Option Investor

Daily Newsletter, Tuesday, 12/23/2014

Table of Contents

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

Market Wrap

Santa Rewards Investors

by Jim Brown

Click here to email Jim Brown

The Dow and the S&P both closed at new highs with the S&P marking its 51st high of the year and the Dow closing over 18,000. Santa definitely came early for investors.

Market Statistics

Of course I am not referring to jolly old Saint Nick. While he may get the credit for a lot of things this week the Santa blessing the markets is still the Federal Reserve. They have been so dovish in their recent statements that we actually saw a rare occurrence today. The GDP was very high and the market did not go down. Good news was really good news today and that is unusual.

The Fed has lulled investors to sleep with their comments about being patient and methodical once they do begin to raise rates. Some analysts are only expecting 2-3 rate hikes in 2015 to end the year at a miniscule .50% to .75% while a lot still believe despite the Fed's cautions that they will not hike until 2016. Investors are on cruise control and the Dow did not even hesitate on the GDP number and gapped over 18,000 at the open.

This cartoon from Hedgeye says it all.

The final revision of U.S. GDP for Q3 rose from 3.9% to 4.97% and the first time the U.S. has had back to back 4% growth quarters since 2003. This was the fastest single quarter of growth since Q3-2003. There is some discussion about the validity of the number, which normally appears after an unexpected print.

Corporate profits rose +3.06%, down from +8.4% in Q2. Consumption rose from 1.75% to 2.21% while inflation declined from 2.15% to 1.38% thanks to falling energy prices. Higher consumer spending revisions were due to more spent on healthcare and recreational services. I though healthcare costs were supposed to go down with Obamacare?

Final sales rose to +5.0%, up from 3.2% in Q2 and the fastest growth since early 2006. The PCE inflation component fell from +2.3% in Q2 to 1.2% in Q3. This is the Fed's primary inflation indicator.

For Q4 the estimates are for 2.6% to 3.0% growth. The drop in oil prices will improve consumer spending but exports will be hurt by the sharply higher dollar. If growth did come in at the high end of estimates at 3.0% for Q4 that would produce 2.62% growth for the entire year. Q1 was -2.1%, Q2 4.59% and Q3 4.93%.

The Durable Goods report for November was a drag on Q4 GDP expectations. New orders fell -0.7% compared to October +0.3% and expectations for +1.3%. Falling orders for transportation goods (-1.2%) were the reason for the decline. Durable goods orders fell off a cliff in August with a -18.3% decline, followed by -0.7% in September, +0.3% in October and November's -0.7%. The trend is not our friend.

Orders for computers and electronics declined -1.8%. Orders for defense capital goods fell -8.1%. The weakness in orders will be a drag on Q4 GDP.

The Richmond Fed Manufacturing Survey posted a small gain from 4.0 to 7.0 in the headline number. You may remember this is down from the +20.0 in October. Manufacturing activity slowed dramatically in the Richmond region.

The new orders component rose slightly from 1.0 to 4.0 also down from 22 in October. Backorders declined further from -2 to -5, down from 15 in August. The good news came from the capital expenditure plans component, which rose from 17 to 28. That suggests manufacturers are confident enough in the business conditions to begin committing new money for expansion projects. The capacity utilization component rose from 21 to 31 so there is activity in progress.

The corresponding Services Survey was VERY negative. The headline number declined from 25 to 3 after four consecutive months over 20. This is a very bad reading and when coupled with the manufacturing survey it is telegraphing significant weakness in the Richmond region.

The employment component fell from 24 to 16 and the expected demand component fell from 28 to 13. The retail demand component crashed from 39 to -9 which is surprising given the decline in gasoline prices. Retail inventories declined from -3 to -34, which is very negative for the outlook.

New Home sales for November came in at 438,000 annualized compared to estimates for a rise from October's 445,000 to 472,000. This was another shocker of an economic report. Three of the four regions declined. Northeast -12%, Midwest -6.3%, South -6.4% while the West rose +14.8% after declining in the prior two months. The months of supply rose to 5.8 while the median home price fell -2.4% from $292,500 to $285,500. This was somewhat expected after mortgage purchase applications fell to a multi-decade low last week. Mortgage credit is still a significant hurdle for home buyers.

The final Consumer Sentiment revision for December declined only slightly from 93.8 to 93.6. The analyst consensus was for a drop to 89.5 so they were way off. The present conditions component rose from 102.7 to 104.8 and the expectations component rose from 79.9 to 86.4.

You would think with sentiment at a 7 year high that home sales would be doing better. However, lower gasoline prices are the main component here and saving $10 on a tank of gas is a long way from buying a $285,000 home.

The rest of the week is lacking in the report department. The major reports were crammed into the last two days so everyone could go home for the holidays.

The market closes early on Wednesday and will be closed on Thursday. Friday will be a full day but volume will be extremely weak. On years like this where the holidays fall on Thursday they should close Friday. Overseas markets tend to take a lot more liberal view of holiday closings.

Gasoline prices declined for the 89th consecutive day to $2.38 and a five-year low. That is the longest streak on record according to AAA. Prices are now down -36% from the highs. I saw the filing station in my area advertising $2.01 this afternoon. I almost wanted to honk my horn and wave as I drove by.

Our lucky streak may be about to end because gasoline futures appear to have found a bottom at $1.53 per gallon. Likewise oil prices are showing a pattern of higher lows with a close tonight at $57.29. That $60 level is going to be a critical test. Going back to a 6 handle on crude could signal the worst is over and entire investors back into the market.

Sony (SNE) shares were fractionally higher after they said they were releasing the movie to anyone that wanted to show it. Several independent chains have now said they will show the movie starting on Christmas Day but the 5 big chains have not yet signed on to the release. Sony is also reportedly working on a Video on Demand showing, also slated to be available on Thursday but the company has not officially announced it.

North Korea lost its Internet connection to the world for 9 hours on Monday but the U.S. denied it was responsible. Internet security specialists said the fact it only lasted 9 hours was pretty good proof it was not a state sponsored attack. If the U.S. wanted them offline they would still be offline.

Sony is opening itself up to further disclosures of data stolen in the cyber attack. The group claiming responsibility for the attack said no more data would be released unless Sony released the movie. Get ready for the next upload of embarrassing emails.

Countries around the world are beefing up security ahead of the holidays. France is deploying extra troops to towns and cities after a series of three attacks over the last week. Hundreds of troops have been seen deploying all around the capital with soldiers at popular landmarks and tourist attractions. French Prime Minister Manuel Walls said "We have never experienced such a great danger from terrorism."

Germany is on the highest terror alert in 40 years. "The terror threat in Germany hasn't been so great since the time of the Red Army Faction and Baader-Meinhof gang at the end of the 1970s" according to a high ranking security official. More than 500 people have left Germany to fight for ISIS. German authorities said there could be more than 7,000 Muslim extremists in the country by the end of December, up from 6,300 just a month ago. More than 1,000 are of serious concern, 230 are being monitored and 130 are under 24 hour surveillance.

U.S. cities have also increased patrols with New York breaking out in full riot gear after the assassination of two officers over the weekend.

The U.S. government has issued a flash warning for all citizens planning to be out of the country over the next week saying an increase in chatter and the potential for attacks on public places has prompted them to issue the warning.

I always worry for the Times Square New Years Eve party but so far it has not been a terrorist target. If terrorists really wanted to make a big splash that would be the venue to attack. However, they would have to get through the cordon of 35,000 New York police surrounding the event.

Be safe, have a merry Christmas at home and watch your football games on TV.

Google shares (GOOGL) rallied this week after they announced their new self-drive car would hit the streets in early 2015. The car has no steering wheel, brake or gas pedals. The first 100 prototypes only have two buttons, stop and go. I think they need one more, a "let me out now!" button. The company said it will fully test the 100 cars in all driving conditions before moving to actual production.

Google better start deciding how it is going to defend a $1 billion lawsuit over YouTube music piracy. A group called "Global Music Rights" is demanding YouTube remove thousands of songs and videos because it does not have the rights. More than 20,000 tracks will be listed in the suit. The group represents heavyweights like Pharrell Williams, the Eagles, John Lennon, Chris Cornell, Smokey Robinson and dozens of others. Google is refusing to remove the music saying it does have the rights. A $1 billion suit should get Google's attention.

The Biotech Index ($BTK) lost more than -4% as the upset from Monday's Express Scripts announcement filtered through the sector. Express Scripts negotiated a deal with AbbVie (ABBV) for a cheaper price on their Hep-C drugs and to only sell that drug. This means market share for the leader in the group Gilead Sciences could decline in 2015 from 80% to 70%. The reason this is impacting the entire sector is because of the precedent. If the pharmacy benefit managers (PBM) like Express Scripts can pick what drugs it wants to carry based on price then companies spending billions to develop drugs will be at the mercy of those PBMs when it comes time to market them. The ABBV drug has several things against it that Gilead's Harvoni does not have but ESRX went with ABBV because of price. That should worry us as patients because we want to know that we are getting the best drug for our illness not the one the PBMs can buy the cheapest.


Today was a strange market. The Dow surged ahead thanks to gains in Exxon, Chevron, Boeing, Caterpillar and Goldman Sachs while the drug stocks JNJ, PFE and MRK all finished with losses. The Dow gapped open over 18,000 and remained there all day.

The S&P gapped up to 2,081 at the open and edged as high as 2,086 but drifted back to close at 2,082 and a gain of only +3 points. There was no excitement on the S&P but advancers did outpace decliners by about 3:1.

The big drag on the market was the biotechs and that kept the Nasdaq in negative territory all day and it finished on its lows. The opening spike did reach to 4,798 but within 15 minutes it was back in negative territory.

This biotech problem could last several days because of the future implications. That could keep the Nasdaq from moving higher and act as an anchor on the broader market.

The S&P did close over prior resistance and close at a new high. While a 3 point gain is not much I would be happy with that every day for the rest of the year. In 2013 the high for the year was on December 31st with a close at 1,848. If we could tack on a few more points every day we have the potential for closing near 2,100 by the end of the year. Support is well back at 2,070 so any decline to that level could take the S&P out of contention too end the year at its high.

The Dow also closed at a new high and above uptrend resistance. If oil stays positive the Dow could extend its gains and begin a new leg higher. Conversely if oil rolls over we could see the Dow dragged lower by Exxon and Chevron. However, I think the bulls are all in for the holidays and we should creep higher on Wednesday.

The 4,800 level on the Nasdaq is going to be a challenge. Each time the index has pulled close it was immediately sold. This appears to be where the bears have decided to do battle. To break over this level it will take all sectors participating and some decent volume. Unfortunately volume the last two days has been 5.65 billion shares and not really enough buyers to push the index higher.

Advancers totaled 1,322 and decliners 1,302 so the market was actually dead even despite the -16 point decline. There were 178 new highs and 58 new lows.

Watch that 4,800 level as critical resistance the rest of the year.

The little engine that thought it could is trying its best. The Russell 2000 managed to post a gain but it was only fractional. The real resistance is 1,208 and the high today was 1,207. We need the small caps to break over this five month high to incite a buying riot. Right now traders are watching that 1,208 level along with the Nasdaq 4,800 and not seeing any real reason to put extra cash to work. There is a worry that the market will simply pass time under these levels until January 1st and then correct. That is a valid worry.

I believe bullish sentiment will win out over the next couple days but I don't expect any giant gains. However, large funds have been known to launch buy programs on days with low volume in an attempt to cause a giant short squeeze. Never say never and don't short a dull market. The next couple days could be dull since almost everyone will be doing something else other than watching their charts.

Every year just before Christmas Art Cashin pens a holiday poem. I received it today and he granted me permission to print it in the newsletter. Good job Arthur!

'Tis two days before Christmas
and at each brokerage house
The only thing stirring
was the click of a mouse

Down on the Exchange
the tape inches along
Brokers bargained and traded
as they hummed an old song

The Fed says they're "patient"
but some folks still fear
That rates they'll start hiking
too early next year

Frisco took the series
and Seattle the Bowl
But Tiger still struggles
to get the ball in the hole

Ellen D. took a group selfie
at the Oscar awards
The darn thing got retweeted
till it pulled down some boards

Putin scooped up Crimea
and some parts of Ukraine
But an oil plunge and sanctions
are causing him pain

In Europe a song contest
was won by a nun
And the song that she sang was -
Girls just want to have fun

In Portland a kid offered
a hug to anyone near
A cop took advantage
for the pic of the year

But with Cosby and Kim K.
there was little to cheer
Yet it's Christmastime, Alice
And Santa is near

So stop looking backwards
have a cup of good cheer
And kiss you a loved one
raise your hopes for next year

And amidst all the trading
Christmas themes we will heed
And share our good fortune
with families in need

And tomorrow they'll pause
as we wait on the bell
To sing a tradition
a song for old "Nell"

Don't let this year's problems
impede Christmas Cheer
Resolve to be happy
throughout the New Year

And resist ye Grinch feelings
let joy never stop
Put the bad at the bottom
keep the good on the top

So count up your blessings
along with your worth
You're still living here
in the best place on earth

And think ye of wonders
that light children's eyes
And hope Santa will bring you
that Christmas surprise

So play ye a carol
by Mario Lanza
Unless you are waiting
to celebrate Kwanzaa

Hanukkah's ending
And Ramadan's long gone
Different folks, different holidays
yet each spirit lives on

Whatever your feast is
we hope you all still
Find yourself just surrounded
by folks of goodwill

Wednesday, as the bell rings
hark to your heart's call
And as Santa would shout
Merry Christmas to All!


Annual End of Year Renewal Special

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

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Natural & Organic Foods

by James Brown

Click here to email James Brown


Sprouts Farmers Market - SFM - close: 32.68 change: +0.27

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

Trigger @ $33.05

- Suggested Positions -

Buy SFM stock @ (trigger)

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

Buy the MAR $35 CALL (SFM150320C35) current ask $1.05

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Big Caps Lead The Market Higher

by James Brown

Click here to email James Brown

Editor's Note:
The big cap market indices continued to lead the market higher but we did see a few pockets of profit taking today.

INSY and GES both hit our stop losses today.

Current Portfolio:

BULLISH Play Updates

Barracuda Networks - CUDA - close: 37.67 change: -0.34

Stop Loss: 36.35
Target(s): To Be Determined
Current Option Gain/Loss: + 5.7%
Entry on November 18 at $35.65
Listed on November 12, 2014
Time Frame: Exit PRIOR to earnings on January 8th
Average Daily Volume = 247 thousand
New Positions: see below

12/23/14: CUDA gave back about half of yesterday's gains. The 10-dma has been support so nimble traders could look for an entry there. However, we plan to exit prior to earnings on January 8th.

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

12/22/14 new stop @ 36.35
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

Sealed Air Corp. - SEE - close: 42.98 change: +0.43

Stop Loss: 40.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.7%
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

12/23/14: SEE continued to march higher. The stock is on pace for its sixth weekly gain in a row.

After the closing bell the company did issue a statement that the Board of Directors had approved a plan to restructure the company, including a "reduction in headcount and the consolidation and relocation of certain facilities and offices." The cost of this new plan could be In the $275 to $285 million range over the next two years. I don't see any after hours movement in the stock on this announcement but it two days before Christmas and most traders are away on holiday.

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

12/22/14 new stop @ 40.85
12/11/14 new stop @ 39.95
12/09/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike

Market Vectors Semiconductor ETF - SMH - close: 55.25 change: -0.12

Stop Loss: 52.85
Target(s): To Be Determined
Current Option Gain/Loss: - 0.9%
Entry on December 23 at $55.75
Listed on December 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.9 million
New Positions: see below

12/23/14: Our new trade on the SMH is open. Shares of this ETF traded just high enough to hit our entry trigger at $55.75 and then reverse. That doesn't inspire a lot of confidence. Readers may want to wait for a new relative high (above $55.76) before considering new bullish positions.

Earlier Comments: December 22, 2014:
The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index.

The top ten holdings in the ETF are Intel (INTC), Taiwan Semiconductor (TSM), Texas Instruments (TXN), Micron Technology (MU), ASML Holding (ASML), Applied Materials (AMAT), Broadcom Corp. (BRCM), NXP Semiconductor (NXPI), ARM Holdings (ARMH), and Analog Devices, Inc. (ADI).

The semiconductor industry has been outperforming the market most of the year. The NASDAQ composite is up +14% in 2014. The NASDAQ 100 index is up +19%. Yet the SMH is soaring with a +29.8% gain this year. Now after a week and a half correction the up trend looks ready to resume.

Traders bought the dip today near short-term technical support at the 10-dma. The SMH outperformed again with a +1.65% gain on Monday versus the NASDAQ's +0.33% gain. Tonight we are suggesting a trigger to open bullish positions at $55.75.

- Suggested Positions -

Long SMH stock (ETF) @ $55.75

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

Long MAR $57 CALL (SMH150320C57) entry $1.60

12/23/14 triggered @ 55.75
Option Format: symbol-year-month-day-call-strike

Sierra Wireless Inc. - SWIR - close: 47.16 change: +1.76

Stop Loss: 41.35
Target(s): To Be Determined
Current Option Gain/Loss: +10.1%
Entry on December 22 at $42.85
Listed on December 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 861 thousand
New Positions: see below

12/23/14: Shares of SWIR continued to soar on Tuesday. Analyst firm Canaccord Genuity was bullish on SWIR's new acquisition. They reiterated their "buy" rating and raised their price target on SWIR from $36 to $53 this morning. Shares of SWIR gapped open on this news and spiked to $48.91 before paring its gains (to +3.8%).

I am not suggesting new positions at this time.

Earlier Comments: December 20, 2014:
The Internet of Things (IoT) is going to be huge. Depending on who is making the forecast the size of just how huge it can become is staggering. Last year (2013) there were an estimated 300 million embedded connected devices in the IoT. IDC is estimating that could reach 15 billion connected devices by 2015. Cisco Systems (CSCO) is forecasting 25 billion devices connected to the Internet of Things by 2015 and 50 billion by 2020. Intel is forecasting up to 200 billion connected devices by 2020.

The backbone of the IoT is M2M communication. That's machine-to-machine communication. SWIR is the market leader with 34% of the market for cellular M2M embedded module market. According to the company marketing material, " Sierra Wireless is the global leader in machine-to-machine (M2M) devices and cloud services, delivering intelligent wireless solutions that simplify the connected world. We offer the industry's most comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, seamlessly integrated with our secure M2M cloud services. Customers worldwide, including OEMs, enterprises, and mobile network operators, trust our innovative solutions to get their connected products and services to market faster. Sierra Wireless has more than 900 employees globally and has R&D centers in North America, Europe and Asia." They make products for a wide array of industries including: automotive, transportation, industrial and infrastructure, security, field service, healthcare, consumer, energy, sales and payments, and networking.

Earnings have been improving. Back in July they reported their Q2 results that beat Wall Street's estimates on both the top and bottom line and management guided higher. SWIR announced their Q3 results on November 5th. Even after guiding higher the prior quarter they still beat estimates. Analysts were expecting a profit of $0.13 per share on revenues of $138.7 million. SWIR delivered $0.24 with revenues up +27.6% from a year ago to $143.3 million. That's a record quarter for revenue and up +6% from the prior quarter. Organic revenue growth was up +18.8%. Looking at the details of the quarter SWIR said their non-GAAP earnings were up +249% from a year ago.

SWIR raised their guidance again for the fourth quarter of 2014. They now expect EPS in the $0.25-0.28 range with revenues in the $145-148 million area. That's about +23% growth from a year ago. Analysts were only forecasting $0.17 per share on revenues of $142 million.

With this big surge in earnings and revenue growth it's not a surprise to see the stock outperforming. SWIR is up +74.5% in 2014 versus the NASDAQ's +14% gain. The point & figure chart for SWIR is forecasting a target near $53.

With a market cap around $1 billion I wouldn't be surprised if someone acquires SWIR, but that's pure speculation on my part. They have about $200 million in cash and no debt.

This past week saw shares of SWIR rally past resistance near $42.00 and close at multi-year highs. Tonight we are suggesting a trigger to open bullish positions at $42.85.

- Suggested Positions -

Long SWIR stock @ $42.85

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

Long MAR $45 CALL (SWIR150320C45) entry $3.60

12/22/14 new stop @ 41.35
12/22/14 triggered on gap higher at $42.85, trigger was $42.85
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Voxeljet AG - VJET - close: 7.44 change: -0.01

Stop Loss: 8.15
Target(s): To Be Determined
Current Gain/Loss: +24.8%
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

12/23/14: VJET continues to drift sideways. The 10-dma has slipped to $7.67. More conservative traders may want to adjust their stop loss closer to this moving average.

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

12/18/14 new stop @ 8.15
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

58.com Inc. - WUBA - close: 40.69 change: -1.34

Stop Loss: 41.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: Yes, see below

12/23/14: It looks like Friday's bounce in WUBA is fading. Shares underperformed the market with a -3.1% decline. We are still on the sidelines. Our suggested entry point for bearish positions is at $38.85.

Earlier Comments: December 18, 2014:
WUBA is part of the technology sector. They are one of several Chinese Internet stocks that see a lot of action in the market with big moves both directions. If you can catch one of WUBA's big moves it can be profitable.

The company has been compared to a Chinese version of Craiglist. They operate an online market for merchants and consumers in China. Growth has been significant. Their most recent earnings report was November 12th. WUBA reported their Q3 results with a profit of $0.09 per share when Wall Street was actually expecting a loss of 0.04 per share. Revenues in the third quarter soared +73% to $72 million. Gross margins improved +0.8% to 95.3%. WUBA management then raised their Q4 guidance.

It was a bullish earnings report and the stock soared. You can see the big move in mid November. Yet something happened a couple of weeks ago. Nearly all of the Chinese Internet stocks were crushed on December 8th. WUBA has struggled to recover. The recent bounce stalled at the 200-dma. Today's rebound attempt failed at the 50-dma. Shares have not participated with the big two-day rally in the U.S. market.

I consider this a technical trade. The company's sales growth and earnings results look bullish. Yet the stock is clearly not acting bullish. Plus, the bears do have some ammunition to build a case. If you tried to build a bearish story you could easily argue the stock is expensive with a P/E of 107. In their latest earnings report nearly all of WUBA's major expenses, including research and development, sales and marketing, and their operating expenses, all more than doubled from a year ago. While growth has been huge their growth is slowing. This year revenues are up +77% but they're expected to slow down to +54% in 2015.

WUBA has found recent support in the $38.90-39.00 area. Tonight I'm suggesting small bearish positions if WUBA can trade at $38.85. We want to limit our position size because the stock can be so volatile. You may want to use the options instead to help limit your risk. I would aim for the September and October lows in the $34.65-34.75 zone.

NOTE: I'm listing the April options only because the February or March options are not available yet. We should see new options available soon.

Trigger @ $38.85 *small positions to limit risk*

- Suggested Positions -

Short WUBA @ (trigger)

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

Buy the APR $35 PUT (WUBA150417P35)

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

Zulily, Inc. - ZU - close: 23.56 change: -1.85

Stop Loss: 26.05
Target(s): To Be Determined
Current Option Gain/Loss: + 9.0%
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

12/23/14: Comments from ITG Research that ZU's new customer activations appear to be slowing down sparked some selling pressure in this stock. Shares plunged -10% intraday and closed with a -7.28% loss.

If you missed the entry this morning 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

12/18/14 new stop @ 26.05
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


INSYS Therapeutics - INSY - close: 41.01 change: -1.67

Stop Loss: 41.15
Target(s): To Be Determined
Current Option Gain/Loss: - 6.5%
Entry on December 18 at $44.00
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 479 thousand
New Positions: see below

12/23/14: Worries about a price war among hepatitis C drugs has sparked profit taking across the entire biotech industry. Shares of INSY have fallen three days in a row. Today's session hit our stop loss at $41.15.

News that INSY received a price target upgrade to $64 today failed to stop the sell-off.

*small positions* - Suggested Positions -

Long INSY stock @ $44.00 exit $41.15 (-6.5%)

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

FEB $45 CALL (INSY150220C45) entry $4.10 exit $2.45 (-40.2%)

12/18/14 new stop @ 41.15
12/18/14 triggered on gap open at $44.00, suggested entry was $43.60
Option Format: symbol-year-month-day-call-strike



Guess' Inc. - GES - close: 20.76 change: +0.29

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: - 6.9%
Entry on December 17 at $19.70
Listed on December 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

12/23/14: GES gapped open higher this morning but I don't see any specific news behind the move. Shares rallied above the $21.00 level and hit our stop at $21.05 before rolling over again this afternoon.

- Suggested Positions -

Short GES stock @ $19.70 exit $21.05 (-6.9%)

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

MAR $20 PUT (GES150320P20) entry $1.70 exit $0.88 (-48.2%)

12/23/14 stopped out @ 21.05
12/17/14 triggered @ $19.70
Option Format: symbol-year-month-day-call-strike