Option Investor

Daily Newsletter, Saturday, 12/13/2014

Table of Contents

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

Market Wrap


by Jim Brown

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That giant sucking sound was the market dropping with the sell on close orders on Friday. The Dow dropped nearly -140 points in the closing minutes to lose -315 for the day.

Market Statistics

The market had its worst week since May 2012 as oil prices collapsed to $57.42 and -44% off their $107.73 high in June. This carnage in the energy sector has infected the rest of equities and completely erased the normal December bullishness.

However, we are at or near a bottom in crude prices. This flush in crude prices has run its course and external events are starting to mount that will create an offset for the selling in crude.

Can we go lower? Absolutely! However, oil is significantly oversold and it is only a matter of time before a rebound appears.

For instance, there are a record number of oil tankers headed toward China. There are 83 Very Large Crude Carriers (VLCC) bound for Chinese ports with a capacity of 166 million barrels. This is the largest number since records were started in October 2011. China averaged 67 VLCCs in past Decembers. The cost to hire a crude tanker is at a 5 year high at $83,605 a day and the highest since January 2010. The International Energy Agency said China was taking advantage of the drop in crude prices to add to strategic reserves.

West Africa has booked 33 VLCC cargoes for the month of December. That is 43% over December 2013. Angola and Nigeria are shipping 4.0 mbpd and the most since August 2012. The cheap oil is forcing producing countries to produce as much as possible to make up for the lower price. This is feeding the current over supply but the cheap prices are causing those countries and refiners with additional storage capacity to stock up. This could consume an additional 200 million barrels over the next 90 days. Obviously that will lower demand in months to follow but by then we should see high dollar oil production begin to decline.

The IEA said stockpile building could consume 297 million barrels in the first half of 2015 to lift inventory totals to 2.87 billion barrels and right at the total global storage capacity.

Reuters reported that new well permits declined almost 40% in November. Drilling Info, an industry tracking firm, said new well permits declined from 7,227 to 4,520. That is a monster decline and that is an indication of what will happen to production 6 months from now. A drilling permit is also a snapshot into what will happen to rig activity over the next 60-90 days. This is the first significant drop in shale drilling since the boom started in 2007.

Permits for the Permian declined -38%, Eagle Ford -28% and the Bakken -29%.

The next data point is the weekly rig report from Baker Hughes. The active rig count plunged by -29 rigs to 1,893 over the last week. The Permian saw the biggest drop of -20 rigs to 548. The Granite Wash shale declined -6 rigs to 57. I expect this drop to continue in the weeks ahead.

Enterprise Products Partners (EPD) announced on Friday they were cancelling the proposed pipeline from the Bakken in North Dakota to Cushing Oklahoma. This is the first major project to fall victim to low oil prices. Many more will follow.

Conoco (COP) said it was cutting 2015 spending by 20%. BP Plc (BP) said it was cutting $2 billion off its capex. Chevron (CVX) said 2015 spending plans were on hold. Apache (APA) said it was slashing its North America budget by -25%. Halliburton is going to lay off 1,000 workers to reduce exposure to a slowdown in drilling.

Oil prices may have declined to $57.50 on Friday but remember shale drillers are getting far less than that because of transportation costs. Bakken crude was quoted at $51 on Friday and Canadian Select was down to $42 per barrel and tar sands crude in the $30s. The WTI price is a benchmark and all land based fields and grades trade at a discount or premium to WTI. The Gulf Coast benchmark is Brent, which closed at $61.43. Louisiana Light Sweet is normally traded at Brent prices. Venezuelan heavy crude was $20-$22 under Brent or $40 a barrel. They need $135 to balance their budget. Expect a country collapse soon.

The impact to the market from the imploding energy sector should not be understated. Dow component Exxon (XOM) lost -2.60 for -21 Dow points and Chevron (CVX) lost -2.53 for -20 Dow points. The 46 energy stocks in the S&P were a major reason for the S&P decline. The Russell 2000 has 195 energy stocks or roughly 10% of the index and accounted for the majority of the -30 points lost for the week.

Energy is in a bear market. That should be no surprise to anyone. Stephen Schwartzman of the Blackstone Group is raising up to $4 billion for a new fund to invest in energy. He is positively giddy about the buying opportunity he is seeing now. He said in an interview, "I think this is going to be a wonderful, wonderful opportunity for us. It is going to be one of the best opportunities we have had in many, many years."

We are seeing a capitulation style sell off. Thomas Lee of FundStrat Global Advisors pointed out that the Relative Strength Index (RSI) on Brent crude has fallen below 23 for only the fourth time in 26 years. On each of the prior three occurrences oil was higher 100% of the time 3, 6 and 12 months later with an average gain of +74%. Three times over 26 years is not a very big dataset but we should pay attention. My chart program does not go back 26 years on Brent but you have to admit the damage is obvious. We are also at the 2007 and 2009 support lows.

Analyst William Maloney pointed to the 200-month moving average on WTI and a level that is rarely penetrated for more than a short term dip. That level is currently $60.26 and just about where WTI closed on Thursday. The break below that level should attract long term buyers.

The International Energy Agency (IEA) cut its demand forecast for 2015 for the fourth time in five months. The agency now expects demand to rise +900,000 bpd in 2015 to 93.3 mbpd and -230,000 bpd below their prior forecast. The agency had a novel reason. They said the fall in prices would reduce government spending in places like Russia, Venezuela, Brazil and Nigeria. Those countries derive much of their revenue from oil prices and that revenue has fallen -44% in the last six months. This is really going to crimp their operations, which depend on export revenue. The IEA said demand in Russia alone would decline -195,000 bpd to 3.4 mbpd.

The IEA said new supplies outside OPEC should rise +1.3 mbpd in 2015 after a +1.9 mbpd rise in 2014. They only expect U.S. production to rise +685,000 bpd but that may be wildly optimistic. This production is from projects already underway that can't be cancelled. For instance there are several deepwater Gulf of Mexico projects that will begin production to add about 300,000 bpd. These multibillion dollar projects have been in the development stages for years.

The IEA expects the demand for OPEC crude to decline -300,000 bpd to 28.9 mbpd. The current OPEC production quota is 30.0 mbpd and they produced about 3.42 mbpd in November. That was down about 400,000 bpd from October.

OPEC is paying the price for 4 years of $100 oil. When prices were high producers spent their extra cash on new wells to increase production even more. They basically overdosed on the large profits and overspent on new equipment, new wells and new government spending on social programs. With that revenue cut in half they can't afford to cut production now because that will further reduce income. To put it bluntly they are in trouble.

Russia is in serious pain. They are commonly referred to as a first rate military with a third world economy. With 9 mbpd in production the revenue funds the military and allows Putin to project force around the world. With that revenue cut in half and the Ruble, or should we say rubble, crashing into oblivion and Russia in recession and sinking fast we could see another debt default on the horizon. So much for the New Russia that Putin was trying to build. A funny thing happens to dictators that run out of money. They tend to be removed from power. We are about to see that in Venezuela. President Maduro is circling the drain. Inflation is rampant. Revenue is nonexistent. He and Chavez before him have nationalized any business that made money and there is nothing left. The 44% drop in oil revenue is the final straw and the country could implode any day now.

The IEA upgrades their demand forecast every month. It is a moving target. Long term I don't give it much credibility. For instance U.S. citizens each consume an average of 23 barrels of oil per year. The average Indian consumes 3 barrels per year and the average Chinese citizen consumes only 1 barrel. China's economy is now bigger than that of the U.S. and still on track to grow by 7% in 2015. They are the largest car manufacturer with more than 20 million cars a year and growing. They have 1.3 billion people and 1.0 billion are trying to move from an agrarian economy into the 21st century. Their oil demand is going to explode over the next several years. They currently import about 8.0 mbpd and they produce about 4.5 mbpd. If Chinese consumption rose only 1 barrel per person in 2015 they would need twice the 12.5 mbpd they consume now. That is not going to happen in 2015 but it is going to happen over the next several years. China is an emerging economy turning into a developed economy and their oil consumption could double by 2020. India is just like China only growing at a slightly slower pace.

Unfortunately the world's excess production is not going to double in the same period. We are going to be looking back at this oil crash several years from now in amazement and wishing we had mortgaged the home, farm and kids to buy energy stocks.

A trader made a $2 million bet on oil on Thursday that could return $10.9 million. The trader bought 14,500 of the March 53/62 call spreads on the XOP for $1.50 each. That cost $2.2 million. The SPDR Oil & Gas Exploration ETF (XOP) has to close over $54.50 by March expiration to be profitable and over $62 to earn the maximum $10.9 million profit. The XOP closed at $44 on Friday so it has to rise +23% just to break even. The high on November 21st was $63. This trader is betting a lot of money the hysteria will fade and crude prices will rally over the next three months.

Deutsche Bank warned that oil prices below $60 could force restructuring in more than one-third of producers. The banking sector is also declining on worries over exposure to energy loans. Five years ago U.S. E&P companies had $300 billion in debt. Today that number is well over $1 trillion. Analysts claim there is $200-$500 billion in high yield debt that is likely to be distressed with oil prices under $65. Some were recommending shorting the XLF with a March timeframe because we should have a clearer picture of the debt problems by March. I think it would be a lot longer than that. Companies selling debt typically go out 5-10 years so the debt increase over the last 5 years probably won't come due until later in the decade.

PNC Financial (PNC) is the second largest regional bank. The CEO said they had about $7.5 billion in exposure to energy including $2.5 billion in outstanding loans. He said they had stress tested the loan portfolio down to $50 without any significant challenges. US Bank said it faced "no material impact" from the oil price decline. They have $2.8 billion in loans to energy companies.

In economic news the Producer Price Index (PPI) declined -0.2% in November. That should be no surprise with the drop in energy prices. The price of goods fell -0.7% with core goods down -0.1%. Energy products declined -3.1% and gasoline declined -6.3%. Finished goods prices declined -0.7% and the biggest drop since July 2009. There is no inflation pressure at the producer level with the trailing 12 month number at +1.4% compared to +2.1% back in May. Next Wednesday we will get the Consumer Price Index (CPI) and I expect it to decline as well.

Consumer sentiment for December exploded higher by a whopping +5 points from 88.8 to 93.8. That is the highest level in more than 8 years since July 2005. The expectations component rose from 79.9 to 86.1 for the majority of the headline gain. The present conditions component was still strong with a rise from 103.7 to 105.7 and the highest level since February 2007.

The combination of job growth and falling gasoline prices is lifting consumer spirits during the holiday season. Gasoline prices fell to $2.60 nationwide on Friday with analysts now expected prices to be between $2.40-$2.50 by the end of December. That will spread a lot of holiday joy. Gasoline prices have now declined for 78 consecutive days. November marked the sixth straight month that sales at gas stations declined. That is the most since 1998.

For next week the highlight is of course the FOMC meeting on Tue/Wed. With oil crashing to 5 year lows, China, Japan and Europe adding stimulus there is no way the Fed is going to be able to raise rates in the near future. The only focal point for the Wednesday announcement is the "considerable period" statement. Nearly everyone believes it will be changed but what they replace it with is the key question. It will probably be some form of "data dependent" language.

Bill Gross said there is a slim chance the Fed will change the language after the crash in oil prices. "Why would they start to eliminate language that talked about an extensive period of time when the U.S. itself is, not deflating but disinflating, and certainly not moving in the direction of its 2 percent target? The sharp decline in the price of oil has disoriented markets and changed the perception of the creditworthiness of companies and countries."

The CPI also on Wednesday is likely to show declining inflation and that will weigh on the FOMC decision.

The Philly Fed manufacturing survey on Thursday will be the proxy for the rest of the regional reports until the ISM in early January. Note that the forecast is for a significant decline from 40.8 to 22.0 and that could be negative for the market.

Stock Split Calendar - No new splits announced.

The market implosion and the crash in oil prices have sent a lot of money into treasuries. The yield on the 10-year closed at 2.1% and analysts are projecting sub 2% levels next week. The drop in all commodities not just oil is creating deflationary pressures that are starting to scare some investors. Copper declined to $2.80 an ounce the prior week and copper is widely considered to be the best indicator of future economic activity. Iron ore is sinking, cotton has gone from $2 to 60 cents. Coal has fallen from $67 a ton to $54 since May. Falling commodity demand is a sign of deflationary pressures and bonds are benefitting.

Gasoline futures closed at $1.59 on Friday and the lowest level since mid 2009. While low gasoline prices are good for consumers it is bad for some corporations. As individuals we can dance a jig around our cars while filling up with cheap gas but some corporations are seeing their stocks decline on the news.

For instance Dow component Boeing has seen its share price fall from $135 to $120 over the last three weeks. Investors are worried that oil producing countries no longer have the cash to pay billions for new fleets of airliners. Boeing has sold more than $25 billion in aircraft to countries that depend on oil for a substantial portion of their revenue. Will those countries cancel those orders? Will other countries place new orders?

Boeing has been selling billions in new planes that are more fuel efficient. If jet fuel is so cheap how will that impact the need for airlines to spend extra for those new planes?

On the flip side the extra $50 to $100 per month in gas savings for consumers will mean an immediate boost in traffic for fast food and casual food restaurants as well as retailers like Target, Macy's and Walmart. It will be interesting to see if Walmart's monthly sales continue to decline or will the gas cash boost give them a lift in December.

Fast food restaurants that should see a boost in sales include Jack in the Box (JACK) parent of Qdoba, Red Robin (RRGB), Burger King (BKW), Chipotle Mexican (CMG) and BJ's (BJRI). Of those companies JACK is performing the best. Cracker Barrel (CBRL) already said sales were up +5% because of more traffic on the highways producing more customers.

Sherwin Williams (SHW) was in the news on Friday after the company provided conservative guidance for full year 2014. They also provided initial guidance for 2015 that was weaker than analysts expected. The company said 2014 revenue would rise +9% to $11.10 billion. They guided for earnings in the $8.75 to $8.80 range and analysts were expecting $8.81 and $11.18 billion. They guided to $1.35 for Q4 and analysts expected $1.39. For 2015 they guided to earnings of $10.65-$10.85 and below estimates for $10.90. Midpoint revenue guidance for 2015 of $12.1 billion was higher than analyst estimates at $11.93 billion. The company said acquisition costs for Mexican paint retailer Comex were weighing on earnings. Shares fell -3% on the news.

Nuskin (NUS) lost -6% after guiding to lower expectations for 2015. The company projected full year earnings of $3.80-$4.00 on revenue of $2.55 billion. Analysts were expecting $4.15 on revenue of $2.55 billion. On a positive side they received approval to begin selling in five districts in Shanghai and two cities in Jiangsu Province, China.

Nuskin and Sherwin Williams are just the leading edge of a problem we are going to face over the coming weeks. We have already seen several companies warn about the strong dollar impacting sales and with economies in Europe, Japan and China weakening that will also depress overseas sales. S&P companies derive about 50% of their earnings from overseas. We are moving into the Q4 warning cycle and companies are starting to give 2015 guidance as well. Based on the guidance warnings above and some we have seen in the last couple of weeks it would appear we are heading into a potentially rough warning season.

Esterline Technologies (ESL) reported adjusted earnings of $1.82 compared to analyst estimates of $1.87. Revenue of $548.1 million also missed estimates of $557.2 million. Shares collapsed -12% on the news.

U.S. corporations are also fighting a losing battle on another front. The cost of cyber warfare is skyrocketing and for every attack that makes the headlines there are thousands that don't make it into the press. Billions of dollars are being spent to slow down hackers. The attacks can't be prevented but they can be moderated by throwing a lot of money at the problem.

The hacking problem just keeps getting worse. We are just now getting the details of the hacker attack on the Las Vegas Sands (LVS) back in February. On the morning of February 10th computers all over the LVS network were dropping offline with their hard drives wiped clean. Email was down, phones did not work and technology systems that ran most of the gaming operations had died. Engineers quickly found that a cyber attack was underway and the attackers were deleting the hard drives of every computer on the network. Engineers ran throughout the building and gaming floor of every Sands property disconnecting every working computer from the network. Even their multimillion-dollar storage system that contained all the archived records was wiped out. Sands Details

The Sands managed to keep the full extent of the hack private for 10 months and the details just came out recently. The cyber sleuths determined the hack was coming from Iran. Sheldon Adelson, 52% owner of LVS, is one of Israel's strongest supporters and friend of Prime Minister Benjamin Netanyahu. He gave a speech in October 2013 about Iran and nuclear weapons and explaining how he would handle the ongoing nuclear negotiations. It was a tough speech and it landed on YouTube almost immediately. Iran's Supreme Leader Ayatollah Khamenei said America "should slap these prating people in the mouth and crush their mouths."

The hackers spent a month trying to secretly break into a small Sands casino in Bethlehem Pennsylvania. On February 1st they found a weak spot on a web development server at the Bethlehem casino. Once inside the network they spent over a week collecting passwords and mapping out the network. On Feb 9th they found a username and password of a senior systems engineer from company headquarters that he had used on a visit to Bethlehem. That allowed them into the servers in Las Vegas and the rest is history.

The hack destroyed thousands of servers and PCs before the network could be shutdown. The Sands has over 25,000 computers. The company estimated the attack cost them more than $40 million.

This was small change compared to the attack on Saudi Aramco that wiped out more than 30,000 computers and process control systems in 2012. The attack on Sony Pictures over the last two weeks is ongoing and the damage is still being discovered. The names, addresses and social security numbers of 47,000 employees, contractors and actors were stolen and posted on the Internet. Thousand of computers remain offline for fear that connecting them to the network will risk reinfecting them. Sony said it could be 2-3 months before operations can be restored. The Sony attack has now been traced to a hacker group known as DarkSeoul, which is believed to be a group that works for the North Korean government.

With Iranian, Korean and Russian hackers known to have infiltrated the U.S. electrical grid and with their ability to destroy computers at will when they decide to take action the future is grim. It is only a matter of time before the U.S. does something that aggravates one of these entities and they attack our infrastructure. Knocking out a few computers on the grid is no more difficult than killing thousands at the Sands, thousands at Sony or 30,000 at Saudi Aramco. We are heading into dangerous times. The attacks will grow and the lack of a material response will embolden the hackers to try even bigger attacks.

On Friday the FBI sent out a flash memo claiming Iranian hackers were currently targeting defense contractors, energy firms and educational institutions. The flash report contained technical details about the attacks and advice on how to thwart the invasion. The memo claimed Iran's government was behind the attacks.

Here is a list of the worst hack attacks of 2014. Worst 2014 Attacks


Last week was ugly. There is no other way to state it. Analysts, including myself expected the market to be bullish because of the historical trends for December. Apparently the market was not paying attention to the calendar.

The Dow lost -678 points for the week, the Nasdaq -127 and the S&P -73. Critical support levels were broken and analysts were left scratching their head over market direction next week. Many analysts blamed the decline on oil prices and I am sure that was a factor. Others blamed it on tax loss selling and that could have been made worse by the drop in oil prices. There were definitely a lot of energy stocks being sold last week. Others felt the market was rolling over because of the economic weakness overseas, the election in Japan, worry over the FOMC meeting next week and a potential government shutdown.

I don't see the FOMC meeting as a problem. They can't do anything but change the language slightly. I think that worry is overblown.

The election in Japan could be a problem if the snap election called by Prime Minister Shinzo Abe does not turn out as he expects. He called the election after the Q3 GDP came in weaker than expected and Japan had slipped back into a recession. Abe is hoping the election will be a vote of confidence on Abenomics, a three pronged policy of monetary easing, public spending and structural reform. Abenomics is the last hope for Japan's struggling economy and its massive debt. If Abe were to lose the election it could prompt a global sell off. Japan is a bug in search of a windshield with debt at 220% of GDP. The election is widely expected to be decided in Abe's favor but there is always risk.

The House finally passed a bill to fund the government by 219-206 after Democrats tried to scuttle the bill to preserve portions of the Dodd Frank regulations. The bill went to the Senate where it failed to come up for vote on Friday and they will reconsider it on Monday. The president has already said he would sign it so the press is ignoring potential deadline miss. The market was not so sure there would not be a repeat of the last government shutdown that caused a serious market decline. To avoid a repeat the House also passed a second temporary measure that would prevent a shutdown until the larger budget bill is complete. The stop-gap funding bill will extend funding until next week. The first temporary measure extended funding from Thursday until Saturday at midnight. The Senate is expected to vote on that on Saturday.

Regardless of the reason the market declined sharply and threw the month of December into uncertainty. Fund managers don't know whether to buy or sell on Monday. Do they protect profits and close positions or take advantage of the opportunity to buy more?

The S&P has crashed back from last Friday's high at 2,079 to close at 2,003 this Friday. A -76 point decline in one week on the S&P is brutal. That erased the gains made since October 30th.

The 50-day average is 2,000.78 and traders are counting on that being strong support but that was not the case in the October crash. The next material support is the 1,985 level and the 100-day average at 1,987.

Since we have already wiped out the potential for another new high before the end of December I would like to see a decline to that 1,985 level to flush out any remaining weak holders before January. I was expecting a sales event in early January but this drop could take the place of the January event if it is deep enough. In theory that would leave the entire first quarter open for gains as long as the Q4 earnings and 2015 guidance didn't get in the way.

Unfortunately I believe investor sentiment has been damaged. We had several attempted buy the dip rebounds that failed and now traders are going to be more cautious about catching another falling knife.

Short term resistance is 2,025 and 2,055.

The Dow closed at 17,280 and just above the 50-day at 17,267 but the Dow is not really reactive to averages because of the impact of single stocks on the narrow 30 stock index. The 678 point drop (-3.78%) erased 25 trading days of gains. It was well overdue but the drops are still painful. Markets tend to take the stairs up and the express elevator down.

All 30 Dow stocks closed in the red with Visa, the largest weighting in the Dow, losing -6.34 points and the equivalent of more than -50 Dow points. IBM and Goldman Sachs were close behind with losses equivalent to more than -80 Dow points.

Support on the Dow is 17,130 and possibly the 100-day at 17,096.

The Nasdaq Composite chart is a joy to behold. Unlike the Dow and S&P the Nasdaq actually stopped at support at 4,650 and well above the corresponding averages being tested on the other indexes. It was still a nasty decline of -2.6% but well within the realm of reasonableness especially when compared to the Dow's -3.78% decline.

Dip buyers should be looking at the Nasdaq chart with excitement ahead of Monday. The support is clear enough that even a novice trader should see it. The challenge here is Apple. Shares have declined -$10 over the last two weeks and support at $110 is being threatened. If Apple continues to slide it will drag the Nasdaq along with it.

The second problem is Google (GOOGL). Shares of Google are testing support at $520 and the trend does not look promising. A break below $520 could suggest a longer term retest of $425. We do not want to see that because it could be a major drag on the Nasdaq for weeks to come. Google is expected to miss on Q4 earnings and the worry is dragging down the stock.

If support at 4,650 fails the nest likely support point is 4,605. Initial resistance if 4,705 followed by 4,760. We can only hope that level is tested again next week.

The Russell 2000 declined -3.4% but did not break support at 1,150. I view this as a major achievement given the 195 energy stocks in the Russell. We are approaching the historical period where small cap stocks shine. Late December and January are typically the best period for the R2K. Historical trends have not played out well this year so it is a tossup on whether we are going to see a miraculous recovery here. However, I see the failure to break below support as a positive sign.

Despite the -315 point decline in the Dow on Friday the advance/decline ratio was only 3:1 in favor of decliners on volume of 7.6 billion shares. There was no panic selling. This was calm and orderly and the volume was just slightly higher than normal. The VIX barely broke 20 and that level is normally considered a signal to buy.

I want to be bullish on stocks for next week because we are now oversold and next week is quadruple expiration. That normally produces a bullish week. However, as I said in past commentaries having Europe, Japan and China all declining at the same time is a serious counterpoint to historical trends. The falling oil demand in Europe, Japan and China is proof the countries are slipping away economically. Yes, China did have lower oil demand in November even though they have a record number of tankers heading in their direction.

I think investor sentiment has been damaged. The buy the dip gang has been successful for the majority of the last two years. The volatility over the last week with alternating spikes and declines may have exhausted their patience and made them a little gun shy. It would be nice to have a day with a minor decline and a narrow range to reenergize the dip buyers.

However, there is a good possibility the equity markets are starting to catch the deflation flu. Everyone always says "this time is different" or "the U.S. has decoupled from overseas economics" but in reality we always seem to catch whatever economic flu is circulating around the world. We may not react as negatively but that does not mean we should be constantly making new highs while the rest of the world is sinking. For 2014 the U.S. markets did relatively well considering the global economic weakness. The U.S. market is up an average of +9% while the rest of the world is down an average of -7%. We were the best house in a bad neighborhood. Unfortunately as the neighborhood continues to decline the value of the best house will also decline. More than $1 trillion in value was erased from global equity markets last week.

The Europe, Australia, Asia and Far East ETF (EFA) declined to two-month lows on Friday with most of the losses coming from Europe. The Russian ETF (RSX) is collapsing as a result of the drop in oil prices and the currency. These charts make our markets look very strong.

Lastly this chart compares the S&P in black to the Vanguard FTSE All-World ex-USA ETF (VEU) in red. Clearly the rest of the world is doing significantly worse than the U.S. and while we may have temporarily decoupled the odds are good we are about to follow the rest of the world lower in the months ahead.

For more than three years now the S&P has been moving steadily higher with only minimum declines until October. We have only touched the bottom of the channel three times since October 2011. We are due for a return to the bottom of the channel and in reality we are due for a breakdown below that channel. The 50-week average has been support/resistance for a long time. It was pierced briefly in October but averages don't rise forever. There is a support break in our future.

I am not expecting it next week but definitely in 2015 and probably early in the year. As the market begins to worry about rate hikes in Q2 we could see some increased volatility. I am pointing out the potential for a retracement to 1,800 or even lower to caution readers to always be aware that some future dip may not be bought. After three years of gains we tend to forget that markets also go down and they don't always need a reason.

Another way to look at the divergence in the markets is with the High Yield ETF (HYG). Typically this ETF trades in tandem with the S&P. Since earlier this year the index and the ETF have diverged significantly and accelerating. The high yield debt market is collapsing. Eventually the S&P will follow.

Last week somebody bought 50,000 January $20/$30 VIX call spreads at a cost of $1.60 each or roughly $8 million. That is a bet that the VIX will rise significantly higher than 20 over the next five weeks. That is an extremely confident investor. A similar thing happened before the October crash. Somebody may know something we don't like a major fund liquidation is about to occur. When people bet extreme amounts of money on a market timing play I definitely take notice. They can lose money if they are wrong but very few hedge funds will bet $8 million on a five-week speculative trade.

I am going all in on oil stocks this weekend. Like the fund managers I mentioned earlier I think this is a major long term buying opportunity. However, we need to be prepared for oil to decline even further. I view $53-$55 as the bottom. That is a 50% retracement from the highs. Oil crashes tend to go to extremes so anything is possible. I think investors are astute enough to see the beginning of a change in posture by energy companies. The drop in rigs, the cancelling of the Enterprise pipeline and capex cuts from major energy players all point to lower production 6 months from now. Also, with Brent at $61 there is a lot of pain in OPEC. I would be really surprised if we did not see an emergency production meeting in the near future. The announcement of a new meeting would be the starter's gun on an oil rebound. I want to be invested before that happens.

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

Random Thoughts

In what may have been the worst trade in the last 40 years Ron Wayne, a cofounder of Apple, sold his 10% stake in the company for $800 and put the money in gold. He is now 80 and currently living off social security and selling some early Apple artifacts in a Christies auction for extra money. He said he will put that in gold as well.

If he actually bought gold when he sold his shares that gold would be worth $1,750 today. If he had kept his 10% stake in Apple it would be worth $64.4 billion. However, he was twice as old as Jobs and Wozniak and said if he had stayed at Apple he would now be the richest man in the cemetery. He said Jobs and Wozniak were a "whirlwind" and he never regretted his decision to leave. When he joined the pair it was to give them some adult supervision but they were too much for him to work with.

Apple shares went public in 1989 at a split adjusted price of $1.26.

Want to buy a cheap iPhone 6? Head on down to Walmart where they have the base model on sale for $129 with a 2-year contract from either AT&T, Verizon or Sprint. That is $50 less than their normal price and the cheapest price on the Web. If you want the 6 Plus it will cost you $229, down from $279. The 5S is $49 and the iPhone competitor Galaxy S5 is $79, down from $139.

Walmart is battling to get people into the stores and away from their computers where Amazon rules the retail world. Having the cheapest prices on iPhones is one way to do it.

Did you know that the top 25 U.S. banks currently hold more than $302 trillion in derivatives contracts? Those same banks have a total of about $14.1 trillion in assets. We saw what happened to AIG in the financial crisis when counter parties to their derivatives holdings started demanding payment. It was a disaster and the government had to step in and cover those payments to prevent a total system meltdown.

You have to wonder what would happen if we had another meltdown in credit, options, futures, commodities, etc. How would 14.1 trillion in assets cover $303 trillion in liabilities? Wait, we are seeing a meltdown in the biggest commodity of all, oil. With the potential for oil prices to fall to 50% of their highs next week that has got to be stressing the bank positions. Those 25 banks hold more than $20 trillion in futures and options contracts.

Obviously we hope these banks have hedged themselves in some way against a pricing disaster that impacts their holdings. Surely they learned a lesson from the AIG crash. Also, there have to be offsetting positions where they are long a commodity to one party and short that same commodity to another party. The banks take a commission on the trades and in theory they lay off the risk on other parties. Unfortunately Albert Einstein once said, "In theory, theory and practice are the same. In practice they are not." What looks good on paper most often turns out badly in reality.

When a bank is called to cover a derivative and they turn to their counter party on the opposite side of the transaction they have no assurance that party will be liquid at the time and that puts the onus back on the bank.

The top 25 banks hold these derivatives.

Exchange Traded Futures $9.479 trillion
Exchange traded Options $11.296 trillion
Over the Counter Forwards $50.259 trillion
Over the Counter Swaps $176.571 trillion
Over the Counter Options $39.675 trillion
OTC Credit Derivatives $15.363 trillion
Spot FX contracts $2.561 trillion
Total $302.526 trillion.

Top Five Banks

JP Morgan $68.326 trillion
Citigroup $61.753 trillion
Goldman Sachs $57.695 trillion
Bank of America $55.472 trillion
Morgan Stanley $44.134 trillion

Does that give you confidence in the stability of the U.S. banking system?

After a lot of research I am ready to post the first summary of 2015 forecasts for the S&P. There are no bears in sight. Every single estimate is higher with 2,100 the lowest so far. After last week there may be some changes ahead. This is sequenced by the 2014 forecast. Those names in pink have revised their 2014 forecasts higher since earlier in the year.

China has offered to help Iraq defeat ISIS but it will not be part of the international coalition. China's foreign minister said their policy does not allow them to be involved in international coalitions. China is the largest foreign investor in Iraq's oil sector. China's support would be in the form of air strikes. With Iraq, China, Iran, Saudi Arabia, Kuwait, several EU nations and the U.S. all bombing ISIS positions. Those skies are going to be really crowded.

This is an interesting chart but it is too big to display in the newsletter. Capital Market Labs put together a list/chart of the top 28 banks that are in serious trouble. Most are in Europe and Asia. Bad Bank Chart

Christmas and New Years gatherings in Sierra Leone have been banned this year because of the Ebola epidemic. Soldiers will be patrolling the roads to enforce a lockdown to prevent travel from spreading the sickness. Nighttime curfews are in effect. All street celebrations have also been outlawed. All public gatherings have also been prohibited. Schools are closed, bars and clubs are closed. Football games have been banned. The WHO said of the 18,000 people that have contracted the virus more than 6,600 have died.

What is more dangerous than Russia and China combined? The answer is a solar storm or coronal mass ejection (CME). There are solar storms all the time but most are not a problem. There have only been a couple in the last 150 years that would have been killers. Those occurred in 1859 and 1921. There are two factors that control the destructive power of a CME. As we follow the path around the sun it is spitting out these CME events every few weeks. However, the earth is only 1 degree of the sun's 360 degree firing line. The sun can fire off CME events in any direction at any time. The only ones that impact us as the ones where the coronal mass is ejected in our direction or more accurately where we will be in 48-72 hours. That is the time it takes for the mass to reach our orbit.

A CME similar to the 1859 and 1921 events could knock out power to the majority of the U.S. for a year or more by destroying the electrical grid. The CME creates a giant electrical surge similar to an EMP that sees the millions of miles of wire in the electrical grid as a giant antenna. The electrical surge builds up in the wires and overloads transformers and fragile electrical circuits. Back in 1859 it melted telegraph wires and set telegraph offices on fire. There was very little electricity back then so there were not a lot of devices to destroy.

If we were hit head on by a G-5 class storm we could be without power for a year or more. It is estimated more than 100 million people would die. There would be no food, no gasoline, no water, no electricity, no banking, no salaries, no medical care for a year or more. The transformers are built in China and it would take years to replace all those that could be burnt out.

I am bringing this up because Congress is finally going to do something about it. There is a committee that has finally begun the effort to protect the grid by spending billions on new infrastructure and mandating that utility companies maintain certain standards that will make the grid EMP/CME proof. While I doubt it will happen in my lifetime it is a start. It could take a decade or more once the law is actually passed to make the changes. Read More Here

In the last 100 or so years there has only been one girl born in my family. That is my daughter Jessica. We welcomed her third son into the world a couple weeks ago and while she was really wishing for a girl I think this one is a keeper. This is my fourth grandson, Grayson, age 2 weeks. Yes, I am a proud grandpa.

Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2015. You will not be disappointed!

Only 11 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"On a long enough timeline the survival rate for everyone drops to zero."

Fight Club 1999


New Plays


by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

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

(bearish ideas) NCR, CFX, CRS, WBAI, P,


TimkenSteel Corp. - TMST - close: 31.34 change: -0.80

Stop Loss: 33.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 449 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
TMST is in the basic materials sector. They were spun off into their own company back in July 2014 and after a +25% rally the stock peaked near round-number resistance at $50 a share in September. Then two things happened. The stock market corrected lower (mid September through mid October) and crude oil prices started dropping in earnest. While the market recovered from its correction the steel industry stocks did not.

According to company marketing materials, "TimkenSteel creates tailored steel products and services for demanding applications, helping customers push the bounds of what's possible within their industries. The company reaches around the world in its customers' products and leads North America in large alloy steel bars (6"+) and seamless mechanical tubing made of its special bar quality steel, as well as supply chain and steel services. Operating from six countries, TimkenSteel posted sales of $1.4 billion in 2013."

U.S. steel companies have been facing pricing pressures from cheaper imported steel. This has been a factor for the industry for a while. This year steel stocks are getting melted by the bear market in crude oil. Why is oil dragging steel stocks lower? That's because for companies like U.S. Steel (X) and Timkensteel (TMST) they do big business making steel products for the energy industry.

The energy exploration, drilling, and production accounts for 10% of the steel used inside the U.S. each year. There's a lot of metal on all of these oil and gas rigs. They put a lot of metal into the ground for drilling, especially fracking rigs with their horizontal drilling. The energy boom in the U.S. has been a boon for steel companies because the steel products they make for the energy sector have been a higher-margin business.

This year the price of oil has been cut in half with Saudi Arabia launching a not so secret war against all rivals in the oil industry including Iran, Russia, and the surging U.S. shale oil industry. If oil prices get too low the Saudis know that that U.S. oil production will fall when it becomes unprofitable. That's bad news for steel companies.

Shale oil and shale gas wells have a high depletion rate. That means drilling companies are constantly drilling new wells to keep up production. Yet if they stop or slow production because oil prices are too low that's going to cut demand for steel products, which is going to hurt companies like TMST in some of their highest margin business.

Shares of TMST just spent the last two weeks consolidating sideways in the $32-33 zone. Friday's move is a bearish breakdown under support at $32.00. Tonight we are suggesting a trigger to launch bearish positions at $31.15.

Trigger @ $31.15

- Suggested Positions -

Short TMST stock @ (trigger)

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

Buy the FEB $30 PUT (TMST150220P30) current ask $2.60

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

Daily Chart:

In Play Updates and Reviews

Bears Make A Mid-December Appearance

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices accelerated lower on Friday capping their worst week in years.

Most of our bullish candidates held up well in spite of the market weakness but MU did hit our stop loss. We're also removing MDCA.

Current Portfolio:

BULLISH Play Updates

Columbia Sportswear Co. - COLM - close: 44.05 change: -0.62

Stop Loss: 43.45
Target(s): To Be Determined
Current Option Gain/Loss: + 9.4%
Entry on Novo:tember 06 at $40.25
Listed on November 04, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 138 thousand
New Positions: see below

12/13/14: COLM has spent the last couple of weeks digesting gains in a sideways consolidation. That's actually encouraging. The longer it can stay at these levels the less overbought it becomes. The challenge with this trade is probably the broader market. If the S&P 500 continues to sink it's going to weigh on winners. Traders start to panic and sell their winners to cover their losses elsewhere.

COLM should bounce here if you follow the short-term trend of higher lows. If COLM doesn't bounce then a breakdown could spark a deeper correction. That's why we have our stop at $43.45 to take us out if shares break that trend of higher lows.

I am not suggesting new positions.

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

12/11/14 new stop @ 43.45
11/29/14 new stop @ 42.85
11/25/14 new stop @ 42.25
11/24/14 new stop @ 41.85
11/19/14 new stop @ 41.45, readers may want to take some money off the table right here.
11/12/14 new stop @ 39.25
11/06/14 triggered @ $40.25
Option Format: symbol-year-month-day-call-strike


Barracuda Networks - CUDA - close: 36.50 change: -0.34

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: + 2.4%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 247 thousand
New Positions: see below

12/13/14: The U.S. market just delivered its worst weekly performance in over two years. Yet shares of CUDA managed to buck the trend and post a gain for the week.

The breakout past resistance near $36.00 is bullish. However, I am suggesting caution. If the wider market continues to sink we have to expect CUDA will eventually follow.

I am not suggesting new positions.

Earlier Comments: November 15, 2014:
CUDA is part of the technology sector. This is a small cap company in the cloud computing space. According to the website, "Barracuda provides cloud-connected security and storage solutions that simplify IT. These powerful, easy-to-use and affordable solutions are trusted by more than 150,000 organizations worldwide and are delivered in appliance, virtual appliance, cloud and hybrid deployments. Barracuda's customer-centric business model focuses on delivering high-value, subscription-based IT solutions that provide end-to-end network and data security."

CUDA has only been a public company for little more than a year. Lately they have been on a roll with their earnings reports. CUDA has beaten Wall Street's estimates on both the top and bottom line four quarters in a row. The last two reports also included bullish guidance.

CUDA's most recent report was October 9th when they reported their Q2 results. Analysts were expecting a profit of $0.04 a share on revenues of $66.7 million. CUDA delivered a big beat with a profit of $0.8 on revenue growth of +18.9% to $68.7 million.

Management said their active subscribers grew +18% and their renewal rate was 96.5%. Their Next Generation Firewall solutions saw sales up +50% in the quarter. CUDA said sales were up across all geographically regions. Plus their gross margins were strong with an improvement to 81.7%. That's above the prior quarter's 80.4% and the year ago period 79.8%.

CUDA's guidance was bullish. Their Q3 estimates are for revenues in the $69-70 million range versus Wall Street's $69 million estimate. They expect a profit in the $0.04-0.05 zone compared to estimates of only $0.03. They raised their 2015 revenue guidance above their prior estimates but this was slightly below Wall Street's estimate. They also raised their 2015 earnings growth into the $0.22-0.24 range compared to analysts' consensus estimates of only $0.17.

Technically the stock has been soaring from its double bottom in the $24.00 area. The point & figure chart is bullish and forecasting a long-term target of $56.00. Right now CUDA is testing resistance in the $35.00 area. A breakout here could spark some short covering. The most recent data listed short interest at 9.7% of the very, very small 9.9 million share float.

We are suggesting a trigger to open bullish positions at $35.65.

- Suggested Positions -

Long CUDA stock @ $35.65

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

Long 2015 Jan $35 call (CUDA150117c35) entry $3.15

12/11/14 new stop @ 34.85
12/06/14 new stop @ 33.85
11/22/14 new stop @ 33.65
11/18/14 triggered @ $35.65
Option Format: symbol-year-month-day-call-strike


Cynosure, Inc. - CYNO - close: 28.70 change: -0.04

Stop Loss: 26.75
Target(s): To Be Determined
Current Option Gain/Loss: + 9.3%
Entry on November 12 at $26.25
Listed on November 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 201 thousand
New Positions: see below

12/13/14: CYNO held up well on Friday. The S&P 500 dropped -1.6% but CYNO closed virtually unchanged on the session. I am still concerned about the big reversal lower on Wednesday's session.

Tonight we will raise the stop loss to $26.75. More conservative traders may want to move their stop closer to $28.00 instead. I am not suggesting new positions at this time.

Earlier Comments: November 11, 2014:
CYNO is in the healthcare sector. The company is part of the medical equipment industry. According to a company press release, "Cynosure designs, manufactures and markets medical devices for aesthetic procedures and precision surgical applications worldwide that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus and ablate sweat glands."

Their flagship product is the PicoSure laser workstation, designed to remove tattoos. This laser technology produces ultra-short bursts of energy to the skin in trillionths of a second. The company recently gained FDA approval to use their PicoSure system to treat acne scars and wrinkles.

CYNO's earnings results have been mixed. Their Q1 report back in May missed estimates by four cents even though revenues were up +52% from a year ago. The stock sold off on this report. They followed that with a Q2 report in July that beat estimates as revenues soared +45% from a year ago. Growth slowed a bit in their latest report in October.

Analysts were expecting 25 cents a share on revenues of $70 million. CYNO met expectations on the bottom line while the top line grew +18% to $71.5 million.

CYNO's Chairman and CEO Michael Davin commented on the quarter saying, "Cynosure delivered record third-quarter revenue of $71.5 million, up 18 percent year-over-year as revenue in each of our direct sales channels improved from the same period in 2013. North American laser revenue increased 17 percent, revenue from our Asia Pacific subsidiaries rose 46 percent, while our European direct sales channel was up 7 percent. Product and technology innovation, expanded indications and new international marketing clearances continue to drive favorable results for the Company."

Discussing his company's outlook Davin said, "We are on schedule to launch our next flagship platform in 2015 for non-invasive fat removal, and we believe this large addressable market represents a significant growth opportunity for the Company."

Technically shares have broken out from a six-month consolidation in the $19-24 range. The rally following its October earnings report lifted CYNO above key resistance at $24.00 and its 200-dma. Shares have already retested this level as support and now the stock is breaking out to multi-month highs. The point & figure chart is bullish with a $31.50 target.

Tonight I am suggesting small bullish positions if CYNO can trade at $26.25. We want to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long CYNO stock @ $26.25

12/13/14 new stop @ 26.75
11/19/14 new stop @ 25.90
11/18/14 caution: potential bearish reversal today
11/15/14 new stop @ $25.35
11/12/14 triggered @ 26.25


Isis Pharmaceuticals - ISIS - close: 62.32 change: +0.45

Stop Loss: 57.25
Target(s): To Be Determined
Current Option Gain/Loss: +17.0%
Entry on November 25 at $53.25
Listed on November 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: see below

12/13/14: ISIS was a great performer last week. Shares outperformed its peers in the biotech industry and the major U.S. indices. The stock tagged the $65.00 area twice and traded at all-time highs.

On a short-term basis ISIS is overbought. It's up five weeks in a row and up eight out of the last nine weeks. I am suggesting more conservative traders consider taking some money off the table now. The newsletter will raise the stop loss to $57.25 (as an alternative you could bump your stop closer to $60 instead).

I am not suggesting new positions.

Earlier Comments: November 24, 2014:
ISIS is part of the healthcare sector. They operate in the biotech space. Biotech stocks have been crushing the market this year. The BTK biotech index is up +43.4% year to date. ISIS is only up +2.2% but it has come a long way from its May 2014 lows near $22.25. The last seven months have produced a +135% rally.

According to a company press release, "Isis is exploiting its leadership position in antisense technology to discover and develop novel drugs for its product pipeline and for its partners. Isis' broad pipeline consists of 34 drugs to treat a wide variety of diseases with an emphasis on cardiovascular, metabolic, severe and rare diseases, including neurological disorders, and cancer.

Isis' partner, Genzyme, is commercializing Isis' lead product, KYNAMRO, in the United States and other countries for the treatment of patients with homozygous FH. Isis has numerous drugs in Phase 3 development in severe and rare and cardiovascular diseases. These include a novel triglyceride lowering drug, ISIS-APOCIIIRx, for patients with familial chylomicronemia syndrome; ISIS-TTRRx, which Isis is developing with GSK to treat patients with the polyneuropathy form of TTR amyloidosis; and, ISIS-SMNRx, which Isis is developing with Biogen Idec to treat infants and children with spinal muscular atrophy, a severe and rare neuromuscular disease. Isis' patents provide strong and extensive protection for its drugs and technology."

Part of the challenge with biotech stocks is their volatility. Biotechs can be extremely sensitive to any headline. The right or wrong headline about an FDA approval or clinical trial results can send a biotech stock soaring or crashing in a heartbeat.

Another challenge is earnings. Many of the smaller biotech names suffer from very lumpy earnings based on milestone payments by partners. For example, last quarter ISIS saw their quarterly revenues soar almost +90% yet they still missed Wall Street revenue estimate.

Most bulls on this stock will point to the company's pipeline. ISIS has a very broad pipeline so it's not just a one-trick pony. You can view their current pipeline here on this webpage: ISIS pipeline.

The stock has been stair-stepping higher with investors buying the dips as prior resistance acts as new support. Last week the stock garnered a new price target upgrade to $62.00. ISIS will also present at a couple of analyst conferences in early December that might offer more catalysts to keep the rally going. The big bounce from its 2014 lows has produced a huge buy signal on the Point & Figure chart that is projecting a long-term target of $73.00.

More aggressive investors may want to open bullish positions now. I am suggesting we wait for a rally past the November high ($53.12) and use a trigger to open positions at $53.25.

- Suggested Positions -

Long ISIS stock @ $53.25

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

Long 2015 Jan $55 call (ISIS150117C55) entry $3.15

12/13/14 new stop @ 57.25
12/09/14 new stop @ 54.85
12/08/14 ISIS soars +8% on clinical trial data and bullish analyst price upgrades
11/25/14 triggered @ 53.25
Option Format: symbol-year-month-day-call-strike


Sealed Air Corp. - SEE - close: 40.92 change: -1.01

Stop Loss: 39.95
Target(s): To Be Determined
Current Option Gain/Loss: -0.3%
Entry on December 09 at $41.05
Listed on December 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

12/13/14: SEE was showing relative strength most of the week. Unfortunately shares were unable to avoid some profit taking on Friday with a -2.4% pullback. The 10-dma near $40.50 could be support. Below that the $40.00 mark should be round-number support. I would wait for SEE to test one of these levels and bounce before considering new positions.

Earlier Comments: December 8, 2014:
SEE is part of the consumer goods sector. They're in the packaging and containers industry. The company describes itself as "Sealed Air is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, Sealed Air offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, Sealed Air generated revenue of $8.1 billion in 2011 and has approximately 26,300 employees who serve customers in 175 countries."

The U.S. economy is improving and that should mean a strong tailwind for SEE. The company has seen earnings growth improve. The last two quarters in a row SEE has beaten Wall Street's estimates on both the top and bottom. If that wasn't good enough they also raised their guidance two quarters in a row.

SEE's most recent earnings report was October 29th. Analysts were expecting a profit of $0.45 a share on revenues of $1.94 billion. SEE said earnings were up +24% from a year ago to $0.52 a share. Revenues rose +3.3% to $1.98 billion.

Jerome A. Peribere, President and Chief Executive Officer of SEE commented on their quarterly performance. He said, "Our financial and operational performance in the third quarter exceeded our expectations across all key metrics. Net sales increased 3.6% on a constant dollar basis, Adjusted EBITDA margin surpassed 15%, and Adjusted EPS increased 24%. Adjusted gross profit margin increased 120 basis points as a result of our continued disciplines and value-added selling approach across all regions and divisions. Despite macro-economic uncertainties, currency headwinds and volume declines in the North American protein market, we are increasing our 2014 outlook for Adjusted EBITDA and Adjusted EPS and expect to generate approximately $540 million in free cash flow."

SEE's new 2014 guidance is $1.70-1.75 a share versus Wall Street's $1.65-1.70 estimate. The stock has been strong following this report. Instead of correcting lower in mid November SEE merely consolidated sideways. Now it's rested and ready to run. Shares are up five days in a row and ignored the market-wide weakness today.

Today's intraday high was $40.87. I am suggesting a trigger at $41.05 to open bullish positions. We're not setting a target tonight but I will note the point & figure chart is forecasting a long-term target of $61.00.

- Suggested Positions -

Long SEE stock @ $41.05

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

Long Jan $40 CALL (SEE150117C40) entry $1.90

12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Cabot Corp. - CBT - close: $39.64 change: -0.51

Stop Loss: 42.05
Target(s): To Be Determined
Current Option Gain/Loss: +0.3%
Entry on December 12 at $39.75
Listed on December 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 414 thousand
New Positions: see below

12/13/14: Our new trade on CBT has been triggered. The stock broke down under support near $40.00 as expected and hit our suggested entry point at $39.75. I would still consider new bearish positions now at current levels.

Earlier Comments: December 11, 2014:
CBT got its start over 130 years ago. Today they are a chemical company with a wide range of products and sales of more than $3.6 billion annually. Company literature describes Cabot as "a global specialty chemicals and performance materials company, headquartered in Boston, Massachusetts. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants and cesium formate drilling fluids and has market-leading positions in fumed silica, aerogel, and elastomer composites."

It is worth noting that CBT does have exposure to the oil and gas drilling industry. CBT makes a number of products involved in the process of drilling and treating oil and gas. Given the weakness in the oil and gas industry it could be accelerating CBT's decline.

Their earnings results have not been very inspiring. Their most recent report was October 28th. CBT managed to beat the bottom line but revenues came in below estimates. Management warned the company is facing "uncertain global macroeconomic conditions." CBT pointed to slowing growth in China, Europe, and South America as potential hazards.

Technically the stock looks like a bearish momentum candidate with a steady stream of lower lows and lower highs. The last half of October and the first half of November formed a pennant consolidation pattern. CBT's breakdown from the consolidation also broke through what should have been significant support in the $41.50-42.00 zone. Now shares of CBT are poised to breakthrough round-number support at the $40.00 level. The stock has also broken down below some very long-term trend lines dating back to 2009 (not shown on the chart below).

Tonight we are suggesting a trigger to launch bearish positions at $39.75. The option spreads are too wide to trade so we'll have to trade the stock.

- Suggested Positions -

Short CBT @ $39.75

12/12/14 triggered @ $39.75


Voxeljet AG - VJET - close: 8.27 change: +0.35

Stop Loss: 8.65
Target(s): To Be Determined
Current Gain/Loss: +16.5%
Entry on December 04 at $ 9.90
Listed on December 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 372 thousand
New Positions: see below

12/13/14: I cautioned readers on Thursday that VJET was oversold and could bounce. The stock ignored the market's decline on Friday and rebounded +4.4%.

More conservative investors may want to either take some money off the table and/or lower their stop loss again.

I am not suggesting new positions at the moment.

Earlier Comments: December 2, 2014:
VJET is in the technology sector. The company is part of the 3D printer industry. A company press release describes VJET as "a leading provider of high-speed, large-format 3D printers and on-demand parts services to industrial and commercial customers. The Company's 3D printers employ a powder binding, additive manufacturing technology to produce parts using various material sets, which consist of particulate materials and proprietary chemical binding agents. The Company provides its 3D printers and on-demand parts services to industrial and commercial customers serving the automotive, aerospace, film and entertainment, art and architecture, engineering and consumer product end markets."

Unfortunately this industry has been struggling. Q3 earnings results were disappointing almost across the board with 3D printing companies either posting earnings misses, lowering guidance, or both. VJET happens to fall in the both category.

VJET reported its Q3 results on November 13th. Analysts were expecting a loss of €0.03 for the quarter. The actual results were significantly worse with VJET reporting a loss of €0.41. That compares to a profit of €0.11 in Q3 2013. Management lowered their guidance following the Q3 earnings report.

The industry is facing a new competition in printer giant Hewlett-Packard (HPQ). Everyone knew that HPQ would eventually jump into the 3D printer market and HPQ has finally announced they will next year. HPQ recently gave a presentation saying their 3D printer technology will use "multi-jet fusion" which will generate speeds 10 times faster than current 3D printers.

Shares of VJET have been underperforming the market with a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $6.00 target.

Today VJET is setting at all-time lows and poised to break what should be round-number, psychological support at the $10.00 mark. Tonight we are suggesting a trigger to open bearish positions at $9.90.

Please note I do consider this a more aggressive, higher-risk trade. There is already a lot of short interest in this name. The most recent data listed short interest at 22% of the very small 12.4 million share float. That poses the risk of a short squeeze should VJET ever bounce. You may want to use put options to limit your risk to the cost of the option.

*higher-risk, more aggressive trade* - Suggested Positions -

Short VJET stock @ $9.90

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

Long 2015 Jan $10 PUT (VJET150117P10) entry $1.05

12/11/14 new stop @ 8.65
12/08/14 new stop @ 9.65
12/04/14 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 24.51 change: -1.58

Stop Loss: 27.30
Target(s): To Be Determined
Current Option Gain/Loss: + 5.4%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

12/13/14: Friday proved to be a pretty rough day for ZU. Shares gapped open lower and then plunged to a -6.0% decline. These are new all-time lows for the stock. The breakdown under potential round-number support at $25.00 is definitely bearish. Traders may want to start lowering their stop loss.

I am not suggesting new positions at current levels.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike



MDC Partners Inc. - MDCA - close: 21.00 change: -1.06

Stop Loss: 20.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 227 thousand
New Positions: see below

12/13/14: The stock market's drop this past week has hit shares of MDCA pretty hard. Our trade has not opened yet and tonight we are removing MDCA as a candidate.

Trade did not open.

12/13/14 removed from the newsletter. Suggested entry was $23.55


Micron Technology - MU - close: 34.00 change: -1.19

Stop Loss: 34.45
Target(s): To Be Determined
Current Option Gain/Loss: - 1.9%
Entry on November 24 at $35.10
Listed on November 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 24.8 million
New Positions: see below

12/13/14: The stock market's sell-off on Friday hit many of the technology names. The SOX semiconductor index fell -1.7%. MU underperformed its peers with a -3.3% decline and hit our stop at $34.45 in the process.

Our trade is closed but I would keep MU on your watch list. The company reports earnings on January 6th. I'd look at it again after it reports.

- Suggested Positions -

Long MU stock @ $35.10 exit $34.45 (-1.9%)

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

2015 Jan $35 call (MU150117C35) entry $2.01 exit $1.55 (-22.9%)

12/12/14 stopped out
12/11/14 new stop @ 34.45
11/24/14 triggered @ $35.10
Option Format: symbol-year-month-day-call-strike