that would hold the stores. Sears would still operate the stores and pay rent. Sears said it would get "substantial proceeds" from the arrangement and shareholders would have the opportunity to buy shares in the REIT. Shareholders have wanted Sears to do something with its vast real estate holdings for nearly a decade now. At the same time they said same store sales declined -0.1% in Q3. Sears stores were expected to decline -0.7% and offsetting a gain of +0.5% in Kmart stores.

First Solar (FSLR) shares fell -11% after reporting earnings of 61 cents compared to estimates for 63 cents. Revenue was $889 million and well below estimates for $1.05 billion. The company said it had decided not to spin off some of its power plants and assets into subsidiaries known as "yieldcos," and that weighed on the stock. Yieldcos are similar to REITs with high yields. By spinning off their completed projects they can drive down the costs by about 20%. Apparently First Solar has decided to pass at the present time.

Monster Beverage (MNST) reported earnings of 70 cents compared to estimates of 68 cents. That was a +31.7% rise in profits. Revenue rose +7.7% to $626 million but still missed estimates of $642 million. The problem is increasing competition by Ultra and Muscle Monster products. Sales outside the U.S. rose +14.3% with a +7% rise in Europe and the Middle East. Wells Fargo said the current quarter should be strong and next year the company should see a major boost from the partnership with Coke.

Medication (MDVN) rallied 7% after reporting earnings of 96 cents and beating estimates by 13 cents according to Reuters. Revenue soared +234% to $200.5 million. The earnings reversed a loss of -18 cents in the year ago quarter. The company said full year revenue should come in at or above the high end of prior estimates thanks to strong sales of its prostate cancer drug.

After the bell Berkshire Hathaway (BRK.B) reported operating earnings of $2,876 per share and well above the $2,593 Capital IQ estimates. That was a gain from the $2,228 in the year ago quarter. Operating earnings ignore one-time items. Revenue rose +10% from $46.5 billion to $51.2 billion. Earnings were hurt by a write down of -$678 million in British retailer Tesco. Buffet is reducing his stake in Tesco. Berkshire had $62.4 billion in cash, up from $42 billion. The BNSF railroad investment added $1.035 billion in net income for the quarter despite serious operational challenges as a result of the congested rails. Shares of BRK.B declined 25 cents in afterhours.

The Q3 earnings cycle is about over. The big names for next week are Walmart, Cisco, JC Penny, Macy's and Applied Materials. Cisco and Walmart are Dow components but I would not expect either one of them to provide positive boost.

This week is filled with late reporting no-names for the most part but the following week earnings will drop off to a trickle. So far 446 S&P companies have reported. About 77% have beaten on earnings and 60% have beaten on revenue. That is the highest percentage of companies beating on earnings since Q2-2010 at 79%. The earnings growth rate for this cycle to date is now 7.6% with 54 companies left to report. At the end of Q3 the expectations for earnings growth was 4.5%.

So far 55 S&P companies have issued negative EPS guidance and 18 have issued positive guidance according to Factset. In Q3 earnings 37% companies have mentioned oil prices as a positive factor unless it was an oil company mentioning it.

The current forward PE for the S&P is 15.8 based on expectations for $128.37 in forward S&P earnings. This suggests the S&P is not over valued even at the record highs.

The 5-year average PE is 13.5 and the 10-year 14.1. However, both of those timeframes included the results of the financial crisis so they will be low. Earnings projections for the next four quarters are over $30 per quarter compared to the current $29.98 estimate for Q3. Earnings are expected to grow +8.5% over the next four quarters.

Crude oil imploded on Tuesday to touch nearly a four-year low at $75.84. The break of support at $80 was traumatic but the majority of energy stocks did not react as violently. There were declines but relatively speaking they were mild.

Some traders are still predicting a further decline to $70 or even $65 but that may be wishful thinking. Harold Hamm, CEO of Continental Resources, one of the biggest shale developers, called a bottom in crude last week saying prices would return to $85-$90 in the coming weeks. To prove his conviction he closed all his hedges for crude for 2015-2016. Continental made a one-time gain of $443 million from closing the hedges at the lower prices. A hedge is when a producer sells a futures contract at a set price for delivery of oil in that time frame. For instance, when oil was $105 back in June a producer could have sold the January futures contract to deliver oil for $105 regardless of what the price declined to by January. For someone like Continental with tens of thousands of barrels of production every day they can sell thousands of futures contracts for future delivery at a set price when the price rises. When it comes time to deliver they can either deliver the oil or buy back the futures contract for a profit. In that example they could buy back that contract today for $80 and pocket a $25 profit.

In the first visible sign of the impact of low oil prices Continental slashed its 2015 capex budget from $5.2 billion to $4.6 billion. Hamm said he was not going to increases the number of rigs in the field until prices returned to normal. They currently have 22 active rigs in the Bakken. Shares declined on the news on Thursday but rebounded with oil on Friday. Hamm owns 68% of Continental and he is going through a hotly contested divorce, which may prove to be the most expensive ever. This is also weighing on the stock despite his claims that any settlement will not impact his holdings in Continental.

What two words can strike fear into homeowners and elicit joy from energy traders? Polar Vortex. That term came back into the headlines last week and lifted gas prices from a 52-week low of $3.54 to a 5-month high at $4.49 in only nine days.

About a month ago weather forecasters began predicting another Polar Vortex winter based on readings from Siberia. Yes, Siberia. The snowpack in Siberia covered 21,000 square kilometers (SqKM) in October 2013. It was the 8th largest since records were started in 1949. This year that has risen to 22,786 SqKM and the third largest on record. According to Rutgers University Global Snow Lab there is already more than ten inches of snow covering the tundra north of Moscow. That is the first time since 2002 that this much snow was on the ground at the end of October. Roughly 900,000 square miles are covered in snow already compared to the 50-year average of 573,000 square miles. Nine of the 10 coldest winters on record have resulted from high levels of snow coverage in Siberia and what is called an arctic oscillation.

However, the cold slated for next weekend is the result of super typhoon Nuri. This giant storm in the Western Pacific is the largest since Jimmy Carter was president and it is headed for Alaska. As it moves north it is disrupting the jet stream and that will push the super cold air in the Arctic down into the U.S. and Canada. Temperatures in some U.S. areas are expected to be in the single digits and 20-40 degrees colder than normal for early November.

When the term Polar Vortex returned to the headlines the rush was on to buy stocks that profit from higher gas prices. It is worse this year because we are starting the winter with about 350 Bcf of gas less than we had in storage at this time last year. If you were not paying attention we almost ran out of gas last year with supplies falling from nearly 4 Tcf to around 800 Bcf before winter finally broke. You better fill those propane tanks right away because prices are going to rise.


Where do we go from here? The age old battle between technicians and fundamentalists is heating up as each day passes. The technicians are getting all worked up about the overbought conditions and the lack of a second dip since the October V bottom. The fundamentalists agree that another dip would not hurt and would welcome it as a buying opportunity because of the strong fundamentals underpinning the market.

I was having a debate with an analyst on Friday that felt the lack of forward motion last week meant the rally was about to fail. While that is possible we could always look at the glass as half full instead of half empty. I view the lack of a decline in the Nasdaq as evidence of dip buyers frantically hoping for the least little pullback to add to positions.

Everyone reading this knows I expected the Nasdaq to decline last week. I showed the isolated bearish candle last weekend and suggested we could see several days of weakness while those October gains were digested. We did get weakness in the Nasdaq but every dip was bought. The index only added +1.79 points for the entire week. While that was the final score there were other things to be learned.

The Nasdaq dropped -60 points from Monday's high at 4,654 to Tuesday's low at 4,594. The rebound was not vigorous but casual and lackluster. Tuesday's close at 4,623 was only -8 points below where we closed on Friday at 4,631.

There are multiple ways to take profits. The normal way is to have a 2-3 day highly visible decline where everyone knows when to get in when the index starts to rebound. The other way is to consolidate in place. That means traders rotate out of positions but not in enough velocity to overpower the buyers that are waiting just under the bid. It is an orderly transition and everyone accomplishes a portfolio restructuring without any bloodshed. That is what we had last week. After the Tuesday dip the buyers and sellers were evenly matched and nobody was in any rush to buy or sell.

In theory that suggests once the rotation is over the market would move higher. In practice that may not happen. You see a consolidation in place is nearly equivalent to a distribution event. That occurs at market tops and it is where current holders believe the rally is done and they attempt to sell to the retail buyers that still believe the rally has legs. The only difference is volume. In a distribution event the volume normally rises. Last week there was no change in volume. We had about 6.8 billion shares traded every single day. There was almost no difference at all. This suggests consolidation rather than distribution.

While the Nasdaq only gained 1.79 points for the week if you look at the intraday swings there was some decent volatility. It was not calm waters. The longer period chart suggests it was calm but the short term chart shows otherwise.

I looked at several hundred charts of Nasdaq stocks. Quite a few were showing an upside drift by the end of the week. When you think about all the big losses on some of the high profile Nasdaq stocks it was amazing we did not close a lot lower. That is a testament to how many of the smaller stocks were being bought.

I believe we could see the Nasdaq begin to move higher next week assuming there are no unexpected headlines. I think it has digested the October gains and fund managers are going to be looking for beta for one last push into the end of December.

Friday's low of 4,606.81 was 2 points above Thursday's low of 4,604.76. Wednesday's low was 4,607.73. Are you seeing a pattern here? After the dip to 4,595 on Tuesday the support has been very consistent at just over 4,605. That is the key level to watch on Monday. As long as any dips respect that level we have the potential for a move higher.

Don't get me wrong. Those clustered candles from last week are still bearish but apparently I am the only person that is worried about it.

The Dow dipped slightly on Tuesday but the rebound was immediate and it moves steadily higher the rest of the week to close at a new high on Friday. There is no weakness here despite the grossly overbought conditions. That is the beauty of a thin 30 stock index. Any 2 or 3 stocks can power it higher on any given day.

Support has firmed at 17,500 and resistance is now 17,750.

The S&P gained +14 points for the week to come to rest right at resistance at 2,033. I do like the stutter step at 2,015 where it dipped below on Tuesday but then quickly rebounded to close just below that level. On Wednesday it gapped higher to 2,023 and then came back to successfully test that 2,015 support level on both Wednesday and Thursday before sprinting higher. The upward progression from Tuesday to Friday was steady and measured. Buyers were in control but in no hurry.

On Friday the 2,033 level became resistance at the open and held all day. Given the lack of headlines and the mediocre volume I am not surprised traders were not in a hurry to be long at the close. There is plenty of time on Monday after the weekend event risk has passed.

Support 2,015, resistance 2,033.

The Russell 2000 traded dead flat for the week with a loss of -0.12 points. That was a lot of volume to go nowhere. However, Friday's close was a four-day high. The pattern could be deciphered as a rising wedge about to breakout or a bearish flag about to break down. However, these patterns normally resolve themselves in the direction of the larger trend and in this case the last three weeks have been positive.

It appears to me that the Russell has consolidated its gains and could try to break higher next week. A strong move over 1,175 could ignite the rest of the markets.

There is a night and day difference between the Nasdaq A/D line and the S&P-500. Clearly the Nasdaq stocks are having a much harder time recovering from the October slump.

Nearly 80% of the S&P stocks are trading above their 50-day average. Only 58% of the Nasdaq stocks are that high. This suggests the Nasdaq has room to run.

We had a good week despite the underperformance by some indexes. The market is at record highs and the outlook is good. Other than being overbought there is nothing on the schedule for next week that should impact the market. However, it is always the unexpected events that do the most damage.

We should remain in buy the dip mode until proven wrong. We should worry about volume. With volume flat at an average of 6.7 billion shares every day last week there was no emotion in the trading. The markets are at new highs. Volume should be rising. Investors should be excited. The next market key will be the next day that volume spikes. The direction on that day is likely to be our next trend.

(Be sure to check the bottom of this commentary for a special offer.)

Random Thoughts

President Obama authorizes another 1,500 troops for Iraq bringing the total to about 3,000 but he said there will probably be additional troops sent since the conflict will be open ended. Troops will be used as advisors to train the Iraqi military to fight ISIS. The administration reiterated that they will not be in a combat role. Analysts believe this is only temporary and they will eventually be imbedded with the Iraqi and Kurdish military to provide targeting and coordination for military aircraft.

Putin recently signed a new agreement between members of the Shanghai Cooperation Organization. The SCO consists of Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. India, Pakistan and Iran have applied for membership.

We should worry because the SCO was formed to be a counter to NATO. They claim it is an economic cooperation organization formed to combat extremism and enhance border security but the real intent is clear because of their announcements and support for member nations. The participants in the SCO signed a document "Model Memorandum on the Obligations of Applicant States for Obtaining SCO Membership." It should not be surprising that military support was mentioned. The organization backed the Russian position on the Ukraine and praised Putin's achievement of a peace initiative. Clearly they are drinking the Russian brand of political Kool-Aid.

Once they figure out how to integrate current enemies India and Pakistan into the organization there will be four nuclear powers able to counter NATO in just about situation in that part of the world. Eventually Putin's ally Iran will also be included and they will be nuclear capable in the near future. The combined countries will represent more than 3 billion citizens and nearly half of the world's population.

The biggest problem is not the nuclear deterrent. Another goal of the organization is to create a new financial structure that competes directly with the IMF and World Bank. The "New Development Bank" created last summer is the first step in that direction. If Russia and China can dethrone the U.S. dollar as the world's official reserve currency the U.S. would be in serious trouble. Our entire way of life in the U.S. is really built on the fact that our currency is THE reserve currency in which all commodities are traded. Oil, gold, wheat, etc. That keeps the dollar as the strongest currency on the planet because everyone has to buy dollars to use to purchase goods from around the world. China and Russia have wanted to change this for decades and now they are building an organization that could eventually make it happen. We should be very afraid.

The Russian ruble is collapsing with a -10% decline last week in less than 48 hours. With the country rapidly falling into a deep recession and oil prices -$25 below June levels the Russian government is in trouble. In 1998 the country defaulted, consumer savings were wiped out and the global markets went into a tailspin. We could be nearing another inflection point for Russia in 2015 if current conditions continue. The decline last week came after the central bank said it would no longer support the ruble. They had been spending billions every week trying to prop it up and they were burning up all their currency reserves in that effort. Now the ruble is unsupported and could decline significantly from here. This is another geopolitical problem because when countries become financially unstable one way to distract citizens from the problems is to go to war with somebody else. Critical times create significant geopolitical instability.

Meanwhile Russia has reinvaded the Ukraine with a column of 32 tanks, 16 artillery systems and dozens of trucks carrying ammunition, supplies and Russian soldiers. This occurred on Friday despite talks of a ceasefire after as many as 200 rebels were killed at the airport by government troops. Apparently the tide of the rebellion turned against the rebels without Russian troops to fight alongside of them.

Reasons the Rally Should Continue

Interest rates near record lows.

Mortgage rates near record lows.

Inflation slowing as a result of commodity deflation.

Oil prices at 4-year lows. Gasoline $2.94.

Fuel savings represents $260 million in weekly consumer stimulus.

Jobs continuing to grow at best pace in 9 months.

Canada added +43,000 jobs equivalent to +430,000 U.S. jobs.

S&P on track for record earnings.

Earnings growth up 10% in Q2, 8% in Q3.

About 77% of the S&P beat on earnings and the highest number since Q2-2010.

Fund inflows last week the most in 2014.

Election results means less regulation on business.

Economy is growing steadily at 3.1% pace.

Global central bank stimulus is on steroids.

QE3 stabilization still in effect for 6 months or longer. Fed is purchasing replacement treasuries for those that mature. Stealth QE.

Japan is going to dump up to $300 billion into the foreign equity markets.

Draghi said he was going to add 1 trillion euros to ECB balance sheet. Purchase of asset backed securities to start next month.

Dow Industrials, Dow Transports and Dow Utilities all at new highs to confirm Dow Theory rally.

Rest of the world sinking towards recession/deflation. Their money is fleeing to our markets.

Fund managers chasing beta into year end to make up for poor performance.

Next 3 months up +8% on average in midterm years, 6 months +15%.

Reasons Rally May Fail

The market does not need a reason to correct.

Market is short term overbought.

Bullish sentiment is at extreme levels. Very few bears. The last time it was this high was December 26th.

The Fed Remembers the Great Depression

The Fed is constantly reminded of the biggest central bank failure in U.S. history. In 1937, the year following the recovery from the Great Depression, the Fed prematurely tightened monetary policy and accidentally plunged the economy back into recession that lasted a very long time. Fast forward to 2014 and the Fed does not want to tighten too quickly on a fragile recovery and knock the economy back into recession and be forced to slash rates and possibly launch another QE program.

This worry was highlighted in a Fed survey of 22 primary dealers that trade treasuries directly with the Fed. The dealers see a 20% chance the Fed will raise rates in 2015 and then be forced to cut them back to zero within two years. The fact that the Fed even asked that question is evidence they are very afraid of raising rates too fast. They are desperately looking for affirmation of their likely plans.

Chicago Fed President Charles Evans said "The U.S. experience during the Great Depression -- in particular, in 1937 -- is a classic example for monetary historians." After a return to growth and inflation led the Fed to raise bank reserve requirements, and the government to reduce deficit spending, "the economy dropped back into recession and deflation."

New York Fed President William Dudley said the premature tightening of the 1930s "turned out to be a horrible mistake. It is actually characterized as the mistake of 1937."

One dangerous parallel is the surge in excess supply of tradable goods and a commodity surplus. In 1937 we had the same excess that we have now. Steven Ricchiuto, chief economist at Mizuho Securities, said, "We have created a world where we have produced an enormous amount of growth in the emerging markets with one model: export to growth. And the problem is, who are you exporting to?" There is no growth. Back in 1937 there was some inflation. Today inflation is only 1.4% and slowing.

Investors get all caught up in worrying about when the Fed will hike rates. In the current environment given what we know about the Fed's worry about acting too soon I don't think we are going to see any rates hikes of any substance for a long time.

This is even more likely because of the mounting stimulus in Europe and Japan. The Fed can't hike rates while the next two largest economies are printing money by the truckload. The dollar imbalance would become unsustainable.

Oil prices will go back up. The law of supply and demand plus ever rising prices of finding and producing a barrel of oil will force prices higher. We may have a temporary glut today but it is only temporary. By 2040 the number of cars on the road will increase from the 2 billion today to more than 3 billion thanks to rising auto acceptance in China and India and population growth to more than 9 billion. More than $1 trillion a year is spent exploring and developing new sources of oil. If prices stayed low that spending would grind to a halt and within 5 years we would be in the worst oil shortage ever. Global oil supplies decline by more than 4 million barrels per day every year. Without constant exploration and development to add up to 5 mbpd of new production the price of oil and gasoline would explode within months. Oil prices are going to rise. That is a fact of life just as immutable as gravity.

Faster than a speeding bullet? No, faster than a Z06 Stingray Corvette. GM just announced a $78,995 Z06 Corvette that will do 0-60 in 2.95 seconds. Yes, you read that right. I would love to be young again but then I would not have had $79,000 and definitely could not afford the insurance. Z06 Stingray

Apple's virus proof iOS may have met its match. A new malware program called "WireLurker" is "under active development" according to security research firm Palo Alto Networks. WireLurker can steal user information and continually requests software updates from zombie servers as it resides on your device. Apple said it had blocked infected apps including Sims 3 and Angry Birds, which had been distributed by an unauthorized app store in China. Apparently that did not stop the spread according to Palo Alto Networks.

Important Limited Time Offer

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 17 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with $50 off for anyone that subscribes this week. This offer expires on Monday. Once the special actually begins on Black Friday the price will revert to the normal.


Only 16 shopping days until Thanksgiving and 46 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The heights by great men reached and kept, were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night."

Henry Wadsworth Longfellow


New Plays

Shareholder Friendly

by James Brown

Click here to email James Brown


International Paper Co. - IP - close: 52.87 change: +0.40

Stop Loss: 50.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
IP is part of the consumer goods sector. According to a company press release "International Paper (IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging and uncoated papers. Headquartered in Memphis, Tenn., the company employs approximately 65,000 people and is strategically located in more than 24 countries serving customers worldwide. International Paper net sales for 2013 were $29 billion (which included our now divested xpedx business)."

The company has been facing a lot of headwinds this year but they still managed to beat Wall Street's earnings estimates three quarters in a row. Their most recent earnings report was November 4th. Analysts were expecting a profit of $0.89 per share on revenues of $6.0 billion. IP reported a profit of $0.95 with revenues beating estimates at $6.05 billion.

The company saw significant improvements in its operating profits in all three categories: industrial packaging, printing papers, and consumer packaging. Management expects a surge in packaging orders in the fourth quarter.

Wall Street loves the company's focus on delivering value to shareholders. IP is almost done with their $1.5 billion stock buyback program they announced in September 2013. They also raised their dividend 14% from $1.40 to $1.60. This is IP's third consecutive fourth quarter double-digit dividend increase. The stock now sports a 3.0% yield.

IP's CEO said they were looking seriously at converting part of their business into a master-limited partnership (MLP). This would be another shareholder friendly step as MLPs do not pay federal tax if the return most of their cash to shareholders.

The stock's current rally has produced a buy signal on the point & figure chart with a long-term target at $70.00. This last week has seen shares of IP break out to new multi-year highs. It is also on the verge of breaking out from a major channeling pattern on its weekly chart (see below).

Tonight we are suggesting a trigger to open bullish positions at $53.30.

Trigger @ $53.30

- Suggested Positions -

Buy IP stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the 2015 Jan $55 call (IP150117c55) current ask $1.10

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

Daily Chart:

Intraday Chart:

Weekly Chart:

In Play Updates and Reviews

Another Week Of New Highs

by James Brown

Click here to email James Brown

Editor's Note:
The market's major indices ended the first week of November at new highs.

AMBA hit our entry trigger on Friday. BABY hit our stop loss.

Current Portfolio:

BULLISH Play Updates

Ambarella, Inc. - AMBA - close: 47.14 change: +1.13

Stop Loss: 43.75
Target(s): To Be Determined
Current Option Gain/Loss: + 1.4%
Entry on November 07 at $46.50
Listed on November 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.6 million
New Positions: see below

11/08/14: Our new play on AMBA is off to a good start. Traders bought the dip on Friday morning and the stock rebounded to a +2.4% gain. Our suggested entry point to launch bullish positions was hit at $46.50.

Earlier Comments: November 6, 2014:
AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in October 2012 at $6.00 a share. That price was significantly below where AMBA was expected to price in the $9-11 range. Investor sentiment has definitely changed since then.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up more than +600% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. GPRO came to market in June this year and the stock has been in rally mode since mid August with a rally in GPRO from less than $40 to $90 a share. I mention GPRO because AMBA happens to make the HD camera sensors in many of GPRO's products. As GPRO rallies it could be giving AMBA a boost and GPRO expects record sales this holiday season. I find it interesting that GPRO has been chopping sideways the last few weeks while AMBA has hit new highs.

Another note on GPRO, the company reported earnings on October 30th and beat estimates on both the top and bottom line. GPRO management then raised their earnings guidance significantly above Wall Street's estimates. That should spell good news for AMBA's business with GPRO.

GPRO isn't the only one with strong earnings. AMBA's rally has been helped by consistent earnings growth. The company has beat Wall Street's estimates on both the top and bottom line for the last four quarters in a row. Their most recent earnings report in September saw AMBA's management raise their revenue guidance.

Shorts are getting killed. As the rally continues AMBA could see more short covering. The most recent data listed short interest at 26.7% of the small 28.0 million share float.

Currently AMBA is bouncing from the $44.00 level after a two-day pullback. If this rebound continues we want to hop on board. The company will likely report earnings in early December so our time frame is the next four to six weeks.

- Suggested Positions -

Long AMBA stock @ $46.50

- (or for more adventurous traders, try this option) -

Long DEC $50 call (AMBA141220C50) entry $2.15

11/07/14 triggered @ $46.50
Option Format: symbol-year-month-day-call-strike


Burlington Stores, Inc. - BURL - close: 42.32 change: -0.56

Stop Loss: 39.85
Target(s): To Be Determined
Current Option Gain/Loss: + 3.1%
Entry on October 30 at $41.05
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: see below

11/08/14: I am urging caution on our BURL trade. Friday's performance was bearish. Not only did BURL erase Thursday's gains but it created a bearish engulfing candlestick reversal pattern. These patterns need to see confirmation but it's still a warning signal.

The simple 10-dma near $41.70 is the nearest support.

Earlier Comments: October 27, 2014:
Christmas is less than 60 days away. This year retail spending is expected to surge. The National Retail Federation is forecasting sales during the holiday shopping season to rise +4.1%. Analyst firm Deloitte LLP is expecting a +4.5% improvement. Last year we only saw +2.8% growth and the 10-year average is +2.9%.

If we take into account the positive impact low gasoline prices will have then the estimates above might be too low. Fuel prices are down nearly 20% from their early 2014 highs. That is a huge boost for consumer spending. Oil looks like it will continue to sink so the trend should continue.

The off-price retailers have been outperforming their regular price peers. BURL is part of the off-price group. According to their company website, "Burlington is a national off price retailer offering style for less for the entire family and the home with up to 65 percent off department store prices every day. Departments include ladies' dresses, suits and sportswear, juniors, accessories, menswear, family footwear, children's clothing, furniture and accessories for baby at Baby Depot, home décor and gifts, along with the largest selection of coats in the nation for the entire family. Burlington has 520 stores in 44 States and Puerto Rico."

Credit Suisse recently noted that BURL has delivered three years in a row of strong same-store sales growth. They did it again when the company reported earnings in early September. BURL said their same-store sales grew +4.7% in their second quarter, compared to estimates for +2-3% growth. Management also noted that their gross margins improved by 50 basis points to 38.2%.

Wall Street was expecting a loss of 8 cents per share on revenues of $1.03 billion. BURL delivered a loss of only one cent and revenues were up +8.2% to $1.05 billion. It was a big improvement from a loss of 19 cents a year ago. More importantly management raised their 2015 guidance for both their earnings and revenue estimates.

The bears will argue that BURL is expensive. It's hard to argue with them since BURL currently sports a P/E near 58. However, investors continue to buy the stock and now shares are poised for another bullish breakout. New highs could spark some short covering. The most recent data listed short interest at 13% of the very small 29.3 million share float.

Tonight we are suggesting a trigger to open bullish positions at $41.05.

- Suggested Positions -

Long BURL stock @ $41.05

- (or for more adventurous traders, try this option) -

Long DEC $40 call (BURL141220c40) entry $3.10

11/01/14 new stop @ 39.85
10/30/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike


Columbia Sportswear Co. - COLM - close: 40.41 change: +0.27

Stop Loss: 38.25
Target(s): To Be Determined
Current Option Gain/Loss: + 0.4%
Entry on November 06 at $40.25
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 138 thousand
New Positions: see below

11/08/14: COLM garnered some bullish analyst comments on Friday and shares rallied to another three-month high. COLM is now up six out of the last seven trading days. I would still consider new positions now or you could wait for a dip near $40.00. Broken resistance at the 200-dma (near 39.75) and the $40.00 level should be new support.

Earlier Comments: November 5, 2014:
COLM has been consistently beating earnings expectations all year long. The company is part of the consumer goods sector.

According to a company press release, "Columbia Sportswear Company is a leader in the global outdoor and active lifestyle apparel, footwear, accessories and equipment industry. Founded in 1938 in Portland, Oregon, the company has assembled a portfolio of global brands whose products are sold in approximately 100 countries. In addition to the Columbia brand, Columbia Sportswear Company also owns the Mountain Hardwear, Sorel, prAna, Montrail and OutDry brands."

The trend of earnings in 2014 has been strong with COLM beating Wall Street's earnings estimates four quarters in a row and raising guidance three out of four quarters. Their most recent earnings report was October 30th. Analysts were looking for a profit of $0.87 per share on revenues of $632.29 million. COLM delivered earnings growth of +20% to $0.93 a share. Revenues soared +29% to $675.3 million.

Management then raised their full year 2014 earnings and revenue guidance above analysts' estimates. COLM expects 2014 sales to hit $2.06 billion, which is +22% improvement above 2013. They also expect gross margins to rise 130 basis points from a year ago. COLM is guiding 2014 net income to rise +35% to $1.80 per share.

COLM's president and chief executive office, Tim Boyle, said they expect 2015 net sales to grow at a double-digit rate above their new 2014 estimate of $2.06 billion. They plan to hit mid-teen operating margins.

COLM appears to have strong sales momentum as we head into the crucial holiday shopping season. Retail analysts are expecting industry wide sales to be above average this year. Low gasoline prices provide a great tailwind for all the consumer goods companies.

Technically shares of COLM found support near $34-35 dating back to their prior highs (see the long-term chart below). The rebound has accelerated thanks to the company's earnings report and bullish guidance. Now COLMN is breaking out past resistance at $40.00 and its simple 200-dma. We are suggesting a trigger to open bullish positions at $40.25.

- Suggested Positions -

Long COLM stock @ $40.25

- (or for more adventurous traders, try this option) -

Long 2015 Jan $40 call (COLM150117C40) entry $1.75

11/06/14 triggered @ $40.25
Option Format: symbol-year-month-day-call-strike


Lowe's Companies - LOW - close: 57.69 change: +0.12

Stop Loss: 55.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.8%
Entry on October 23 at $55.05
Listed on October 21, 2014
Time Frame: Exit PRIOR to earnings on November 19th
Average Daily Volume = 5.5 million
New Positions: see below

11/08/14: Shares of LOW continue to resist any profit taking. The stock hit new highs again on Friday and is up almost $8.00 from its October low.

The company has earnings coming up on November 19th and its rival Home Depot (HD) will report on the 18th. We will plan on exiting this trade on Friday, November 14th to avoid holding over the earnings report, unless we get stopped out first. More conservative traders may want to move their stop closer to the 10-dma near $56.75.

Our November call option has doubled in value. Traders may want to take profits now.

I am not suggesting new positions at this time.

Earlier Comments: October 21, 2014:
LOW is in the services sector. They run the second biggest chain of home improvement stores in the country. Their 1,837 stores offer more than 200 million square feet of retail space through the U.S., Canada, and Mexico.

The company's most recent earnings report was back in August. LOW beat Wall Street's top and bottom line estimates. Revenues were up +18.2% from a year ago. Gross margins saw some improvement. Same-store sales were up +4.4%, which was impressive. Management provided a small reduction in their full year revenue guidance but this failed to have much impact on the stock. Shares of LOW gapped down on its earnings news and investors bought the dip at support near $50.00.

Since this August earnings report we've seen homebuilder confidence hit nine-year highs while shares of LOW were hitting all-time highs in the $54-55 zone. Investors keep track of the housing market because LOW's business seems to rise and fall with real estate.

The stock market's recent volatility drug LOW back to support near $50.00 and once again traders bought the dip. There was a recent analyst note that was cautious on LOW and its rival Home Depot. The analyst noted that a slow down in sales for building materials would suggest the slowdown should hit retailers too. We may have to wait for LOW's earnings report to see if the analyst is right. In the mean time shares of LOW just ended at an all-time closing high.

If you believe the U.S. economy will continue to improve and the labor market will continue to see job growth then home improvement retailers like LOW and HD should see steady improvement as well.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish and forecasting a long-term $75.00 target for LOW.

Use a trigger at $55.05 to open bullish positions. We will most likely exit ahead of LOW's earnings report on November 19th.

- Suggested Positions -

Long LOW stock @ $55.05

- (or for more adventurous traders, try this option) -

Long NOV $55 call (LOW141122c55) entry $1.45

11/05/14 new stop @ 55.85
11/01/14 new stop @ 55.35
10/23/14 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike


The Pantry, Inc. - PTRY - close: 27.21 change: -0.16

Stop Loss: 24.85
Target(s): To Be Determined
Current Option Gain/Loss: +11.1%
Entry on October 17 at $24.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 190 thousand
New Positions: see below

11/08/14: PTRY continues to be a relative strength leader with the stock up six weeks in a row. Shares have set a string of new multi-year highs.

PTRY is currently overbought and due for a pullback. Investors might want to take some money off the table. Or you may want to raise your stop closer to the 10-dma (currently near $25.85).

I am not suggesting new positions at this time.

Earlier Comments: October 16, 2014:
This is a simple relative strength trade. PTRY has been almost bullet proof against the market's recent weakness. Instead of following the major indices lower PTRY has soared to new four-year highs.

The company website says, "Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of September 25, 2014, the Company operated 1,518 stores in thirteen states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers."

PTRY is a small cap stock that has been dead money for years. That seemed to change with their last earnings report. When PTRY delivered earnings on July 30th they beat estimates on both the top and bottom line. The stock soared and broke out past key resistance. Several analysts have raised their earnings estimates on PTRY since that report.

Shares are currently hovering just under short-term resistance at $24.40. We are suggesting a trigger to launch small bullish positions at $24.50. I am suggesting small positions to limit our risk. Looking at a long-term weekly chart of PTRY you could argue that the $25.00 level might be resistance. We will try and limit our risk with a stop loss at $22.90, just under today's low.

*small positions to limit risk* Suggested Positions -

Long PTRY stock @ $24.50

- (or for more adventurous traders, try this option) -

Long DEC $25 call (PTRY141220c25) entry $1.60*

11/08/14 traders may want to take some money off the table here.
11/01/14 new stop @ 24.85
10/30/14 new stop @ 23.80
10/23/14 new stop @ 23.30
10/17/14 triggered @ $24.50
Option Format: symbol-year-month-day-call-strike


Sonic Corp. - SONC - close: 24.98 change: -0.15

Stop Loss: 24.45
Target(s): To Be Determined
Current Option Gain/Loss: -0.7%
Entry on October 29 at $25.15
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 738 thousand
New Positions: see below

11/08/14: We need to be cautious here with SONC. Shares just snapped a six-week winning streak. It could be just a pause in the rally or it could be a potential reversal in the making.

It's worth noting that Friday's move is bearish because it's the first close below the simple 10-dma since September, which is a warning signal.

I am not suggesting new positions at this time.

Earlier Comments: October 25, 2014:
"Service at the speed of sound." That was SONIC's original slogan after the company was rebranded from a chain of Top Hat root beer stands decades ago. Today the company has over 3,500 locations in 44 states. That makes SONIC the largest chain of drive-in restaurants in the United States.

Shares of SONC saw big gains in 2013. The rally continues in 2014 but it has been a much more volatile year for the share price. Yet in spite of all the ups and downs SONC is still respecting the long-term bullish trend of higher lows. Now with strong earnings numbers the stock it hitting multi-year highs.

SONC recently reported its Q4 results on October 21st. Same-store sales in the quarter were up +4.6% and margins improved 150 basis points. Net profits came in at 34 cents a share, which is a 62% improvement from the same period a year ago. Revenues were up +3.1%, which beat Wall Street's estimates.

Management guided in-line and SONC expects profit growth of 18-20% in 2015. Multiple analyst firms raised their price target on SONC stock follow these results. The stock's rally has produced a buy signal on the point & figure chart that is forecasting a long-term target near $35.00.

Friday's high was $25.07. Tonight we are suggesting a trigger to open bullish positions at $25.15. We will start with a stop loss at $23.75. I will point out that the 2007 highs in the $25.30-26.20 area is potential resistance so this might be considered a more aggressive entry point.

- Suggested Positions -

Long SONC stock @ $25.15

- (or for more adventurous traders, try this option) -

Long DEC $25 call (SONC141220C25) entry $0.95

11/01/14 new stop @ 24.45
10/29/14 triggered @ 25.15
Option Format: symbol-year-month-day-call-strike


Zumiez Inc. - ZUMZ - close: $35.10 change: +0.04

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: + 2.8%
Entry on October 29 at $34.15
Listed on October 28, 2014
Time Frame: Exit prior to earnings in early December
Average Daily Volume = 296 thousand
New Positions: see below

11/08/14: ZUMZ delivered a strong performance last week. Traders bought the dip at its trend of higher lows. Then the company announced stronger than expected same-store sales data for October. ZUMZ shares are up three weeks in a row and closed at new two-year highs.

I am not suggesting new positions at current levels.

Earlier Comments: October 28, 2014:
ZUMZ is in the services sector. The company is considered a specialty retailer. The website describes the company as "a leading multi-channel specialty retailer of action sports related apparel, footwear, equipment and accessories, focusing on skateboarding, snowboarding, surfing, motocross and BMX for young men and women. As of October 4, 2014 we operated 594 stores, included 545 in the United States, 34 in Canada, and 15 in Europe. We operate under the name Zumiez and Blue Tomato. Additionally, we operate ecommerce web sites at www.zumiez.com and www.blue-tomato.com."

Apparel retailers as a group have been pretty hit or miss this year. Yet the sports-related names have been doing okay. ZUMZ's focus on sports-related clothing and equipment might insulate it from the normally finicky teen crowd.

ZUMZ's latest earnings report was back in September. You can see the gap down on the daily chart. ZUMZ beat EPS estimates by 4 cents as earnings grew +35%. Yet revenues only rose +11.9% and missed analysts' estimates. More importantly management issued somewhat soft EPS guidance. The good news for investors is that the post-earnings sell-off did not see any follow through. Instead ZUMZ continues to build on its multi-month trend of higher lows.

I suspect investors might be willing to over look guidance that was a couple of cents below Wall Street's estimates in favor of a company that continues to grow same-store sales. ZUMZ has a pretty good track record with the retailer reporting same-store sales growth that beat analysts' estimates several months in a row. Their latest sales data was very impressive. On October 8th ZUMZ said their net sales in September rose +12.5% while their comparable store sales soared +6.6% compared to estimates for only +2.7% growth.

The current rally has lifted ZUMZ stock to new 2014 highs and the point & figure chart is bullish and forecasting a long-term target of $46.00. Tonight we are suggesting a trigger to open bullish positions at $34.15. We will plan on exiting prior to ZUMZ's next earnings report in early December.

- Suggested Positions -

Long ZUMZ stock @ $34.15

- (or for more adventurous traders, try this option) -

Long DEC $35 call (ZUMZ141220C35) entry $1.60

11/01/14 new stop @ 32.45
10/29/14 triggered @ 34.15
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Coach, Inc. - COH - close: 33.66 change: +0.20

Stop Loss: 34.65
Target(s): To Be Determined
Current Option Gain/Loss: - 2.6%
Entry on November 05 at $32.80
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.6 million
New Positions: see below

11/08/14: COH has produced a little oversold bounce the last couple of days but the rebound stalled at resistance near $34.00 and its 10-dma on Friday. I would still consider new bearish positions here or as an alternative you could wait for a new relative low under $32.70 instead.

Earlier Comments: November 4, 2014:
The Coach brand could be dying and may never regain its previous cachet in the luxury goods market. The company describes itself as, "Coach, established in New York City in 1941, is a leading design house of modern luxury accessories and lifestyle collections with a rich heritage of pairing exceptional leathers and materials with innovative design. Coach is sold worldwide through Coach stores, select department stores and specialty stores, and through Coach’s website at www.coach.com."

Unfortunately for COH their sales have been falling for quite some time. They're currently in the midst of a turnaround plan but they're not seeing results fast enough and investors are losing their patience. The company's most recent earnings report was October 28th. COH beat Wall Street's estimates on both the top and bottom line but the devil is in the details.

Analysts were expecting COH's Q1 (calendar Q3) results to be $0.45 per share on revenues of $1.01 billion. The company delivered $0.53 cents and revenues hit $1.04 billion. Sadly, at 53 cents per share, COH's earnings are still down -31% from a year ago. At $1.04 billion, revenues dropped -9.7%. Margins also contracted from a year ago.

A key metric to watch for any retailer is same-store sales. The company gets about 65% of their total sales in the North American market. Sales were down -19%. Same-store sales were off -24%. That was actually better than analysts' estimates of -25.5%. A year ago COH's same-store North American sales were -6.8%. Last quarter they were -17%. You can see the trend is getting worse.

Disastrous sales in the N. America were offset by +4% sales growth internationally. Yet again it's the details that paint the real picture. Japan saw sales drop -12%, which was the eighth quarter of declines in a row. COH saw sales in China rise +10% but that's down from +20% the prior quarter.

Coach's CEO Victor Luis blamed their terrible results on rising competition and "intensified promotional activity". He's right. It's a tough market for the luxury handbag and accessory business. COH's main rival, Michael Kors (KORS) just reported their earnings results today. KORS also beat Wall Street's top and bottom line estimates. Yet KORS warned of slowing growth and same-store sales. That's terrible news as we approach the key holiday shopping season. KORS blamed slower spending in North America and less mall traffic.

Both companies face challenges. COH may not be able to recover. They were once a highly coveted, luxury brand. Yet today they get 70% of their revenues from their discount stores. That could prove to be an impossible job to reverse this trend now that customers expect to buy COH products at a discount. The high-end customer may have moved on.

- Suggested Positions -

Short COH stock @ $32.80

- (or for more adventurous traders, try this option) -

Long 2015 Jan $30 PUT (COH150117P30) entry $0.75

11/05/14 triggered @ $32.80
Option Format: symbol-year-month-day-call-strike


Pandora Media, Inc. - P - close: 18.51 change: +0.73

Stop Loss: 20.05
Target(s): To Be Determined
Current Option Gain/Loss: + 2.8%
Entry on October 30 at $19.04
Listed on October 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.1 million
New Positions: see below

11/08/14: The stock market may be hitting new highs but Pandora just marked its third weekly loss in a row. Shares did see a big oversold bounce on Friday (+4.1%). We will adjust our stop loss down to $20.05.

Earlier Comments: October 29, 2014:
Pandora is in the services sector. The company provides streaming music over the Internet and through your mobile device. They have over 200 million registered users and over 76 million active users.

It has been a really rough year for shares of Pandora. The stock is down over 50% from its all-time high of $40.44 set in March this year. Traders have been selling the rallies for months. If you only looked at the profit numbers you might be surprised by Pandora's performance.

Pandora's most recent earnings report was October 23rd. They beat analysts' estimates with a profit of 9 cents per share. That's a +50% improvement from a year ago. Revenues were up +41.5% from a year ago to $239.6 million, which also surpassed analysts' estimates. Pandora said listener hours soared +25% to almost 5 billion hours in the third quarter versus a year ago. The company's guidance was actually somewhat bullish with Pandora guiding slightly above consensus estimates on both the top and bottom line.

Given this impressive growth from 2013 you might think the stock would be soaring. Unfortunately for Pandora shareholders the company is seeing growth actually slow down and that's due to significant competition.

The 4.99 billion listener hours last quarter may have been up from a year ago but it's down -1% from the second quarter. The company's active users came in at 76.5 million users in the third quarter. That's up +5.2% from a year ago but it's virtually flat versus the 76.4 million from the prior quarter.

The slowdown is likely a result of too much competition. There are a ton of streaming music services like Rdio, Deezer, Grooveshark, Xbox Music, Sony Music Unlimited, and Songza. Yet the major competitors for Pandora are probably Spotify, Amazon.com's Prime Music, Apple's iTunes radio, which will soon merge with Beats Music, and finally Google has their Google Play Music All Access service. If all the competition wasn't enough Pandora also has to contend with music labels constantly fighting to raise the royalties that Pandora has to pay.

There are plenty of bears in this name. The most recent data listed short interest at 13.2% of the 197.2 million share float. Given the stock's recent performance, the slowing growth, and rising competition, the bears should have the upper hand. The stock's performance has produced a bearish signal on the point & figure chart, which is forecasting a long-term target of $11.00.

Tonight we are suggesting bearish positions at the opening bell tomorrow morning. More conservative traders could wait for a new relative low under $18.90 instead. The next support level might be the $15.00 area.

- Suggested Positions -

Short P stock @ $19.04

- (or for more adventurous traders, try this option) -

Long 2015 Jan $19 PUT (P150117p19) entry $1.71

11/08/14 new stop @ 20.05
10/30/14 trade begins. P opens @ $19.04
Option Format: symbol-year-month-day-call-strike


Twitter, Inc. - TWTR - close: $40.31 change: -0.53

Stop Loss: 43.05
Target(s): To Be Determined
Current Option Gain/Loss: - 1.4%
Entry on November 04 at $39.75
Listed on November 03, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 27.9 million
New Positions: see below

11/08/14: TWTR continues to underperform the broader market. Last week the stock did manage to hold support near the $40.00 level. Traders could be waiting to hear from TWTR at the company's analyst day, which is this Wednesday (November 12th).

There seems to be a growing chorus of criticism for TWTR's management so the analyst day could be a pivotal event. Will TWTR executives soothe Wall Street's concerns or exacerbate them on Wednesday? The reaction on Wednesday could see our trade stopped out or TWTR breaking down to new lows.

Earlier Comments: November 3, 2014:
TWTR is considered part of the technology sector. The company runs a micro-blogging, communication platform. Users can express themselves but they're limited to 140 characters. The platform is part of the social media industry, which constantly gets a lot of attention from Wall Street.

TWTR came public with its IPO about one year ago. The stock priced at $26.00 and shares ended their first day of trading (November 7, 2013) at $44.90. It has been a roller coaster ride for the stock price. TWTR almost hit $75.00 in December last year and then fell to $30 by May 2014. The company has seen incredible growth but even with the growth its valuations fuel a lot of critics. Their P/E ratio is negative. The stock is trading around 20 times its annual revenues and over 100 times next year's earnings.

The stock's most recent earnings report was October 28th and Wall Street was not happy with the results. Analysts were expecting a profit of $0.01 per share on revenues of $351.59 million. TWTR delivered $0.01 cent, matching estimates, and revenues soared +114.9% to $361 million in the quarter.

TWTR's advertising revenue grew +109% to $320 million from the same quarter a year ago. International revenues were up +176%. With all of this growth and the revenue beat, why did TWTR's stock crash on this report?

The reason is user growth. The company's user growth appears to be slowing down. TWTR's Monthly Active Users (MAUs) hit 284 million in the third quarter. That's an improvement of 13 million from the same quarter a year ago. Wall Street was expecting 285 million MAUs and the whisper number was around 290 million or higher.

The 284 million MAU number is a +4.8% growth rate from the same quarter a year ago. Yet a year ago MAUs were growing +6.4%. The prior quarter Q2 2014 MAUs were growing +5.9%. You can see the concern here. TWTR's valuations are based on extremely strong growth, which is it seeing in its ad revenues, but if users aren't growing then ad revenues will likely stall as well.

Management issued Q4 revenue guidance in the $440-450 million range versus consensus estimates around $448 million. This is another reason traders could have hit the sell button. At least five firms downgraded TWTR following these results.

The stock plunged from the high $40s to low $40s on this earnings report. There has been almost no oversold bounce and now shares are hitting new three-month lows near support at $40.00.

Tonight we are suggesting a trigger to open bearish positions at $39.75. I do want to caution readers that there was a rumor of an activist investors getting involved with TWTR but nothing has been confirmed yet. Should that that story prove to be true it could spark some short covering.

- Suggested Positions -

Short TWTR stock @ $39.75

- (or for more adventurous traders, try this option) -

Long DEC $40 PUT (TWTR141220P40) entry $2.69

11/04/14 triggered @ $39.75
Option Format: symbol-year-month-day-call-strike



Natus Medical Inc. - BABY - close: 33.15 change: -0.74

Stop Loss: 33.45
Target(s): To Be Determined
Current Option Gain/Loss: -4.1%
Entry on October 31 at $34.97
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 282 thousand
New Positions: see below

11/08/14: BABY had been consolidating sideways all week and not participating that much in the market's rally. We turned cautious on Thursday and raised the stop loss to $33.45. Friday saw shares break down under their 10-dma and hit our new stop loss before closing with a -2.1% decline.

- Suggested Positions -

Closed BABY stock @ $34.97 exit $33.45 (-4.1%)

11/07/14 stopped out
11/06/14 new stop @ 33.45
10/31/14 trade opened on gap higher at $34.97, suggested trigger was $34.35