Option Investor

Daily Newsletter, Thursday, 1/8/2015

Table of Contents

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

Market Wrap

Can You Say Rally

by Thomas Hughes

Click here to email Thomas Hughes
Economic data, along with FOMC outlook and a string of positive guidance carried the market higher.


Today was a good day to be in the market. Economic data, FOMC outlook support and plain old good news added forward momentum to the indices and lifted not only our own, but markets around the world. Asian and European indices both moved more than 1% higher with those in the EU gaining upwards of 3%. Helping to support the EU markets is yesterday's read on inflation for the region which is leading traders to speculate heavily on potential QE moves by the European Central Bank.

Futures trading was positive from the very start. The S&P 500, Dow Jones Industrials and NASDAQ Composite were all indicated about 1% higher with some signs of strength going into the bell. Labor data and guidance news released in the pre-market session helped early trading reach it highest levels. All ten S&P sectors were in the green once the opening bell sounded and quickly moved higher. The SPX was up about 1% in the first 10 minutes of trading and extended the gain all morning.

Market Statistics

Trading held steady through the lunch hour and was buoyed by all the news. A minimum of 5 retail stocks including American Eagle, Cato and Aeropostale raised guidance for 2015 along with several health companies and an auto-industry wide upgrade from GM. GM CEO Mary Barra came out during the morning, speaking at a conference, and upgraded US automotive sales to over 16.5 million this(2015) year. I believe her outlook is shared by execs at Ford because they announced an increase to the dividend.

After lunch the market made another high, and then another and another. No sector was left out with gains in the range of 2% or more. The gains were broad with advancers leading decliners by at least 3 to 1. By 2:30 there was still no indication of the rally letting up. Buying persisted throughout the afternoon and into the close keeping the indices at or near the intra-day high.

Economic Calendar

The Economy

Challeger Gray&Christmas released their report on planned layoffs leading off this mornings line-up. The firm reports that the number of planned lay-offs fell in December to 32,640. This is 9.2% lower than the previous month, the 2nd month of declines and the third lowest reading for this year. While slightly above December levels last year, the total for 2014 is 5% lower than 2013 and the lowest level since 1997. This is looking pretty good to me and should help to keep the labor market on track. And also help to reverse some of the gains in jobless claims we saw last month as well.

Challenger Gray&Christmas see this as very positive for the labor market and job seekers. Company CEO John A. Challenger had this to say in response to the numbers, “Layoffs aren’t simply at pre-recession levels; they are at pre-2001-recession levels. This bodes well for job seekers, who will not only find more employment opportunities in 2015, but will enjoy increased job security once they are in those new positions,” His statements jibe with other data, such as the JOLTS/Quits rate, which suggest that employees are growing more confident in the market. The next JOLTS is due next week.

It's been three weeks since I've been able to touch base on jobless claims and in that time not much happened. Claims have held steady at or near current low levels. This weeks report shows a drop of 4,000 from last week's unrevised figure. This puts claims at 294,000, below the 300K mark and firmly in line with long term trends. At this level claims are indicating low amounts of turnover in the market and are conducive to declining unemployment. On an not adjusted basis claims rose by 9.1% versus a 10.6% gain expected by seasonal factors. Michigan and New York led with increases of 11,000 and 9,000 respectively; Texas and North Carolina led with declines in claims of -7,000 and -2,400.

Continuing claims ticked higher this week by 101,000. This is above expectations for ongoing claims to remain flat or mildly rise. The previous week was revised lower by -2,000 but doesn't lessen the gain this week. Continuing claims are back over 2.4 million but remain near long term lows set in November.

Total claims for unemployment benefits fell by -135,432 making this fourth week of increased volatility in this number. Claims are down from their recent peak and near long lows but remain elevated off of those lows. This is most likely coincidental with the November increase in initial and continuing claims (total claims lag initial claims by two weeks) but bears watching. Regardless, claims are still near the long term lows and at levels consistent with the long term decline in unemployment.

Tomorrow be on the lookout for the ever important NFP payrolls and unemployment data. Payrolls are expected to be around 250K, just like the ADP, with unemployment holding steady. After last months surprisingly big NFP I would not be surprised to see a downward revision and/or a drop this month. An upward revision would just be over the top I think.

What may be more important now and into the future is earnings and workweek. We need to see hourly earnings and wage inflation on the rise as well as the work week holding steady or improving in order to maintain the momentum that is growing in the economy.

The Oil Index

Oil prices held steady today. WTI traded just below $49 while Brent hovered just below $51. This is most likely on bottom picking as there is no other sign of support for prices. The cold weather may have some impact but is most likely factored in. WTI is hanging around the 5.5 year low and now at extended levels and possibly susceptible to a snap back.

The Oil Index traded to the upside today, gaining more than 2.5%. Today's action is driven on the so-called stabilization of oil prices and the broad market rally. While a positive, today's move has only brought the index up to retest resistance along the now 4 month down trend. The index is now at resistance with bearish indicators and still looks set up to test support along the 1,212 level. However, there is a divergence in the indicators suggesting that support could be strong at this level. Not only that, if oil prices are able to snap back then the index could break back above the trend line.

The Gold Index

Gold was basically flat around $1210 today after making a mid day surge to $1215. Gold prices are now above $1200 for the third day and are being supported by economic trends. Economic data released today, along with the FOMC minutes yesterday, are leading the market to think more and more that interest rates will rise sooner and not later. This same data is causing a spike in the dollar that sent the Dollar Index to new highs but its affects on gold are being dampened by the longer term outlook. Also, reports that physical buying is on the rise is helping support prices too.

The GDX Gold Miners ETF is trying really hard to break out of its current pattern, to the upside. The ETF and sector as a whole has been exhibiting signs of potential bottoming based on the stabilization in gold prices, the long term economic outlook and expectations for inflation/rising interest rates. Over the last 2 ½ months it has been in a pattern that, along with the MACD and stochastic, indicating support at $17.50. Today's action is the third day of trading since bouncing off of that support and could now be confirming resistance. The indicators are bullish but MACD has peaked which is in line with price meeting resistance. If the index does break above resistance targets are equal to the height of the previous pattern, about $2.50. If resistance is not breached downside potential is equally $2.50 with a target at or near the long term low just below $17.50.

In The News, Story Stocks and Earnings

Biogen hit the news this morning as well, providing its own amount lift to the market. The company announced that one of its drugs has shown promising results in a 2nd stage trial for optic nuerosis. This, along with an upgrade for Boston Scientific and upwardly revised guidance from Valeant and ISIS Pharma helped lift the entire health care sector. Shares of Biogen tried to gap open but lost the gain, ending up down for the day. The stock lost about a half percent today but is trading near the top of the 12 month range. While the news for Biogen is good, drugs in 2nd stage trials are still a long way from making money for this company.

The retail sector is another to receive a number of upgrades and other positive developments. At least 5 retailers raised guidance today. The companies cited strong holiday sales as well as benefits from restructuring and brand repositioning. American Eagle, Aeropostale and Cato are among the five. Some caution is due however as many of these companies had very low hurdles to beat in the first place. The upward revisions may merely be putting expectations more firmly in reality. The XRT Retail Spyder moved higher in the pre market and made a small gap at the open. Today's action created a small doji and set a new all-time closing high, but not an all-time intra-day high. Resistance may be found at the all-time intra-day high with indicators suggesting a shift in momentum to the upside may be in progress. If so expect a test of resistance near $97.

Constellation Brands reported better than expected results driven by higher deliveries of beer. I am not surprised, I know I do my part to help. The company was able to raise full year guidance because of the increase in business and expects strong volumes and sales increases into calendar 2015. Guidance is now in the $4.25-$4.35 range, above the previous range. Shares of Constellation, which have been in a mild up trend for the past 12 months, moved higher in early trading and gapped up nearly 5% at the open. Shares traded in a wild range throughout the day but the bulls were able to keep control into the closing bell. My take; if beer is gods gift to the working man, and there are more and more working men (and women) everyday as evidenced by the trends, Constellation should do well into the foreseeable future.

Family Dollar reported earnings and revenue below expectation. The company reported adjusted earnings of $0.44 versus an expectation of $0.59. The miss is blamed on a “very challenging” fiscal quarter do in part to the companies transition from a “promotional brand to a more everyday low price brand”. In hindsight maybe this isn't surprising. Another big name company, cough JCP cough, tried to do that and failed ... and then someone got fired. Shares of the stock were little changed as they are caught between a merger agreement with Dollar Tree and a tender offer from Dollar General. Both Dollar General and Dollar Tree fell in today's session, led by DG with a drop of 1.22%.

The Indices

The markets wanted to move higher, and it did. Much higher, near 2% in most cases with no sector losing out. The gains were broad and by all accounts strong, led by the Dow Jones Transportation Average. The transports gained 2.15% today, moving up 188.85 points to finish the day right at the 30 day moving average. Today's action brings the index to the middle of the two month range with indicators that remain bearish. The long term trend is up, but the short term trend is sideways until resistance is broken. Resistance is the all time highs and top of the two month range near 9,250. Failure to break above resistance could keep the index range bound into the short term.

The NASDAQ Composite is runner up today. The tech heavy index made a gain of 1.89% and created a gap at the open. Today's action broke above the short term moving average and is approaching the long term high set over the Christmas holiday. The index is moving higher in a trend following bounce but is not yet confirmed by the indicators. Both MACD and stochastic are consistent with the trend and support in the long term but have only begun to turn bullish in the near term. Current target is the long term high, near 4,800, with support just above the long term trend line.

The Dow Jones Industrial Average was next biggest gainer in today's session. The blue chip index climbed 1.84%, over 320 points, and is fast approaching its current all time high. Today is now the 2nd day in a month of trading in which the index moved 300 points or more, up, from support at 17,500. While the transports look like they are trading sideways, the industrials have a slightly more upward tilt to price action over the past two months.

The S&P 500 is last up in today's action. The broad market gained 1.79% and erased all its losses year-to-date. Today's move extends the trend following bounce that began yesterday and confirms the long term trend. The indicators have not yet confirmed but they are shifting to the upside so not a worry as yet. The index looks like it is on the way up with the current all time as a first target for resistance. Support is along the long term trend line between 2,000 and 2,020 should the bulls go running for cover. I'm bullish in the near term, and in the long term, but with resistance just above and earnings season starting on Monday the index could continue to be volatile over the next month or so.

I have to say it looks like the bull market is alive and well. The bulls were out in force today, driving stocks higher across the board with a broad rally. Today's action is a trend following bounce with economic tailwinds that looks likely to carry the indices to retest current highs if not move higher. The only thing standing in the way right now is economic data and how it affects future outlook, along with earnings and geopolitics.

Tomorrow we get a big dose and perhaps the most important piece of monthly data at this time, Non Farm Payrolls. Provided the data remains in line with trends and does nothing to dispel the idea that 2015 will be as good or better than 2014 then the bull market should continue.

After the data the next hurdle for us to get past is earnings season. Based on today's action the expectations are good but the season could add some churn to the market. The season starts on Monday and heats up toward the end of the week but the bulk of companies are not scheduled to report for another week or two.

Until then, remember the trend!

Thomas Hughes



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New Plays

New All-Time Highs

by James Brown

Click here to email James Brown


Tree.com, Inc. - TREE - close: 49.21 change: +1.02

Stop Loss: 47.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 08, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 147 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Do not go to Tree.com if you're looking for deciduous or coniferous trees or any plants for that matter. The deceptive name is part of a new marketing campaign. Tree.com started out as LendingTree.com, which is an online exchange for mortgage loans between consumers and lenders.

According to the company website, "Tree.com, Inc. is the parent of several brands and businesses that provide information, advice, products and services for critical transactions in our customers' lives. Our family of brands includes LendingTree®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight!® and ServiceTree ?. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, home services, education, auto and other services from multiple businesses and professionals who will compete for their business."

DegreeTree.com helps consumers choose from hundreds of schools. InsuranceTree is a free to consumer service to find insurance. Done Right! is a home improvement professional directory for consumers. LendingTree Autos is designed to help consumers make smarter decisions about their vehicles. Meanwhile HealthTree sounds like a competitor to WebMD but I couldn't get the website to come up.

Earnings appear to be improving and the stock has more than doubled from its 2014 lows. In May 2014 the company raised their full year revenue guidance. They beat earnings estimates on both the top and bottom line last August. In November they beat the EPS estimate and raised their guidance again. That announcement sent the stock soaring (you can see the big rally on November 6th).

After a correction from its post-earnings rally shares of TREE have recovered. Now the stock is breaking out to new all-time highs. The P&F chart is very bullish and forecasting a long-term target above $90. The stock does have a very small float of less than six million shares. Daily volume is pretty low as well. For that reason I am labeling this a more aggressive, higher-risk trade.

Shares were showing relative strength today with a +2.1% gain and a breakout past recent resistance at $49.00. The $50.00 mark is potential round-number resistance. I am suggesting a trigger to open small bullish positions at $50.10.

Trigger @ $50.10 *small positions*

- Suggested Positions -

Buy TREE stock @ $50.10

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Continue To Rebound

by James Brown

Click here to email James Brown

Editor's Note:
The bounce in stocks picked up speed and the major averages delivered gains across the board.

Tonight we have removed MO as a candidate.

Current Portfolio:

BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 27.90 change: -0.15

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on January 05 at $28.05
Listed on January 03, 2014
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: see below

01/08/15: After a +5% gain yesterday shares of CVTI experienced a little profit taking on Thursday in spite of the market's widespread rally. Last night I suggested waiting for a rally past $28.20 as a new entry point. Today's I'd look for a move above $28.30.

Earlier Comments: January 3, 2015:
Last year the S&P 500 added +11.3%. The Dow Jones Transportation Average doubled that with a gain of +23%. Yet CVTI's performance is light years ahead of the major indices with a +230% gain in 2014.

According to the company, "Covenant Transportation Group, Inc. is the holding company for several transportation providers that offer premium transportation services for customers throughout the United States. The consolidated group includes operations from Covenant Transport and Covenant Transport Solutions of Chattanooga, Tennessee; Southern Refrigerated Transport of Texarkana, Arkansas; and Star Transportation of Nashville, Tennessee. In addition, Transport Enterprise Leasing, of Chattanooga, Tennessee is an integral affiliated company providing revenue equipment sales and leasing services to the trucking industry."

Why are shares of CVTI surging? The simple answer seems to be business is booming. The company has raised its guidance twice in the last four months. The most recent time was December 11th. Now you might think the stronger profit picture is due to falling gasoline prices. CVTI confessed they hedge some of their fuel costs so the drop in gas prices actually has little impact on its current outlook. They're raising guidance because demand is so strong. Anecdotally this is a pretty optimistic sign on the strength of the U.S. economy.

Technically shares of CVTI have been consistently rising with a bullish trend of higher lows and higher highs. Shares are just starting to bounce from support again. This is our chance to jump on board. Friday's high was $27.80. I'm suggesting a trigger to open bullish positions at $28.05. Earnings are expected in late January or early February. We will most likely exit prior to their announcement. I will note that the point & figure chart is bullish and forecasting at $34.50 target.

- Suggested Positions -

Long CVTI stock @ $28.05

01/05/15 triggered @ 28.05

Sprouts Farmers Market - SFM - close: 33.75 change: -0.02

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: + 2.1%
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

01/08/15: SFM struggled to rally past its recent highs and essentially closed unchanged on the session. Lack of participation in today's widespread market rally is a potential warning signal. I'd hesitate to launch positions tomorrow.

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

TASER Intl. - TASR - close: 26.63 change: +0.65

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: + 0.5%
Entry on January 08 at $26.50
Listed on January 07, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: see below

01/08/15: Our new play on TASR is open. As expected the rally continues and shares hit our suggested entry point at $26.50. I would still consider new positions now at current levels.

Earlier Comments: January 7, 2015:
50,000 volts. That's what a Taser electro-muscular disruption (EMD) device shoots through your body to override the central nervous system. Your body freezes as all the muscles contract.

Their website describes the company as "TASER International makes communities safer with innovative public safety technologies. Founded in 1993, TASER first transformed law enforcement with its electrical weapons. TASER continues to define smarter policing with its growing suite of technology solutions, including AXON body-worn video cameras and EVIDENCE.com, a secure digital evidence management platform."

They may have started with electrical weapons but now the company is expanding to mobile video cameras worn on a law enforcement officer's gear. The company has been in the news lately thanks to President Obama. On Monday this week Obama wants to spent $75 million over the next three years to outfit the nation's police force with body-worn cameras.

The White House believes that body-worn cameras on police will help reduce violence and avoid another event like the one in Ferguson, MO. Current estimates suggest there are only 70,000 police wearing cameras now. Obama's plan would almost double that. Industry analysts are forecasting significant growth if the federal government approves Obama's plan. There are nearly 800,000 policemen in the U.S. There's plenty of room to grow. Plus TASR is expanding internationally.

The bears will argue that TASR's stock is expensive with a P/E near 63. There is no denying that. However, the body-camera business could soar. Currently it's less than 8% of their annual sales. The real winner could be TASR's Evidence.com ecosystem. This is a subscription service for law enforcement to back up and manage all the data from TASER electric weapons, body-worn cameras, and more.

The stock hit multi-year highs on back in December following President Obama's comments suggesting the federal government endorsing body cameras for cops.

I will caution investors that TASR can be a volatile stock. You may want to limit your position size. I will point out that the latest data lists short interest at almost 30% of the 51.3 million share float. If the rally continues TASR could see some short covering.

Technically shares of TASR just bounced near the bottom of its bullish channel. We think TASR will outperform if the rally resumes. The simple 10-dma is at $26.36. Tonight we are suggesting a trigger to open bullish positions at $26.50. We will plan on exiting prior to TASR's earnings announcement due in late February.

- Suggested Positions -

Long TASR stock @ $26.50

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

Long MAR $27 CALL (TASR150320C27) entry $2.50

01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike

Wayfair Inc. - W - close: 21.40 change: -0.94

Stop Loss: 21.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

01/08/15: This morning Stifel initiated coverage on W with a "hold". They believe the company offers a great long-term opportunity but they're worried about W posting operating losses through 2016. This opinion may have been a wet blanket on the stock and shares crumbled -4.2% today. That's disappointing when the broader market was in rally mode. Traders did buy the dip near W's 10-dma.

Currently we are on the sidelines with a suggested entry point at $23.05. We may need to either adjust our entry strategy or remove W as a candidate if shares don't improve soon.

Earlier Comments: January 6, 2015:
The S&P 500 is down five days in a row. One stock bucking that trend is W. Shares of W are up five days in a row. The rally appears to be accelerating.

Who is Wayfair? According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and décor across all styles and price points. The Wayfair family of brands includes:
Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home décor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October last year and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. Since that opening day the stock has been cut in half. W traded down to $16.74 in mid December. The stock bottomed a couple of days before the S&P 500 did in the market's December decline.

There was a recent story about the surge in Class A shares of W. Sometimes mutual fund and hedge fund managers have limits on how much stock they can own in their portfolio. Their systems will not allow them to own more than a certain percentage of any one company based on the number of shares outstanding. When W initially came to market it had a very low count of Class A shares and a high number of Class B shares. The Class B shares are convertible into Class A.

According to Wayfair's CFO they asked Class B shareholders to convert some of their investment into Class A. That would boost the amount of shares outstanding. This is a bullish development since it means more fund managers want to own W and now they can with the increase in Class A shares.

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

The stock is also a short squeeze candidate. In a recent interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. Meanwhile short interest is more than 56% of the very small 11.1 million share float. If the current rally continues W could see a short squeeze.

Tonight I am suggesting a trigger to open bullish positions at $23.05.

Trigger @ $23.05

- Suggested Positions -

Buy W stock @ (trigger)

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

Buy the Feb $22.50 CALL (W150220C22.50)

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

BEARISH Play Updates

SodaStream Intl. - SODA - close: 19.29 change: +0.15

Stop Loss: 20.25
Target(s): To Be Determined
Current Option Gain/Loss: + 0.7%
Entry on January 05 at $19.42
Listed on January 03, 2014
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

01/08/15: SODA is still underperforming the market. The major indices are up big two days in a row. SODA managed a +0.7% gain today but that pales compared to the +1.8% rally in the NASDAQ. SODA continues to trade beneath support, now resistance, at $20.00.

Tonight we are moving the stop loss down to $20.25.

Earlier Comments: January 3, 2015:
The excitement over shares of SODA has definitely fizzled out over the last couple of years. The stock peaked just below $80 a share back in 2011. Then in early 2013 the stock was soaring and looked like it might reach $80 again. The rally lost its buzz and SODA peaked near $78 in mid 2013. Since then shares have reversed and stuck in a bear market decline.

Who is SODA? According to the company's marketing material "SodaStream is the world's leading manufacturer and distributor of home beverage carbonation systems which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. Soda makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated soft drinks and sparkling water. Our products are environmentally friendly, cost effective, promote health and wellness, and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles home from the supermarket, to store bottles at home or to regularly dispose of empty bottles. Our products are available at more than 65,000 retail stores in 45 countries around the world, including 17,000 retail stores in the United States."

2014 was tough for SODA investors as the stock collapsed from about $50 to $20. The company guided lower when they reported earnings in July 2014. Then SODA shares gapped down sharply on October 7th when they issued another earnings warning. That big spike on October 24th was a story from Bloomberg that SODA was testing some Pepsi products. The rally was probably short covering as investors worried a partnership with Pepsi could turn things around. The rally quickly faded. Pepsi has already partnered with in-home beverage company Bevyz in Europe so any deal with SODA might be limited.

SODA's most recent earnings report was October 29th. Their EPS came in at $0.45, which beat estimates of $0.35. Yet revenues fell -12.9% in the third quarter to $125.9 million, which was significant below Wall Street's estimate. Gross margins are also sinking and fell 380 basis points to 50.5% in the third quarter. Management lowered their guidance again and announced they would stop providing annual guidance in 2015. That's never a good sign.

Like rats jumping off a sinking ship there have been stories that hedge fund managers are bailing out of their SODA positions. Plenty of investors are already bearish on SODA and short interest at about 17% of the small 20.8 million share float.

Friday's drop was significant because it's a bearish breakdown under major psychological support at $20.00. Tonight we are suggesting bearish positions immediately with a stop loss at $21.05. More conservative traders may want to wait for a new relative low under $19.33 before initiating positions.

NOTE: SODA has been rumored to be a takeover target for a long time. That hasn't stopped the stock from crashing over the last 18 months. You may want to limit your position or use the options to limit your risk just in case some M&A news happens to appear out of nowhere and send SODA higher.

- Suggested Positions -

Short SODA stock @ $19.42

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

Long FEB $20 PUT (SODA150220P20) entry $2.05

01/08/15 new stop @ 20.25
01/05/15 trade begins. SODA gaps down 30 cents to $19.42
Option Format: symbol-year-month-day-call-strike

Zulily, Inc. - ZU - close: 22.11 change: +0.87

Stop Loss: 23.55
Target(s): To Be Determined
Current Option Gain/Loss: +14.6%
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

01/08/15: Before the opening bell this morning ZU garnered a bullish "buy" recommendation with a $30 price target. This helped shares gap open higher but fortunately for the bears this rally failed at its 10-dma again.

Tonight we are adjusting the stop loss down to $23.55. 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

01/08/15 new stop @ 23.55
01/03/15 new stop @ 24.10
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


Altria Group - MO - close: 50.72 change: +0.84

Stop Loss: 50.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 05, 2014
Time Frame: Exit PRIOR to Q4 earnings (see below)
Average Daily Volume = 6.6 million
New Positions: see below

01/08/15: MO is not cooperating. Shares have gone up three days in a row. Today's breakout past resistance near $50.00 is technically bullish. One potential explanation is investors are looking for high dividend stocks because they're worried that U.S. bond yields will continue to sink.

Our trade did not open. Tonight we are removing MO as a bearish candidate.

Trade did not open.

01/08/15 removed from the newsletter, suggested entry was $48.25