Option Investor

Daily Newsletter, Saturday, 1/17/2015

Table of Contents

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

Market Wrap

Pause to Refresh

by Jim Brown

Click here to email Jim Brown

After an extremely volatile week traders closed out short positions ahead of the long three-day weekend and will enjoy the break in trading with a much needed rest. The volatility has been extreme with 30 point intraday swings on the S&P-500 instead of the normal 10 point ranges.

Market Statistics

Other than aftershocks from the 30% move in the Swiss franc the market was relatively calm on Friday. After an ugly week of triple digit moves to the downside the calm trading on Friday gave traders an easy exit from their shorts. Dip buyers were ready to buy any bounce and a short squeeze was born. Rising oil prices helped support the market with high profile energy companies rising sharply.

Fake tweets from hacked accounts tried to move the market with headlines saying Chinese warships fired on a U.S. ship and the Fed convened an emergency meeting because of the Swiss franc debacle. Neither was true.

Crude prices traded as low as $44.21 last week before rebounding to close at $48.48 on Friday. The black gold traded in an average range of $3.25 per day all week. That is basically a 7% range every day and extreme volatility. Positive crude prices were a calming influence on Friday's market. The +4.8% gain was due mostly to short covering ahead of the long weekend. The strong close pushed oil into positive territory for the week to end seven consecutive weeks of declines. The $50 level is now resistance.

On the economic front the Consumer Price Index (CPI) fell -0.4% in December and the biggest monthly decline since 2008. The biggest contributor to the decline was of course gasoline prices with a -9.2% drop. Overall the energy component declined -10.8%. The core rate, which does not include food and energy, was flat at zero compared to the average of +0.013% for the prior seven months.

The trailing 12-month number for headline inflation declined to +0.7% and down from +2.0% just last summer. Headline prices should continue lower in the months ahead as the impact of low energy prices work their way through the system into consumer prices. The Fed is really facing a challenge if they are planning a June rate hike we Yellen suggested. With inflation declining further and the dollar still rising the deck is stacked against a Fed rate hike.

The Industrial Production report for December showed a -0.1% drop after a +1.3% rise in November. However, the headline number is deceiving. The warmer weather in December caused a -7.3% decline in utility output and skewed the entire index. Manufacturing production rose +0.3% and mining output rose +2.2%. Because of the utility component the report was ignored.

Consumer Sentiment for January rose +4.6 points to 98.2 and an 11 year high. The present conditions component rose from 104.8 to 108.3 and the strongest since May 2007. The expectations component rose from 86.4 to 91.6 and the highest since January 2004. More than 66% of respondents say it is a good time to buy a major household item and more than 82% say it is a good time to buy a home.

Falling gasoline prices are a major part of this sharp gain in the sentiment index. The average driver is saving $750 a year in gas and the average household $2,125 a year. That is a huge raise and that money goes straight into other retail spending.

The calendar for next week only has one critical event and that is the ECB QE decision on Thursday. The ECB is expected to announce up to 500 billion euros of sovereign QE. Unfortunately Mario Draghi has failed to deliver so many times in the past that there is likely to be some extreme market volatility surrounding the event.

The Greek elections are next Sunday. If the ultra left Syriza party captures enough votes they could disrupt the bailout process, defy the EU over Greece's debt and possibly leave the eurozone. The anti-austerity movement is picking up speed and there could be an upset next week. This would be a major blow to the eurozone although everyone is trying to downplay the implications. Stay tuned as the headlines increase this week.

The following week the U.S. Fed will meet and we will hear their interpretation of the economic tea leaves and the fallout from the Swiss franc debacle.

In case you live in a cave without Internet or TV I will recount the news on Switzerland. On Wednesday morning the Swiss central bank broke the peg on the Swiss franc to the euro. The Swiss central bank had pegged the franc at 1.20 to the euro for the last several years. As recently as 10 days ago they affirmed that stance saying they had no plans to change it. On Wednesday they cancelled that peg to let the franc float to its own level. Immediately the franc soared 30% against the euro and 25% against the dollar. It was the largest single day movement by any currency since World War I. These are mind numbing moves since currencies normally moved in tenths of basis points not full percentage points anyone in the currency market surrounding the franc was wiped out.

The global currency markets were thrown into disarray with multiple FX companies being crushed. The most visible in the U.S. was FXCM Inc (FXCM), which is a currency trading firm for individual investors. The company disclosed it was owed more than $225 million by customers that had positions that were wiped out.

In the U.S. currency trading margin is 50:1. That means a $1,000 account can control $50,000 in currencies. Leverage is wonderful because a move to the upside can be huge because of the 50:1 ratio. However, in the currency markets they leverage works both ways. A -2% move against you would zero your account. A 30% move in the example above means you are suddenly -$15,000 overdrawn and that ringing phone is your broker telling you to deposit money immediately.

FXCM said blown up accounts now owed the company more than $225 million. This happened instantly when the Swiss bank announced the peg break. Since the broker is responsible to the exchanges for the user accounts FXCM was suddenly out that $225 million and in violation or regulatory capital requirements.

Shares of FXCM declined from $16.70 to $12.64 by Thursday's close. On Friday they were halted for trading all day as they negotiated with lenders for a loan to keep them solvent. Leucadia National (LUK) parent of Jefferies Group, agreed to lend them $300 million in two-year senior notes with a 10% coupon. However, if FXCM is sold to anyone else in that two year period LUK will receive 75% of the proceeds. Apparently Leucadia was concerned FXCM may not be able to recover that $225 million in margin shortfalls and would have to sell itself or liquidate to end the pain. FXCM has the right to sue the individual account holders for the margin shortfalls but individual investors with marginal accounts probably are not going to be able to come up with 15-20 times their original investment just to cover their overdrafts.

I remember back in the early 1980s when you had to trade through a real live person my Shearson Lehman broker called me four days in a row telling me I had to wire another $25,000 that day to cover a currency position that moved against me overnight. I know exactly how those investors feel this weekend.

Shares of FXCM opened late Friday and traded at a low of $1.50 before rebounding on the news of the LUK loan to close at $4.70. The company said it will resume business as usual next week.

Citigroup (C) said it lost up to $200 million on forex because of the Swiss move. Barclays said it lost $100-$150 million. More problems are sure to surface next week. European currency broker Alpari closed its UK arm saying "exceptional volatility and extreme lack of liquidity" resulted in the majority of their customers sustaining losses. "When a client cannot cover a margin loss, it is passed on to us. This has forced Alpari (UK) to enter into insolvency."

New Zealand foreign exchange dealer Global Brokers NZ was also forced to close its doors because of losses incurred in customer accounts.

This was a major story and it is going to be a major story for months to come. Many Europeans had secured mortgages in francs because the interest rates were very low and the currency stable. Today it will take 20% more to pay off those mortgages. Swiss watch makers are warning they could go out of business because their watches just spiked 20% in price because of currency translation issues. All exports from Switzerland will suddenly cost 20-25% more for Europeans and westerners.

Here is the problem for next week. The Swiss Miss as the franc event is being called has put even more expectations on Draghi to launch a major QE program to bail out Europe from the currency maelstrom and theoretically stimulate the economy. The more the expectations build for Draghi to do something big the better chance he will disappoint. Even if he does launch a big program the market may not be satisfied. If he tries to push the decision off to the next meeting or launches some complicated program of just a few billion then the market is going to be VERY disappointed. The big fear today is that Europe is sliding into deflation and it will drag the U.S. with it. Therefore, if Draghi does not halt that deflationary view the U.S. markets could sour.

The treasury markets are telling us two things. First, the U.S. is a flight to safety and all that European money is flooding into the USA. Second, there is real fear that bankers may not be able to keep the deflation monster away and the next year could be very volatile. Some fringe analysts are still expecting the Fed to be forced to launch another round of QE. While I think that is out of the realm of possibilities I could be wrong.

The 30-year treasury traded down to a 64-year low yield of 2.53% on Friday before profit taking began. It takes a lot of money to push yields lower at this level. It takes a lot of really scared money since the odds of yields dropping further are getting smaller every day.

The dollar is at an 11-year high and still rising. If Draghi launches QE the dollar will continue to rise and the euro decline. That means commodities will continue to go down and add to deflation worries.

Oil prices are also declining because the dollar it at the highest level since 2003. Since oil is priced in dollars it takes fewer dollars to buy a barrel than it did as recently as May. The dollar index hit a low of 78.90 in May. It hit a high of 93.00 on Friday. That is a 18% rise in 8 months. Crude oil was $107 in June and the rise in the dollar equates to a -$19.26 decline in oil prices even without the current surplus. That means one third of the -$59 decline was due to the rise in the dollar not the surplus production.

The dollar strength is going to be a serious headwind to international companies. With the earnings cycle heating up next week we should be watching for the impact of the dollar and the decline in the energy sector as factors in Q4 earnings. Companies not in the energy sector but making products and services that are used by companies in the sector can be impacted. This is a rare opportunity to see how the sector interactions impact the economy.

The earnings activity picks up next week and companies facing currency issues could include IBM, McDonalds, GE and Starbucks to name a few. The brokers should be watch for comments about losses related to the Swiss franc. Those include Interactive Brokers, Ameritrade and E*Trade. Numerous banks report next week but I won't list them here. There were easily 50+ smaller banks that I did not put on the list. With the financial sector reeling from the low rates and weak earnings we could a continued drag on the market.

The airlines including Alaska Air, United Continental, Delta and Southwest should post decent results as a result of the low fuel prices unless their hedges turned against them.

In an unusual move Cowen upgraded Netflix to outperform before their earnings on Tuesday citing strong user survey results, increasing original content and attractive valuation. Netflix is releasing 20 new original shows in 2015, twice the 2014 rate. Cowen raised the price target from $360 to $382. If Netflix trips over earnings and crashes the analyst will look pretty silly. If they beat and soar he will be a hero.

Goldman Sachs (GS) posted earnings of $4.38 compared to estimates of $4.32 but that was lower than the year ago quarter of $4.60. Net revenue declined -12% to $7.69 billion but that still beat estimates of $7.64 billion. Revenue from fixed income, currencies and commodities trading fell -29% to $1.22 billion. Investment banking revenue declined -12%. Shares declined slightly on the news.

Oil services firm Schlumberger (SLB) said it was laying off 9,000 workers roughly 7% of its workforce and taking a $296 million charge in order to slim down after the oil price crash. The company reported adjusted earnings of $1.50 that beat estimates of $1.47. Revenue of $12.6 billion was less than expected by -$100 million. During the quarter they repurchased $1.1 billion in stock (12.1 million shares) and that helped them post better than expected earnings per share. The company said it was reducing capex spending in 2015 by 25% from $4 billion to $3 billion. The company surprised investors with a +20% increase in its dividend from 40 cents to 50 cents. Shares rose on the combination of events.

Charles Schwab (SCHW) reported adjusted earnings of 25 cents that beat estimates by a penny. Revenue of $1.55 billion beat estimates of $1.53 billion. They ended the quarter with $2.46 trillion in client assets. If interest rates ever rise this will be a huge cash generator. Active brokerage accounts rose +3% to 9.4 million.

Shares rebounded slightly after crashing with the sector over the last two weeks.

When companies make announcements late on Friday night it is normally something they don't want you to see. AT&T announced late Friday evening a total of $10 billion in charges but they claim it won't impact earnings. More than $7.9 billion is related to actuarial gains and losses on pensions and post employment benefit plans. Another $2.1 billion is a charge for abandoning some copper lines it felt it no longer needed. AT&T plans to turn off its entire copper line network by the end of the decade. Both of the charges are non-cash and will not impact their adjusted earnings but they still announced it late on Friday so they were expecting some negative publicity. Shares dropped about 50 cents in afterhours.

Precision Cast Parts (PCP) warned it was facing weaker demand from the oil and gas industry. No surprise there. The company also pre-released its Q4 earnings estimate between $3.05-$3.10 but analysts were expecting $3.34. Revenue estimates of $2.42-$2.47 billion were also below analyst forecasts for $2.54 billion. The company said demand in its aerospace business continued to grow. Shares fell -9% on the warning.


I warned last weekend that the Nasdaq 100 ($NDX) was the one to watch for market direction for the week as it was leading the broader market. That was true all week with the NDX closing at a three-month low on Thursday and the biggest percentage loss of all the major indexes for the week. On Friday the index gapped down to 4,078 before rebounding +61 points to close at 4,140. It was still the biggest loser for the week but that was a decent rebound from critical support.

The 4,090 level has been support on the last three declines but even with the decent rebound on Friday the chart is still ugly. If selling resumes next week I would not expect that level to hold on the fourth retest. The Nasdaq big caps are eroding and unless this situation reverses immediately we are likely to retest 4,000.

Google is being downgraded almost every week. Apple is declining ahead of what could be fantastic earnings but expectations are too great. The tech earnings we have seen already were not exciting and that is weighing on expectations for future tech reports.

The Nasdaq composite is not much better. However, the low for the week of 4,563 was still above the December low of 4,547. Unlike the NDX it did not make a lower low. The Composite index did retest the January 6th lows of 4,567 almost to the penny on Thursday before rebounding on Friday.

The Composite chart is still bearish but not quite as bad as the NDX. Resistance is now 4,650 and support is that 4,547 level from December.

The S&P-500 dipped below 2,000 twice last week to hit 1,988 each time before rebounding. The average range on the S&P for the week was nearly 30 points per day. That is huge and shows how much indecision there was in the market. The 31 point rebound from Friday's low was probably a combination of dip buying and short covering. I am sure very few traders wanted to be short over a three-day weekend. Historically Friday's before a long weekend are positive 73% of the time. With the recent volatility and 300 point moves in the Dow nobody wanted to be faced with the potential for a triple digit gap open on Tuesday because of some European event on Monday.

Even with the decent rebound it is too early to call it the beginning of a rally. I did like the dead stop on 1,988 on Wed/Fri but it is not enough to call a bottom. We need a couple more days of gains on decent volume before we can say the January decline is over.

We did see some strong volume last week. Tuesday was 7.8 billion shares. Wednesday 8.1 B, Thursday 7.9 B and Friday 7.7 B. Since it was option expiration week we should have seen decent volume. I am just concerned that there was strong volume on the downside and weaker volume on the rebounds.

The line in the sand for next week is 1,985. That has been in play multiple times since June and I fear it will come back to haunt us again.

The Dow did something it rarely does and that is respect a moving average. In this case it was the 100-day at 17,309. It was more than likely coincidence rather than support but we will take the rebound regardless of the reason. The Dow did set a five-week low on Friday at 17,243. That was -19 points below the Jan 6th and 14th lows at 17,262. In Dow terms the three lows in January were close enough to be identical. In theory we could call is support but the real test will be next week. If those lows are broken we could easily test the December low at 17,067.

Several Dow components report next week and the European curse could exact a toll on their earnings. The strong dollar, weak European economy is going to weigh on the international blue chip companies in the Dow.

Support 17,262, resistance 17,915.

The Dow Transports fell below the 100-day average for only the second time in 16 months but rebounded back above that level at the close on Friday. I expect this average to be broken again and for the Transports to break below 8,500 in the near future UNLESS the airline earnings next week are blowouts.

The NYSE Composite is still very weak. The trend of lower highs is continuing with the threat of a lower low if the index drops below 10,360. This is already a very negative chart but that would be the kiss of death.

The Russell 2000 was the hero by far on Friday with a +1.9% gain of +22 points. The recent support at 1,150 held but the rebound stalled at resistance at 1,180. Even more surprising was the +2.0% gain in the Russell Microcap Index. I can't decide if this was purely a short squeeze or the dip buyers were flooding into the micros. Given the sentiment in the market last week it was probably a short squeeze.

With the market closed on Monday we will get our direction from whatever happens in Europe on Monday. I would love to believe Friday's rebound had legs but I think it was just short covering. This week is going to be very volatile with the ECB QE decision and the ramp into the Greek election next Sunday. I would recommend a continued cautious approach until we see what Draghi pulls out of his hat and how the earnings shape up on Tue/Wed. The market should have a direction by Thursday.

Random Thoughts

Mario Draghi is facing a daunting task in trying to keep the eurozone from falling into deflation. There are three things making his task harder and the ECB can only control one of them and then only marginally. The first challenge is an output gap across the single currency region. That means production is higher than consumption and there is considerable excess capacity. The ECB only has limited control over this problem and a QE program may not help.

The second factor causing deflation in Europe is the crash in commodity prices. This is good disinflation in some respects because it lowers the price on everyday items and may induce consumers to spend some of their hoarded cash. The last item is the change in economic direction in China. Previously China was consuming 50% of the world's commodities building highways, housing and huge cities that were never inhabited. China has more than 64 million vacant homes and apartments. The cost of the new housing built over the last decade is more than the average consumer can pay. Now China is moving to a consumer focused economy rather than an export economy. This is a long term change. It will take a decade or more to complete. China is no longer building ghost cities so the demand for commodities has fallen dramatically.

Draghi and the ECB have no power over China and their commodity demand and the drop in commodity prices are dragging Europe's inflation rate ever lower. Draghi has to announce a monster QE program, not because it will help the rag-tag collection of countries to rebound from the brink but because not announcing it will push Europe over the economic cliff.

The Goldman Sachs Commodity Index has fallen -42% since June. This compares to the -65% decline during the financial crisis. These are once a decade moves. Commodities are trading today at the same level as 2002 when the global GDP was $30 trillion. The global GDP today is $72 trillion. This appears to be extremely oversold to me and I would suggest long term long entries in a non leveraged commodity ETF. Commodities prices at this level are unsustainable in the long term but they could remain low for several more months. We are currently at or below cash production costs for oil and various metals. If prices don't rise production will decline sharply and will require a couple years to restart.

The World Bank cut its global growth forecast for 2015 from 3.4% to 3.0% and also lowered 2016 estimates. The U.S. may be the best house on a bad block but the other houses are on fire and the flames are getting closer.

In the U.S. hardly a day goes by without somebody getting hacked. On Friday the NY Post tweeted "Federal Reserve head Yellen announces bail-in in emergency meeting rumored negative rate to be set at 4pm EST today." The account had been hacked. That tweet was followed by "The Fed will peg the dollar to the Swiss franc" and "Chinese anti-ship missile fired at USS George Washington." The same tweets were seen on the UPI twitter account.

Active drilling rigs in the U.S. declined by -74 rigs to 1,676 for the week ended on Friday. This came after a -61 rig cut the prior week and brought the total to -255 since the peak of 1,931 on September 26th. That is a -13% decline and the biggest drop since the financial crisis. Oil production is going to slow dramatically if this rig decline continues. Some analysts are saying a minimum of 500 rigs must be stacked and others are looking for a 50% drop in active rigs to something in the 1,000 range by year end if oil prices remain this low.

Schlumberger announced 9,000 layoffs. Halliburton 1,000, Suncor -1,000, Shell -300, Apache -250. I am sure there are many more but the headlines are flying so fast it is hard to keep up. The real cuts will be announced with the energy earnings over the next four weeks.

The Dallas Fed expects Texas alone to lose more than 140,000 jobs from the oil crash. We are hearing from all over the country of layoffs of drillers, drivers for sand and water trucks, service contracts cancelled, vacancies in the oil worker housing in places like the Bakken. It is going to be increasingly depressing as the capex cuts for 2015 begin to take effect.

The world will consume 92.0 million barrels of oil per day in 2015. That is up from 89 mbpd in 2012 and will continue to rise about 1.0 mbpd for the foreseeable future. There may be an oil glut today but it will go away by 2016.

Venezuela may only be weeks away from a collapse. The food shortages are becoming worse. With nearly empty food stores guarded by the military a new plan was put in place last week. Consumers can now shop only two days a week and they can only buy two bags of groceries. That is almost laughable since they can rarely fill up even one bag. Opposition forces are working the population into some serious anger about the current state of affairs. The official inflation rate is 64% but the unofficial rate is well over 150%. The government is running out of money to acquire and distribute needed supplies. When the government can no longer pay the military it is going to turn ugly. Default is inevitable and will be followed by hyper inflation. Consumers are going to bear the brunt of this tragedy and will require massive relief supplies from outside the country once the government fails.

The Swiss stock market fell -13% for the week after the Swiss central bank dropped the peg on the Franc to the Euro. Instead of dropping from 1.2 to the euro to 1.10 to 1.15 as analysts expected it fell to parity at 1:1 to the euro. At one point the franc surged 41% against the euro. At the same time the bank cut the deposit rate to a negative -0.75% in hopes of slowing the influx of money into the country. The head of the Swiss bank said "markets tend to strongly overreact" to surprises. He expects the situation to correct itself once the panic has left the market. He may be surprised. I am sure there will be a lot of headlines next week regarding losses at other currency trading firms and the impact of the currency move on Swiss businesses. I suspect SNB President Thomas Jordan may be looking for a new job in the near future.

For instance the John Hancock $1.9 billion Absolute Return Currency Fund lost -8.7% on Friday. That is a huge decline and the most among more than 2,000 funds tracked by Bloomberg. The AMG FQ Global Alternatives Fund lost -8.3%. This story has a long way to go before it ends and the impacts may show up where we least expect it.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten."

Bill Gates


New Plays

Potential Short Squeeze Candidate

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

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

(bearish ideas)


ACADIA Pharmaceuticals - ACAD - close: 32.68 change: +0.51

Stop Loss: 31.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 17, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.24 million
New Positions: Yes, see below

Company Description

Why We Like It:
The biotech industry was a big outperformer last year. That outperformance looks like it could continue into 2015.

According to a company press release, "ACADIA is a biopharmaceutical company focused on the development and commercialization of innovative medicines to address unmet medical needs in neurological and related central nervous system disorders. ACADIA has a pipeline of product candidates led by NUPLAZID (pimavanserin), for which we have reported positive Phase III trial results in Parkinson's disease psychosis and which has the potential to be the first drug approved in the United States for this disorder. Pimavanserin is also in Phase II development for Alzheimer's disease psychosis and has successfully completed a Phase II trial in schizophrenia. ACADIA also has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. and two preclinical programs directed at Parkinson's disease and other neurological disorders. All product candidates are small molecules that emanate from internal discoveries."

You can view ACAD's current pipeline of drugs in development on this web page.

Shares of ACAD shot higher in early September after the FDA gave the company a breakthrough therapy designation for its NUPLAZID treatment for Parkinson's. Currently there is an estimated 6.3 million people around the world who suffer with Parkinson's and there is no cure. If ACAD can eventually get this therapy approved then the drug could generate an estimated $1 billion in sales in jut the United States.

There is speculation that ACAD is an acquisition target by a larger biotech or pharmaceutical company. That has got to scare the bears in this name. Believe it or not but there are a lot of bears shorting ACAD. The most recent data listed short interest at about 30% of the 79 million-share float. That's plenty of fuel for a short squeeze.

Technically traders have been buying the dips in ACAD near its rising 40-dma. You can see the bullish trend of higher lows and ACAD just bounced on it Friday. This looks like a good spot to speculate on a follow through higher.

We always consider trading biotech stocks as a higher-risk, more aggressive trade. The right or wrong headline can send biotech stocks crashing or soaring overnight. You might want to use call options to limit your risk. Tonight we are suggesting a trigger to open bullish positions at $33.10.

Trigger @ $33.10 *small positions to limit risk*

- Suggested Positions -

Buy ACAD stock @ (trigger)

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

Buy the FEB $35 CALL (ACAD150220C35) current ask $1.05

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Big Numbers For ZU Put Traders

by James Brown

Click here to email James Brown

Editor's Note:
Friday morning we closed our January puts on Zulily (ZU) to lock in potential gains.

We also closed the TASR trade on Friday morning.

Current Portfolio:

BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 27.77 change: +0.52

Stop Loss: 26.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.0%
Entry on January 05 at $28.05
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings on Jan. 21st.
Average Daily Volume = 203 thousand
New Positions: see below

01/17/15: Attention! Our time frame on this CVTI trade just changed. The company announced they would report earnings on January 21st. That's this coming Wednesday and the market is closed on Monday.

We want to exit this trade on Tuesday at the closing bell. I am not suggesting new positions.

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

01/17/15 Prepare to exit on Tuesday, Jan. 20th at the closing bell
(unless we get stopped out first)
01/15/15 new stop @ 26.45
01/05/15 triggered @ 28.05


Sprouts Farmers Market - SFM - close: 34.01 change: +0.07

Stop Loss: 33.45
Target(s): To Be Determined
Current Option Gain/Loss: + 2.9%
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

01/17/15: SFM's performance on Friday was disappointing. Shares rallied up toward Thursday's high and then reversed. The S&P 500 produced a +1.3% gain on Friday but SFM settled with a +0.2% gain. This relative weakness could be a warning signal.

I am not suggesting 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

01/15/15 new stop @ 33.45
12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Discovery Communications - DISCA - close: 29.42 change: -0.05

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +3.8%
Entry on January 14 at $30.57
Listed on January 13, 2015
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 3.8 million
New Positions: see below

01/17/15: It's very encouraging to see DISCA underperforming the market on Friday and ignore the widespread market bounce. Bears got a little help from an analyst downgrade on Friday morning.

I am not suggesting new positions at this time. DISCA is potentially short-term oversold.

Earlier Comments: January 13, 2015:
We have heard for a long time that content is king. Discovery has some great content. So why is the stock suffering so poorly? The stock market posted double-digit gains last year and yet shares of DISCA was one of the market's worst performers with a -23.8% decline.

According to company marketing materials, "Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the world's #1 pay-TV programmer reaching nearly 3 billion cumulative subscribers in more than 220 countries and territories. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. Discovery also controls Eurosport International, a premier sports entertainment group, including six pay-TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks."

It looks like the revenue picture has soured for DISCA. Back in February 2014 the company reported earnings and raised their revenue guidance. One quarter later, when they reported in July, they lowered the top end of their guidance. Then in November, when they reported earnings, DISCA missed Wall Street's revenue estimate and management lowered their revenue guidance.

In a recent interview Discovery's CEO said they are having trouble monetizing all of their content. The advertising environment has gone soft and they haven't figured out why there is a lull in ad spending.

Research is forecasting that online video watching will more than double by 2020. A USB analyst believes online will eventually pose a significant threat to more traditional TV watching trends and companies. Another analyst, this time with Sanford Bernstein, believes the huge declines in TV viewership will continue. Analyst Todd Juenger said, "We believe ad-supported TV is in the early stages of a structural decline." That's long-term bearish for TV. DISCA needs to do a better job of monetizing their content online.

Technically DISCA looks very bearish. The oversold bounce from November stalled in the $36 area several time. The point & figure chart is bearish and forecasting at $23.00 price target. Today DISCA is breaking down to new 52-week lows.

We are suggesting a trigger to open bearish positions at $30.90. Plan on exiting ahead of DISCA's earnings report in mid February.

- Suggested Positions -

Short DISCA stock @ $30.57

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

Long FEB $30 PUT (DISCA150220P30) entry $1.20

01/15/15 new stop @ 30.85
01/14/15 triggered on gap down at $30.57, trigger was $30.90
Option Format: symbol-year-month-day-call-strike


Lions Gate Entertainment - LGF - close: 28.98 change: -0.01

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on January 15 at $28.85
Listed on January 14, 2015
Time Frame: Exit prior to earnings on February 5th
Average Daily Volume = 1.2 million
New Positions: see below

01/17/15: LGF also underperformed the market on Friday. Shares failed to participate in the broad-based rebound, which is good news if you're bearish.

LGF just announced they will report earnings on Feb. 5th. We plan to exit prior to the announcement.

Earlier Comments: January 14, 2015:
Everyone loves the movies. While 2014 had some pretty big hits total box office receipts for the industry were $10.3 billion. That's a -5% drop from the 2013. "The Hunger Games: Mockingjay - Part 1" was one of the most successful films last year with a gross of $309 million.

LGF is the studio that makes the Hunger Games movies. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, channel platforms and international distribution and sales. The Company currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses."

In addition to The Hunger Games, LGF also makes the new Divergent films, which could be a big hit although probably not as big as Games. The company has also seen success in television with hits like Mad Men, Nurse Jackie, and Orange is the New Black. However, the stock tend to trade around its movie releases. That could prove challenging.

The last Hunger Games move is now last year's news. Shares of LGF could lack any serious catalyst to move the stock until the next round of movies come out. The next Divergent movie ("Insurgent") is expected to come out in March this year. Meanwhile the Mockingjay - Part 2 doesn't hit theaters until November 2015. If the stock's action is any indication then Wall Street is not very enthusiastic over the next Divergent movie.

Shares failed multiple times in the $35.50 area from mid November through December 1st. This is now a new lower high on the weekly chart (see below). While the broader market rallied in December, shares of LGF were under performing. That underperformance has continued into 2015.

Investors have taken notice of LGF's weakness. The most recent data listed short interest at 18% of the 84 million share float. The point & figure chart has turned bearish and is currently forecasting at $24 target but that could get worse.

Today LGF is about to test support at $29.00. A breakdown there could be our entry point. Tonight we're suggesting a trigger at $28.85.

- Suggested Positions -

Short LGF stock @ $28.85

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

Long FEB $30 PUT (LGF150220P30) entry $2.10

01/15/15 triggered @ 28.85
Option Format: symbol-year-month-day-call-strike


SINA Corp. - SINA - close: 35.16 change: -0.57

Stop Loss: 36.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 15, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 1.4 million
New Positions: Yes, see below

01/17/15: Chinese Internet stocks bounced on Friday. SINA followed the group with a +1.5% gain. The intraday low was only $35.16. I don't see any changes from the new play description on Thursday night. Our suggested entry point for bearish positions is $34.70.

Earlier Comments: January 15, 2015:
China has the largest Internet audience on the planet. More than 641 million of their 1.357 billion people are online. In spite of these massive numbers Chinese Internet company SINA is having trouble making money.

SINA is part of the technology sector. They run a digital media network through SINA.com (their "portal") in addition to SINA mobile. They also control a majority stake in the Twitter-like microblog service Weibo.

Unfortunately for SINA shareholders the stock has collapsed. It's a long way from the all-time highs near $147 a share back in 2011. It's 2014 high was about $90. SINA was one of the market's worst performers last year with a -55% decline. That's likely because earnings have been so challenging. The last three earnings reports in a row have seen SINA guide lower. Revenues are falling and analysts are worried about margins.

The bearish trend of lower highs has pushed SINA toward key support near $35.00. A breakdown here could spark the next big leg lower. It is worth noting that Chinese Internet stocks can be volatile. I would consider this a more aggressive, higher-risk trade.

Tonight we are suggesting a trigger for bearish positions at $34.70 with an initial stop loss at $36.55, above the 10-dma.

Trigger @ $34.70

- Suggested Positions -

Short SINA stock @ (trigger)

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

Buy the MAR $35 PUT (SINA150320P35)

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


SodaStream Intl. - SODA - close: 17.93 change: -0.14

Stop Loss: 18.85
Target(s): To Be Determined
Current Option Gain/Loss: + 7.7%
Entry on January 05 at $19.42
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

01/17/15: SODA continues to underperform the market and shares failed to participate in the market's widespread bounce on Friday. I don't see any changes from my recent comments.

I am not suggesting new positions at this time.

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

01/15/15 new stop @ 18.85
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: 20.81 change: +0.44

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +19.7%
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

01/17/15: ZU has been a great performer for us. We had to close our January $25 puts on Friday before they expired. The plan was to exit the puts at the opening bell.

The stock trade is still going although we're 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) -

Jan $25 PUT (ZU150117P25) entry $1.15 exit $4.40 (+282.6%)

01/16/15 planned exit for the January $25 puts
01/15/15 new stop @ 21.65
Prepare to exit the January put option tomorrow morning
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



TASER Intl. - TASR - close: 25.36 change: +0.13

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: -4.5%
Entry on January 08 at $26.50
Listed on January 07, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: see below

01/17/15: TASR was not looking very healthy on Thursday so we decided to exit. Shares opened at $25.30 on Friday morning and spent most of the day hovering just above round-number support at $25.00. You can see on the daily chart below that TASR appears to have broken down from its bullish channel.

The policy body-camera story might still have legs to drive TASR's stock this year but shares may need to correct lower first.

- Suggested Positions -

Long TASR stock @ $26.50 exit $25.30 (-4.5%)

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

MAR $27 CALL (TASR150320C27) entry $2.50 exit $1.70 (-32.0%)

01/16/15 planned exit this morning
01/15/15 prepare to exit tomorrow morning
01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike