Option Investor

Daily Newsletter, Monday, 12/29/2014

Table of Contents

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

Market Wrap

Riding High In 2014

by Thomas Hughes

Click here to email Thomas Hughes
The major indices make another round of new highs as 2014 rapidly approaches its end.


The year is fast approaching its end and the market is still making new highs. Most of the major indices set new highs today, closing if not intraday. Volume was light, characteristic of the holiday season, resulting in tight daily ranges.

Despite low volume those trading seemed to shrug off early news that sent some ripples through the international markets. Asian indices were mixed as traders attention was split between the missing AirAsia flight and fear of a possible Ebola case in Japan. At last report a Japanese man was being tested for Ebola after visiting Sierra Leone earlier this month. Markets in Europe were also mixed, but more focused on the Greece and the ongoing political situation and state of its bail out. The most recent news is that the vote held over the weekend did not come to a satisfactory conclusion and another vote will be held in January. The fear is that a new coalition that is not in favor of bail-out terms will come to power.

Market Statistics

Futures trading was negative in earliest part of the day. The S&P 500 was indicated to open about 4 points lower, the Dow about -30 but these levels moderated going into the open, firming to levels closer to break even. There was not really much news, aside from the international headlines, to affect the early market. There were no economic announcements and only 3 earnings reports.

The major indices were flat to slightly negative when the opening bell sounded but began to drift higher within the first five minutes. The morning high was reached just after 10:30 at which time the market began a near perfect sideways drift that lasted until early afternoon. Mid afternoon the indices dipped down to test today's opening levels before moving back higher, all except one. The Dow Jones Industrial Average dipped into negative territory, where it remained into the close, while the S&P 500, NASDAQ and Dow Tranpsortation Average all ended the day with a gain if slightly below the daily high.

Economic Calendar

The Economy

There was no economic data released today and there are only a handful due out this week. It's the end of the month, which means a big round of monthly macroeconomic data is due, but it is also the end of the year which means the week is shortened by one day. It also means that the big data such as ADP, NFP and Unemployment Rate will come out next week. This week we get a look at the Case-Shiller Index, Consumer Confidence, Mortgage Index, Jobless Claims, Chicago PMI and Pending Home Sales over the next two days and then ISM and Construction Spending on Friday.

This is the last Moody's Survey Of Business Confidence for the year, and according to Mark Zandi is ending the year at all time highs. The survey, and the four week moving average, are at the highest levels in the 12 years of the survey's run. According to the report sales, hiring and investment spending are all strong, credit availability is improving “notably” and expectations for next year are “especially strong”.

The Oil Index

Oil prices tried to stage a rebound today as renewed violence in Libya is threatening production. The current violence is reported to have destroyed two days supply and is threatening to curb production to around 300-400,000 barrels per day. This is well below the peak reached this fall near 1 million BPD but still at levels contributing to global over supply. The news initially sent WTI and Brent up by more than 1% each, but the gains did not hold long. By mid-morning both were in the red and more than 2% lower; WTI near $53.50 and Brent near $58.

The chart of the USO, oil tracking ETF, is pretty bearish. The ETF has been in a downtrend and it appears to be gaining momentum. The ETF had been consolidating in a flag/pennant pattern over the past two weeks and today broke to a new low. Stochastic is confirming with a bearish trend following crossover occurring below the lower signal line but MACD has yet to follow. Momentum is bullish in the near term but very weak and not showing signs of reversing the short term trend. If momentum shifts back in line with the trend it could carry prices significantly lower.

The Oil Index traded to the downside but is holding up rather well considering that the underlying commodity is reaching new lows. The thing to keep in mind here is that low oil is bad for producer profits, but good for downstream profits from refiners, distributors and retailers which means that the integrated oil companies may not be hurting as much as feared. The index is currently above the short term 30 day moving average and above long term support but in light of the four month downtrend and today's drop in oil prices looks better set to test support rather than continue a bounce. The indicators are bullish, but cresting a peak, while the index itself is trading just above the down trend line and set up for a drop in line with the down trend. If the index does move down potential support exists along the down trend line and just below that along the 23.6% retracement level near 1,335. A break below this level could take the index all the way down to retest long term support near 1,212.

The Gold Index

Gold lost a little over 1% today as firming dollar values pressured it lower. While rising dollar value is keeping gold prices from rising to much, the longer term outlook for interest rates is keeping it from falling too far. Even though the Fed has indicated it will be at least two meetings before they raise rates last week's reading on 3rd quarter GDP indicates that we should expect them to come sooner rather than later. Support may be found just below the current levels, near $1175, with longer term support below that near $1150. Resistance is near $1200 and the $1215-$1225.

Unfortunately the CBOE Gold Index (GOX) that I normally follow is no longer disseminating. Good thing there are other symbols with which to view the gold miners such as the GDX, Market Vectors Gold Miners ETF. This ETF is a broader gauge of the sector, includes twice the number of companies, tracks gold prices like the CBOE index, is a little less volatile and easy to trade.

The ETF traded to the downside today, but like with the CBOE Gold Index and gold itself, is exhibiting signs of a potential bottom near the full retracement of the 2008-2011 bull market in gold. Over the past two months the ETF has bounced from a potential long term support just above the full retracement level, in line with the potential FOMC/Interest rate bottom that is forming in gold. The ETF looks a little stronger than the CBOE index as it found support above the retracement level while the the Gold Index is/was bouncing from support that is below the comparable level on its chart. The indicators are in line with support at this level but have yet to confirm; stochastic is making a weak bullish cross, MACD has yet to crossover. Support is between $16.50 and $17.00 and could be tested in the near term. Resistance and upside targets are along the short term 30 day moving average and then above that near $20 and the top of the two month range.

GoldCorp is the name I like to follow within the sector. It is a senior miner, operates in North America, is not hedged and pays a dividend over 3.3% at current levels. The stock has been trending sideways for the past 12 months, at the tail end of a long term downtrend, and is now at the low end of that range. The stock is currently trading near the bottom of that range and testing support while gold prices are also testing support levels. The indicators are consistent with support at this level and mildly bullish. MACD has retreated from a bearish peak and about to cross the zero line with stochastic showing an almost strong bullish crossover. I say almost strong because both %K and %D are pointing up but %D is still below the lower signal line and MACD has not confirmed. Support is near $16.75 with upside target should it hold near $20.

In The News, Story Stocks and Earnings

Earnings season starts in just two weeks on Monday, January 12th 2015 with Alcoa. The company is expected to earn slightly less than the previous quarter, due in part to declining aluminum prices. Aluminum has fallen more than 10% in the last month and is now trading below the 6 month range. Today Alcoa traded in a tight range, just below the short term 30 day moving average. The stock has been consolidating below this level since just before Christmas week and a test of support earlier this month. The stock has been range bound near long term resistance the past 6 months, following a near 1 year up trend that lasted part of 2013 and most of 2014. The indicators are bullish in the short to near term and in line with support in the longer term, together suggesting that the stock could move up to test the December high near the top of the range. This could happen ahead of earnings but the short term moving average, near $16, needs to be broken. A failure could bring the stock back down to test support along the $14.50 level.

Manitowoc got a nice little boost from Carl Icahn today. Mr. Icahn now owns over 8% of the industrial crane and restaurant refrigerator maker. Icahn thinks, and many analysts agree with him, that the company should split its two halves to better serve shareholders. It makes sense, what do cranes and reach-in refrigerators have in common with each other and how do you manage a business like that? Regardless, the move was enough to spark a rally in shares of the company that carried it nearly 10% higher. Today's move broke above resistance and closed a gap opened earlier this year.

The Indices

The indices drifted today, mostly to the upside, but drift is what they did. Volumes were light and catalysts were not to be had but even still some of the indices were able to set new highs. Today's action was led by the Dow Jones Transportation Average which set a new closing high. The transports moved 0.19% higher in today's session and are approaching the all time intra day high set at the end of November. The index is moving higher following the trend following bounce earlier this month and supported by the indicators. Stochastic is moving higher following a bullish cross but momentum is still weak and there could be resistance just above the current level, near 9,250. The trend is up and it looks like the index is moving in line with trend, but with possible resistance so close and this a holiday week I am cautious. There could be a pull back to support, which is about 200 points lower along the short term moving average, that would present a much more attractive entry point.

The S&P 500 also made a gain today, and set a new high. The broad market set a new all time closing and intraday high in today's session, creating a small bodied white candle. Price action is without real direction, although it is drifting higher in line with the underlying trend. Today's action is most likely a spinning top, although a bullish spinning top, consistent with my expectations for the week. The indicators are bullish but momentum is very weak and stochastic is overbought near term. The trend is up and I remain bullish long term but I am not rushing into any new positions right now and stops on open trades remain tight. First target for support on a pullback is at the previous all time high near 2,075 and then below that along the short term moving average near 2,050.

Both the Dow Jones Industrial Average and the NASDAQ Composite traded as near to break even as makes no difference. Although the Comp did trade a hair to the plus side while the blue chips were a hair in the negative. The tech heavy index gained 0.0011% today, creating a very small bodied candle and setting, barely, a new closing high. The index is moving higher, in line with the underlying trend following a bounce from the long term trend line. The indicators are bullish and consistent with higher prices although momentum is weak and there is a possible divergence showing. If not for the holiday I would say that this index is in rally mode and about to move higher but until volume returns and it is officially 2015 I remain cautious. Support, on a pull back, is about 100 points lower along the short term moving average and then another 100 below that between the long term trend line and the September high near 4,600.

The Dow Jones Industrial Average brings up the rear today with a slight loss, only -15.48 points or -0.09%. The index had been leading today's gains until falling back late in the day. The blue chip index created the third of three small spinning tops today, just above the all time high set earlier this month. The indicators are bullish and in line with higher prices but there is a chance a pull back or test of support could happen. First support is the December high, just a few points below today's close, with next target about 300 points below that along the short term moving average. The past three days looks a little like it could be a bullish continuation/consolidation pattern but as with the others, the holiday and light volume environment give me reason to sit back and wait-n-see.

The indices are drifting higher in line with the trend, accompanied by bullish indicators and assisted by economic tail wind. In normal trading circumstances that is a good thing but this is the holiday's, not normal conditions. Today's move is not a bad thing, just not as good as it would be if the market were fully present. Because we have drifted higher on light volume I see a real possibility the market could move lower before moving higher, once the New Year has begun. The trend is up, I am bullish long term and looking to buy on the dips and right now I think a dip could happen. It might not happen but I'd rather err on the side of caution. Next week the rally will get another dose of big data and another chance to move on, or correct, if that is what its going to do.

Until then, remember the trend!

Thomas Hughes

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New Plays

Another 5-Year Low for Oil

by James Brown

Click here to email James Brown

Editor's Note:

The weakness in crude oil failed to stop the rally in stocks. The S&P 500 and the small cap Russell 2000 both closed at new record highs.

Volume was extremely low due to the holiday week.

We are not adding any new trades tonight.

In Play Updates and Reviews

Another High For Small Caps

by James Brown

Click here to email James Brown

Editor's Note:
The rally in the small cap Russell 2000 index continued and the index closed at another record high. Strength in the small caps is a bullish sign for the broader market.

We did see CUDA hit our stop loss today. However, SFM hit our suggested entry point to launch positions.

Current Portfolio:

BULLISH Play Updates

Freescale Semiconductor - FSL - close: 26.15 change: -0.33

Stop Loss: 24.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

12/29/14: FSL failed to see any follow through on Friday’s rally. Shares continue to trade sideways. I don’t see any changes from my prior comments.

Earlier Comments: December 27, 2014:
Headquartered in Austin, Texas, FSL has operations in more than 20 countries. According to the company, "Freescale Semiconductor (FSL) is a global leader in embedded processing solutions, providing industry-leading products that are advancing the automotive, consumer, industrial and networking markets. From microprocessors and microcontrollers to sensors, analog integrated circuits and connectivity – our technologies are the foundation for the innovations that make our world greener, safer, healthier and more connected. Some of our key applications and end-markets include automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy management, portable medical devices, consumer appliances and smart mobile devices."

FSL has beaten Wall Street's earnings estimates every quarter this year. Back in October they beat estimates by seven cents. FSL's CEO Gregg Lowe said, "Each of our five product groups has grown at double digit rates so far in 2014, and we are well positioned to continue gaining market share." Unfortunately management also lowered their Q4 revenue guidance into the $1.075 billion to $1.13 billion range. That was below Wall Street's estimate of $1.18 billion. The good news is that investors don't seem to care. Shares of FSL have been soaring from their October lows.

A couple of weeks ago Bernstein Research upgraded FSL and raised their price target from $11 to $31 a share. Forbes also ran a bullish article on FSL. According to the Forbes author FSL is extremely well positioned to take advantage of the growing use of semiconductors in automobiles. FSL is the number two player in automotive chips with 22 percent of the market. Right now every car built in the world averages about 29 semiconductor chips and six of them are from FSL. That means FSL averages about $13.75 in sales per car, globally. The Forbes article also noted that automotive semiconductor sales are expected to grow +10.8 percent over the next three years. That's 50 percent more than communication chips, which is the next fastest growing segment.

The relative strength in FSL is impressive. The stock is up significantly from its October lows. Yet after the mid-December consolidation FSL does not look quite so overbought. The point & figure chart is bullish and forecasting a long-term target near $44.00.

Today FSL is hovering just below the $26.00 level. This was resistance back in April 2014. A breakout past $26.00 could spark some serious short covering. The most recent data listed short interest at almost 20% of the 107 million share float.

Tonight we are suggesting a trigger to open bullish positions at $26.15. We will plan on exiting prior to the Q4 earnings report due out around the very end of January or early February.

Trigger @ $26.15

- Suggested Positions -

Buy FSL stock @ (trigger)

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

Buy the MAR $25 CALL (FSL150320C25)

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

Sealed Air Corp. - SEE - close: 43.02 change: -0.45

Stop Loss: 41.65
Target(s): To Be Determined
Current Option Gain/Loss: +4.8%
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

12/29/14: SEE encountered a little profit taking with a –1.0% decline. We can watch the $42.00 area for short-term support. I am not suggesting new positions at this time.

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

12/27/14 new stop @ 41.65
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

Sprouts Farmers Market - SFM - close: 32.96 change: +0.23

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: - 0.3%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

12/29/14: Our SFM is finally open. Shares managed to trade above the $33.00 level. Our suggested entry point was $33.05 and SFM hit $33.06. Unfortunately the stock failed to close above $33.00. I would wait for a new relative high (above $33.06) before initiating new positions.

Earlier Comments: December 23, 2014:
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.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike

Market Vectors Semiconductor ETF - SMH - close: 55.19 change: -0.15

Stop Loss: 52.85
Target(s): To Be Determined
Current Option Gain/Loss: - 1.0%
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

12/29/14: In my prior update I expressed concern that the rally in SMH is struggling. It is starting to look like a potential bearish double top pattern with the early peak in December and now Fridays high.

It did not help that a handful of semiconductor stocks were downgraded this morning.

I am not suggesting new positions at this time.

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: 48.38 change: +0.49

Stop Loss: 43.90
Target(s): To Be Determined
Current Option Gain/Loss: +12.9%
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

12/29/14: SWIR continues to drift higher and added another +1.0% today. I want to reiterate that the $50.00 level could be round-number resistance for SWIR. More conservative traders may want to start taking profits soon.

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

12/27/14 new stop @ 43.90
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

Zulily, Inc. - ZU - close: 22.40 change: -0.88

Stop Loss: 24.45
Target(s): To Be Determined
Current Option Gain/Loss: +13.5%
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

12/29/14: ZU continues to sink. Investors only have a couple of days left if they want to do any tax loss selling in this name. Shares underperformed with a –3.78% decline.

Tonight we are adjusting the stop loss down to $24.45. I am not suggesting new positions at this time.

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

12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
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


Barracuda Networks - CUDA - close: 36.71 change: -1.09

Stop Loss: 36.35
Target(s): To Be Determined
Current Option Gain/Loss: + 2.0%
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

12/29/14: CUDA hit some profit taking on Monday. Shares underperformed the market with a –2.88% decline. The stock hit our stop loss at $36.35. The drop today could spell trouble for CUDA as shares broke the bullish trend of higher lows.

- Suggested Positions -

Long CUDA stock @ $35.65 exit $36.35 (+2.0%)

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

2015 Jan $35 call (CUDA150117c35) entry $3.15 exit $2.75 (-12.6%)

12/29/14 stopped out.
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