Option Investor

Daily Newsletter, Saturday, 1/24/2015

Table of Contents

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

Market Wrap

Kings Passing, Countries Collapsing

by Jim Brown

Click here to email Jim Brown

The markets were positive for most of Friday but global headlines and earnings misses produced too much uncertainty for traders to hold long positions over the weekend. However, the indexes posted their first positive week for 2015.

Market Statistics

On Friday the Dow was handicapped by the weeks -$3.50 plunge in oil prices to $45 with Exxon and Chevron heading the list of losers. The Dow Transports lost -161 points after UPS lost -10% on higher than expected holiday costs.

The Nasdaq posted the only gains for the day with support from the Netflix, Starbucks, Google, GoPro and Zillow.

The market week was looking good until Friday's open and everything began to fall apart. There was an attempt to move higher throughout the morning but there was no volume and no conviction. The death of King Abdullah caused uncertainty about the current policies on oil, the alliance with the U.S. on terror and whether terrorists would take advantage of the change in leadership to attack Saudi Arabia.

There was also profit taking after the big reactionary gains from the ECB decision on QE. After multiple analysts talked down the possible economic impacts of that move and the potential for Europe to continue sliding towards the abyss it is not surprising that traders wanted to take profits on Friday.

On the economic front the Chicago Fed National Activity Index showed that U.S. growth slowed in December. The headline number fell from 0.92 to -0.05 and the first negative reading in four months. The production component fell -0.12 after a -0.1% decline in Industrial Production.

However, here is the key point. A slowdown in "oil related activity" also contributed to the decline. Oil companies buy stuff that is manufactured in the U.S. and they are going to be buying a lot less in the coming months.

Hiring also declined from November's level of +353,000 to +252,000 and this weighed on the index. Housing permits also declined along with retail sales.

All is not well in the U.S. economy despite being the best house on a bad block.

On the positive side the rate of Existing Home Sales for December rose from 4.93 million to 5.04 million. That was actually below expectations but still a gain of +3.5% from the prior December. Sales in the Northeast declined -2.9%, Midwest -3.5% and rose +3.8% in the South and +9.8% in the West. The supply of homes on the market declined from 5.1 months to 4.4 months. The average home price rose slightly from $207,200 to $209,500.

However, only 29% of the home purchasers in 2014 were first time buyers. That is a three decade low and suggests there are still challenges in the economy. Wages are declining. People are forced to work two part time jobs because they can't get 40 hours at their primary job and credit requirements are still very high.

With 30-year mortgage rates near record lows we should see a surge of buyers as spring approaches. Mortgage applications surged 49.1% the prior week and +14.2% last week. In the prior week when applications surged, 66.4% of them were refinance applications.

The SEMI Book-to-Bill ratio fell from 1.02 in November to 0.98 in December. Orders have been lower than billings for 3 of the last 4 months suggesting demand is slowing. Bookings were $1,366.2 billion compared to shipments at $1,391.9 billion.

The calendar for next week has some definite problem areas. The Greek elections on Sunday could throw Europe into a tailspin if the left wing Syriza party wins as expected. Less than 18% of the public approves of the current Greek leadership and they have experienced two years of crushing austerity and 29% unemployment. This has given rise to Syriza party pledging to renegotiate the bailout terms on the nearly 200 billion euros of loans. The rise of "protest parties" in the polls suggests trouble ahead for Greece with the potential for an exit from the euro. However, in the last couple weeks the Syriza has tempered its comments on an exit probably in an attempt to attract more moderate voters to the party.

On Wednesday the FOMC will give us another update on their plans to raise rates later this year. This is not a quarterly meeting so there is no press conference. However, since there have been significant changes in the economic outlook, oil prices, the rise in the dollar and the QE from the ECB the post meeting statement could be different than what we got after the last meeting. This could be a challenge for the market.

Lastly the first look at the GDP for Q4 will be out on Friday. The official consensus estimate is for a decline from +4.97% in Q3 to +3.1% in Q4. However, there are multiple individual estimates in the 2.0% to 2.5% range. If the number comes in much under the 3.1% consensus it would cause some market stress since there is already some concern about the economy slowing.

Two new splits were added to the split calendar this week but neither are exciting. NJ Resources (NJR) is a small energy services holding company that supplies natural gas to about 504,000 customers in northern New Jersey. Westmorland Resources (WMLP) owns 15 surface mines and six mining complexes in eastern Ohio. The 5:4 split is uninteresting and shares outstanding at only 898,000 makes it untradeable.

The move by the ECB to launch a monster QE program disrupted currency markets around the world as the euro collapsed and moved even closer to parity with the dollar. The main points of the program are as follows.

Each of the 19 central banks in the eurozone will buy bonds issued by its own government and take the losses should that government default. That solves the problem of taxpayers in one country getting hit by losses in another country. Of course that only emphasizes the main problem that the eurozone is not one country but a loose collection of 19 different economies each with its own problems.

The program will begin in March and the 19 banks, using new money from the ECB, will buy a total of 60 billion euros of bonds every month until at least September 2016 or until inflation rises to the 2% target. The theory of QE is that it will lower the interest rates and make it more attractive for companies to increase investments and thereby grow the economy. By making the program unlimited in duration it shows the central bank is committed to fighting deflation however long it takes.

The side effect of the bond buying pushing interest rates lower is the deflation in the currency. A cheaper euro means products from Europe are cheaper and exports should rise. However, in order to offset the decline in the euro other countries are faced with their own currency problems. If the euro goes down it basically means other currencies are rising. Stronger currencies mean exports from those countries will decline. It is called a currency war. Everyone, except the USA, is working to weaken their currencies to maintain the status quo.

In addition to the ECB action and the Swiss removing the peg on the franc we also saw central bank actions from India, Denmark, Canada and Peru. Others are sure to follow.

Currency war cartoon from Hedgeye.

The downside to this is the dollar strength. With all the other countries pushing their currencies lower the U.S. dollar surged to a new 11-year high. That means U.S. companies are going to have a lot harder time selling overseas. We have already had a multitude of warnings about "currency headwinds" and the earnings cycle is just getting started. With the euro headed for parity with the dollar that means the dollar strength is only going to increase.

A sharply rising dollar means a continued fall in commodities. That means more deflation in costs and lower profits for producers. We may have just seen the ECB trigger an entirely new round of deflationary concerns.

The earnings calendar for next week has 25% of the S&P 500 reporting. The most watched events will probably be Apple on Tuesday, Facebook on Wednesday and Amazon, Alibaba and Google on Thursday. Over 450 companies report earnings this week. By the time this week is over we should have a very good idea how the rest of the cycle will play out. Only 179 companies have reported for Q4 and 60% beat street estimates on earnings and 60.1% beat on revenue. As the earnings progress they normally worsen as the big companies report early and smaller companies report later.

UPS upset the market on Friday after it warned that Q4 earnings were going to be ugly. The company spent millions to prevent a repeat of the 2013 holidays when a last minute flood of packages and bad weather led to more than a million packages not being delivered before Christmas. Unfortunately all that extra spending helped to avoid the late deliveries this year but it also led to higher costs that weakened earnings. The company said they expected package volume to rise +11% in December. They prepared for the "extreme spike" on Cyber Monday and again on December 22nd the last shipping day before Christmas and those problem days were handled. However, the company said package volume the rest of December was lackluster. They had far more staff on hand than they needed and the lack of volume led to higher costs per package. The peak staffing led to higher training costs and inefficiencies related to contract workers.

UPS now expects full year earnings of $4.75 compared to prior estimates between $4.90-$5.00. Analysts were expecting $4.96. For Q4 they now expect to earn $1.25 compared to $1.47 analysts expected. The company said strong "currency headwinds" would negatively impact results for 2015 and growth would be below their prior expectations of 9% to 13% for the year. UPS shares fell -10% on the news and knocked nearly 1.8% off the Transport Index.

Zillow (Z) soared +13% early in the day but faded to +8% by the close. The motivation for the move came from news regulators were going to approve the merger with Trulia (TRLA). Zillow is buying Trulia for $3.5 billion in stock. TRLA shares rallied +10%. Shares in both companies had declined significantly since the merger was originally announced.

Netflix (NFLX) shares are still in rally mode after the big earnings win on Tuesday evening. Shares are up almost $100 since the report. The big jump in Netflix shares was a major mover of the market on Wednesday. The company said it expected to complete its international roll out to more than 200 countries over the next two years and "generate material global profits from 2017 forward." Subscribers outside the U.S. rose by a record 2.43 million in Q4 to 18.3 million. They expect to add another 2.25 million in Q1. Netflix said it was planning on producing 320 hours of original content in 2015. That is three times the amount produced in 2014.

Starbucks (SBUX) exploded higher with a +7% gain to a new high after the company reported earnings that rose +82% to $1.30 compared to 71 cents in the year ago quarter. That met analyst estimates but the company said same store sales rose +5% compared to 1% in the year ago quarter. CEO Schultz said one in seven Americans received a Starbucks gift card for Christmas. More than 2.6 million cards were activated on Dec 23rd alone.

Starbucks has been expanding its food line and offering alcohol in some stores. The pilot programs have been so successful they are expanding the roll out to hundreds of additional stores. The company is now allowing customers in 150 stores to order their drinks online through their smart phones. That is expanding to 600 stores in Q1 and then nationwide later this year. Starbucks already processes more than 7 million mobile payment transactions every week. Over 13 million U.S. customers are using the Starbucks mobile app, up +30% since March, with more than 9 million using the mobile payment app. Schultz said numerous companies were knocking on the door to gain access to the mobile payment app technology for their own stores.

GoPro (GPRO) shares rallied after the company signed a deal with the National Hockey League to put cameras on players to put fans closer to the action on the ice. The partnership begins this weekend with the All-Star game. The cameras will transmit live HD video for broadcast. This is the first partnership with a sports league but you can bet there will be more. This is a big win for GoPro and could mean an end to the decline in the stock. Earnings are Feb 5th.

Got BOX? Shares of the cloud computing company were priced at $14 on Thursday night and closed at $23.15 for a +66% gain. Somebody priced that IPO too low. Analysts were surprised at the reaction to the IPO since Box lost $121 million for the first 9 months of 2014. Rapid Ratings, which rates companies on financial health on a scale of 0-100 gave Box a 23. The CEO of Rapid Ratings said the company had about a year to prove itself or be in serious trouble. They are spending twice what they earn and recently went through an identity crisis.

Originally they were going to compete with DropBox and Google Drive and sell to individual consumers. They suddenly changed direction and now sell only to corporate accounts. They have 44,000 paying customers including NBC, Fox and General Electric. Rather than just a place to store photos and emails they are focusing on developing tools for enterprise users to share and collaborate on stored data. Revenue for the first 9 months of 2014 rose +80% to $154 million.

Kimberly Clark (KMB) posted adjusted earnings of $1.35 which missed analyst estimates at $1.37. Revenue of $4.83 billion also missed estimates of $4.91 billion. The company warned that sales were expected to fall 3-5% in 2015 and that would reduce earnings from the current $6.00 estimate to a range of $5.60-$5.80. The reason for the big drop was the strong dollar and weak currencies elsewhere. The company expects the strong dollar to reduce revenue by 8-9% in 2015.

When overseas sales of Kleenex and Huggies diapers are impacted by the strong dollar you know that higher priced items from any U.S. company are going to be impacted as well. Kimberly Clark gets about half its revenue from international sales. In 2014 the company benefitted from strong demand in Brazil, China, South Africa and Vietnam helping to offset declines in other countries. In Q4 the company said volumes fell significantly in Venezuela as a result of the currency crisis there. Nobody has any dollars to pay for importation of their products and the official exchange rate of 6 Bolivars to the dollar is not even a fraction of the black market rate of 184 to the dollar. It makes no sense to accept Bolivars for your imported products. Shares fell -6% on the news.

This is a very obvious sign that the dollar strength is going to be a challenge for S&P earnings since about 50% of the revenue on the S&P comes from international sales.

Honeywell (HON) reported adjusted earnings that rose +15.3% to $1.43 that beat estimates of $1.42. Sales declined -1.1% to $10.3 billion and narrowly beating estimates of $10.2 billion. However, Aerospace sales declined by -6% to $4 billion as a result of the strong dollar. They reaffirmed full year guidance of $5.95-$6.15 and sales of $40.5-$41.1 billion. Analysts were expecting $6.11 and $41.7 billion. The company blamed the strong dollar and currency translation issues for the weak forecast. Shares responded positively to the news with many analysts expecting an earnings miss.


We have reached the fork in the road as Johnny Carson joked so many times in decades past. The rebound last week from oversold conditions was basically a short squeeze and traders positioning themselves ahead of the ECB decision. The S&P rebounded to prior resistance at 2,064 and stalled. The coming week is going to be crucial for longer term market direction.

The FOMC meeting, the GDP and the Employment Cost Index could represent potholes in the rally road. Earnings reports from 25% of the S&P could either propel us higher or kill the rebound depending on the results. Eventually the strong dollar excuse will be a "get out of trouble free" card once enough companies use it. Initially it could be a slick spot in the market's uphill climb. We have seen in quarters past when there is a common excuse that is not the fault of the companies that the excuse is eventually ignored. Investors just accept it and overlook it. I don't think we are there yet although Ford (F) warned it was taking an $800 million charge for currency issues and the stock declined only 12 cents.

The election in Greece will be a lingering trouble spot all week. Whichever party wins they will have three days to form a coalition. If they can't form a coalition the country would be forced into new elections. They need 38% of the vote for a parliamentary majority and the Syriza party is expected to win with only 32.5% of the vote. There are 22 parties in the election. Syriza will have to form a coalition with one or more to reach the 38% control needed for Parliament. Since only a handful of those 22 parties will garner the minimum 3% of the vote to gain a seat in parliament that will limit the possible coalition partners willing to join with Syriza. Greek elections are very confusing because of the wide number of parties and the rules governing the resulting parliament. This means just winning the election on Sunday is only the first step and we will be faced with Greek headlines for the rest of the week. Assuming Syriza does win and is able to form a coalition they will then have about five weeks until the payment deadline on the nearly 200 billion euro loan from the Troika bailout. Syriza claims they are not going to pay it and will scrap existing austerity measures and those headlines will roil the European markets.

Now that the State of the Union is behind us the next problem from Washington will be the expiration of funding for the Dept of Homeland Defense on Feb 27th. Congress is going to use that deadline to pressure the president on his executive actions on immigration. While this is not as big as shutting down the entire government it will be a huge fight with homeland defense as the main topic. With terrorist actions rising the administration will be hammering home the point that we can't do without homeland defense. It could become a very high profile skirmish between the president and Congress so once Greek headlines fade the funding headlines will begin.

Don't you wish this was the good old days when all the market had to worry about was earnings and analyst recommendations?

While all these problems exist in our immediate future we have no idea how they will play out. We need to just follow the charts and not get married to our positions. All the charts are showing key resistance levels and a failure at those levels could lead to another round of market weakness.

The S&P level to watch is 2,064 and the resistance high from January 9th. If we don't exceed that level it would be another lower high and project the potential for a lower low in the days ahead. Breaking through and closing above that level would be bullish and project a return to the December highs at 2,093. Clearly a move through 2,064 would trigger additional short covering but not guarantee a breakout to new highs. There are far too many headlines in our future although bull markets do like to climb a wall of worry.

The Dow failed to return to the January resistance highs at 17,915-17,923. Friday's resistance failure at 17,800 was a lower high and right at downtrend resistance from the December highs. What we have is a triangle forming and eventually there will be a high velocity breakout but today the direction is unknown.

The Dow is particularly at risk because the Dow components are all international companies. They will all have significant currency issues and earnings problems.

Support is 17,275 and resistance 17,800 and 17,915.

The Nasdaq 100 was my key index for the last two weeks and it outperformed by a mile. The index gained +3.28% for the week compared to +0.9% for the Dow and +1.6% for the S&P. The Russell 2000, normally the best performer in January gained only +1.0%. The Nasdaq 100 made a higher high and came very close to downtrend resistance at 4,300 with a high at 4,292 on Friday. The Nasdaq big caps will be driven by the Apple earnings on Tuesday. Traders will be cautious ahead of the event and then follow Apple on Wednesday. Microsoft reports on Monday and they could also be a lift or an anchor.

This is a somewhat bullish chart with the triple bottom just below 4,100 and the approaching resistance test at 4,300. If the $NDX breaks through that 4,300 level it will be very close to a new relative highs at 4,321 for December and 4,337 from December. If the large caps decide to run they could drag the rest of the market with them.

The Nasdaq Composite is less defined but the objective is clear. Resistance at 4,800 from November would be a triple top head and shoulders formation if the index failed at that level. The 14 year high in December of 4,813 would be the next challenge. The Composite index could struggle if a lot of the smaller stocks start missing on earnings. I would rather key on the $NDX and let it pull the composite index along.

Support 4,570 and resistance 4,800.

The Russell 2000 is underperforming and stuck in its recent range between 1,150-1,190. The small caps are being avoided even though they are primarily U.S. focused and have little currency exposure. The weakness stems from the constant whining about deflation in Europe contaminating the rest of the world economy and eventually dragging our markets lower. Since most small caps are U.S based this European malaise excuse is unfounded.

However, we have to trade what we see rather than what we believe. If small caps are not performing then trade something else. This is a stock pickers market rather than a market of stocks.

The NYSE Composite is still the weakest index. This is probably due to the number of energy and financial stocks in the index. This is a market breadth indicator and it is telling us the broader market is still weak.

The Dow Transports collapsed on Friday with a -1.7% decline thanks to UPS. Earlier in the week the transports tried to rally with the market but the effort was lackluster despite the low prices on oil.

The Goldman Sachs Commodity Index continues to decline with Friday's close the lowest since the financial crisis. Copper, iron, coal, oil, etc continue to push lower as institutional traders are forced to close positions to escape margin calls. Speculators continue to short the commodities because of the rising dollar. It takes less dollars to buy the same pound, barrel, etc, and because of expectations for lower demand in Europe.

I am neutral on the market for next week because of the whirlwind of cross currents in the headlines and the various economic events. This could be a very choppy week for trading. Try not to launch a lot of big bets because the market will almost always go against you when there is a lot of money at risk. Maintain small positions and trade in the direction of the trend. After this week we should see the market turn directional based on the combination of all these events.

Random Thoughts

Many U.S. companies have assets stuck in Venezuela which they are unable to extract. American Airlines (AAL) has $721 million held in the Venezuelan Bolivar currency. It can't remove this money from the country because it can't get dollars in Venezuela. If the airline converted the money at the current market rate of 184 to the dollar they would only receive $25 million. Overall foreign companies have about $16 billion in cash in Venezuela that they can't repatriate. These companies are going to have to take significant charges for currency conversion in their future earnings. Currently the official government exchange rate is 6.4 Bolivar's to the dollar but nobody is willing to do the transaction. There are no dollars in Venezuela. The government said on Friday it is considering merging the three exchange rates that exist and the result would be something in the 50:1 range but even at that level there are no dollars to exchange. If the government does devalue the Bolivar every company with dollars held hostage will be forced to take a charge on their statements. Expect a lot of Venezuelan line items in the coming earnings reports. P&G, Ford, General Motors, Baker Hughes, Brinks and others have already announced charges.

Saudi Arabia is in trouble. King Abdullah died last week and King Salman has taken over as his successor. Immediately the new king is facing a world of problems. With Iranian backed rebels taking control of Yemen last week and the U.S. backed government dissolving that is one more country bordering Saudi Arabia that is hostile to that country. Iranian backed rebels or Iranian troops now control significant portions of Iraq, Syria, Jordan and Lebanon.

Saudi is currently constructing a high tech 600 mile long border fence along the Iraq border to keep ISIS and refugees from Iraq out. Called the Northern Border Security Project it is a high tech way to provide alerts if ISIS decides to cross the border into Saudi Arabia. One of the ultimate goals of ISIS is to capture Saudi Arabia, home to the "Two Holy Mosques" of Mecca and Medina. The project had been discussed since 2006 but work began on a crash basis in September after ISIS began charging across Iraq. The border defense zone includes five layers of razor wire fencing, watch towers, night-vision cameras and radar cameras. There are underground censors, sand berms, reconnaissance vehicles, 240 rapid response vehicles, helipads, 1,450,000 meters of fiber optic cable and 30,000 troops. Despite all this preparation this may not be enough to protect the country with Iranian backed forces on nearly every side. Description of fence with pictures

If those are not enough problems the new king is 79 years old, is partially crippled by a previous stroke and suffers from dementia.

Since the attack on Charlie Hebdo in France more than 19,000 French websites have been hit by cyber attacks according to a top French security official. Many of those were carried out by well-known Islamic hacker groups. The sheer volume of attacks had never been seen before according to French officials. Military authorities have launched round the clock surveillance to protect government sites coming under attack.

In the unbelievable but true column President Obama agreed to be interviewed after the SOTU speech by GloZell, a self described YouTube star with more than 3 million subscribers to her channel. Her claim to fame is filling a bathtub with milk and fruit loops and then swimming in the mess while slurping up the cereal. Other programs on her channel include stuffing a condom up her nose. Meanwhile the president refuses to meet with Israeli President Netanyahu when he visits the U.S. in early March.

The president has also refused to put combat troops on the ground in Iraq but there are rumors there will be U.S. military advisors (translation = SEALS) on the front lines when the Iraqi military attempts to retake Mosul in the coming weeks. The retaking of Mosul is likely to be an intense and long lasting battle. Coalition forces have intensified air strikes around Mosul in an effort to cut supply lines and degrade the forces currently holding the city. General Dempsey said the U.S. advisors would "support Iraqi forces on the ground." They could call in air strikes and direct Iraqi forces during the battle. Anyone close enough to do those things would have to be close enough to be targeted by ISIS artillery.

Business Insider published a great chart of past bull/bear markets and their durations. This reduced size version is a little hard to read but click the link for the full size version. It is worth the click. Bull and Bear Markets

Despite the weak economics, record lows on the 30-year treasury, monster QE in Europe and shrinking economies in China and Japan, the Fed is still pushing the mid-year rate hike scenario. They believe the falling oil prices are going to be so stimulative to the economy that rate hikes will be necessary to slow inflation. We don't have any inflation now but they are convinced it will appear by summer. Future employment reports could throw a wrench into their plans. With hundreds of thousands of energy related workers losing their jobs it will be tough for the economy to offset that drain. Also, removing hundreds of billions in spending by energy companies is going to be a serious drag on GDP. Thanks to cutbacks in energy employment initial jobless claims have risen about 50,000 per week since the cycle low in October. Stay tuned!

A survey by ConvergEx Group of 306 investment professionals found that crude prices are just $17 away from triggering a global recession. They found that at some point low oil prices are no longer stimulative and the decline in exploration and production spending triggers a global slowdown. The $30 level is the most common trigger point according to the analysts surveyed. $35 was the second most common level listed with 26% of respondents believing that would trigger the global recession. Over 68% of respondents believe oil prices have not yet bottomed.

Active rigs drilling for oil and gas declined -43 to 1,633 for the week ended on Friday and is now down -15% from the highs at 1,926 back in September. This is the lowest level of activity since August 2010 and dropping fast. Despite the decline in active rigs U.S. production declined only 6,000 bpd from the 35 year high of 9.192 mbpd in the prior week. Crude inventories rose 10.1 million barrels last week and the largest increase since March 2001 and the highest inventory level for late January in 8 decades. It will take 6-12 months for the impact of the rig declines to be reflected in oil production.

Green = recent highs, yellow = recent low.

Gasoline prices continue to decline with the streak currently at 119 days. Oklahoma is in the lead with gasoline prices at $1.49 at several stations. AAA reported on Saturday the national average was $2.03 and still declining. They are predicting sub $2 gasoline by the end of next week.

So far every trading day in 2015 has seen a Dow trading range of more than 200 points. This is extremely rare. Fifteen days in a row of 200 point ranges has not been seen in a long time. On analyst pointed out that even moderate orders are moving markets and nobody appears ready to take long term positions. Funds are trying to move money around but having a very hard time doing it because of the volatility. Volume is shrinking with only 6.2 billion shares on Friday. Volume has been heavy on the down days and light on the rally days. The higher we move the lighter the volume. Indecision is rampant. Conditions are setting up for another flash crash.

The Transportation Security Administration (TSA) found more than 2,200 guns in airport carry-on bags in 2014. That is 400 more than they found in 2013 and three times the number found in 2005. Over 80% of those guns were loaded. This statistic is unbelievable. Why anyone would think they could just walk on an airplane with a loaded gun in their bag after 14 years of increased airport security is unknown.

Israel released security video of new Iranian Intercontinental Ballistic Missiles capable of reaching the USA. The video shows a long-range 27 meter missile on a launch pad outside Tehran. There are U.N. sanctions against Iran to prevent them from developing long-range missiles. Apparently the sanctions are not working too well. Also, the IAEA now says Iran has enriched enough uranium to construct between 8-12 nuclear weapons within 3-6 months. More than 86% of Middle Eastern experts surveyed believe President Obama will not be able to stop Iran from constructing and testing nuclear weapons over the next 12-18 months. That is really unsettling.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"It is the soldier who salutes the flag,
Who serves beneath the flag,
And whose coffin is draped by the flag,
Who allows the protester to burn the flag."

Charles Province


New Plays

A Bearish Package

by James Brown

Click here to email James Brown


Greif, Inc. - GEF - close: 39.59 change: -1.10

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 22, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of GEF are crumbling like wet cardboard. The company operates in the consumer goods sector. They make packaging and container products. According to a company press release, "Greif is a world leader in industrial packaging products and services. The company produces steel, plastic, fibre, flexible, corrugated and reconditioned containers, intermediate bulk containers, containerboard and packaging accessories, and provides blending, filling, packaging and industrial packaging reconditioning services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 50 countries to serve global as well as regional customers."

Unfortunately for investors GEF did not have a good 2014 on the earnings front. They missed analysts estimates the last four earnings reports in a row. In August 2014 GEF's management guided earnings lower. In December they lowered guidance again.

GEF's most recent earnings report was January 14th and Q4 earnings plunged -90% to $8.7 million. Revenues dropped -4% to $1.05 billion, below Wall Street estimates. For all of 2014 GEF said profits declined -38% and revenue slipped -3%. Once again management guided earnings lower. They now expected 2015 earnings in the $2.25-2.35 range compared to Wall Street estimates of $2.78 a share.

The company's earnings report provided an outlook where management issued this statement:

The company anticipates the overall global economy to reflect a modest recovery in fiscal 2015, with positive aspects of the improving economy in the United States being offset by the negative trends in other regions, particularly in Europe and Latin America. We anticipate that foreign currency matters will continue to present challenges for the company, as the strengthening of the United States dollar against other currencies will continue to impact the company’s revenues and net income.

Following GEF's Q4 results several analyst downgraded their rating on the stock. The point & figure chart is bearish and currently forecasting at $31.00 target.

Technically Friday's display of relative weakness (-2.7%) broke down through significant support near $40.00. We are suggesting bearish positions immediately on Monday morning. More conservative traders may want to wait for a little confirmation (perhaps a decline below $39.25). The nearest support looks like the $35 and $30 regions.

NOTE: GEF does have options but the spreads are too wide to trade.

Launch bearish positions at the opening bell

- Suggested Positions -

Short GEF stock @ (the opening bell)

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Equities Fail To See Follow Through On QE Rally

by James Brown

Click here to email James Brown

Editor's Note:
After widespread gains on Thursday thanks to new QE from the ECB, the U.S. market did not see much follow through on Friday.

Currently markets are focused on the Greek elections this weekend.

TRCO hit our stop loss.

Current Portfolio:

BULLISH Play Updates

ACADIA Pharmaceuticals - ACAD - close: 31.88 change: -0.69

Stop Loss: 31.25
Target(s): To Be Determined
Current Option Gain/Loss: -3.7%
Entry on January 20 at $33.10
Listed on January 17, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.24 million
New Positions: see below

01/24/15: The S&P 500 just delivered its first four-day rally of 2015 with a pullback on Friday. Unfortunately ACAD did not participate very much. The longer-term trend is still bullish but short-term ACAD appears to be flashing us a warning signal.

Tonight we are choosing to exit this trade early. We will plan on closing this trade on Monday morning. It might be worth keeping ACAD on your radar screen should the stock resume its up trend.

*small positions to limit risk* - Suggested Positions -

Long ACAD stock @ $33.10

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

Long FEB $35 CALL (ACAD150220C35) entry $1.00

01/24/15 prepare to exit ACAD on Monday morning.
01/20/15 triggered @ 33.10
Option Format: symbol-year-month-day-call-strike


Burlington Stores, Inc. - BURL - close: 51.25 change: +0.61

Stop Loss: 48.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.3%
Entry on January 23 at $51.10
Listed on January 22, 2015
Time Frame: Exit PRIOR to earnings in mid March
Average Daily Volume = 830 thousand
New Positions: see below

01/24/15: Our new play on BURL is open. Shares displayed relative strength on Friday with a +1.2% rally. The stock hit our suggested entry point to launch bullish positions at $51.10.

Earlier Comments: January 22, 2015
One of the best performing stocks last year was BURL. The stock gained +47% in 2014 versus the S&P 500's +11% gain.

According to the company website, "Burlington is a national off-price apparel, home and baby products retailer, operating in the United States and Puerto Rico. We offer great value to our customers by featuring high-quality, primarily branded apparel, home and baby products at "Every Day Low Prices", to deliver savings of up to 60-70% off department and specialty store regular prices. We operate more than 500 stores under the Burlington Coat Factory, Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes nameplates."

The company has been on a roll and is poised to see earnings grow +100% in its current fiscal year. Management has been consistently raising estimates. Back in September they reported earnings that beat estimates on both the top and bottom line and raised their full year guidance. They beat again with their earnings report in December and raised guidance. Then on January 9th they raised guidance again. We are starting to see Wall Street analysts raise their price targets for BURL into the $58-60 zone.

Investors have been consistently buying the dips. Now shares are in the process of breaking out past round-number, psychological resistance at the $50.00 level. Tuesday's high was $50.90. Tonight I am suggesting a trigger to open bullish positions at $51.10.

- Suggested Positions -

Long BURL stock @ $51.10

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

Long MAR $55 CALL (BURL150320C55) entry $1.87

01/23/15 triggered @ 51.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 36.42 change: +0.97

Stop Loss: 34.85
Target(s): To Be Determined
Current Option Gain/Loss: +10.2%
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

01/24/15: The rally in SFM accelerated on Friday with a +2.7% gain. The stock delivered a big week with a +7.0% gain. SFM is probably short-term overbought so don't be surprised to see a dip soon.

We are raising our stop loss to $34.85. 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

01/24/15 new stop @ 34.85
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: 29.84 change: -0.22

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +2.4%
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

01/24/15: DISCA continued to struggle with round-number resistance near $30.00 on Friday. More conservative investors might want to tighten their stop loss. Traders looking for a new entry point may want to wait for a new relative low (below $28.75).

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: 28.85 change: +0.19

Stop Loss: 31.05
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
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

01/24/15: Shares of LGF briefly traded above resistance at $29.00 on Friday (intraday high was $29.09). The stock did show relative strength with a +0.6% gain, which might suggest some caution here. Looking at the intraday chart I am suggesting a new decline under $28.50 could be used as a bearish entry point.

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


Zulily, Inc. - ZU - close: 19.88 change: -0.05

Stop Loss: 21.65
Target(s): To Be Determined
Current Option Gain/Loss: +23.2%
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

01/24/15: ZU delivered a quiet session on Friday as shares drifted sideways. If the recent pattern holds true then ZU will likely bounce up and tag technical resistance at its simple 10-dma (currently near $20.70) and then roll over into another drop to new relative lows.

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) -

(option trade was closed on Jan. 16th, 2015)
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



Tribune Media Co. - TRCO - close: 57.78 change: +2.00

Stop Loss: 56.65
Target(s): To Be Determined
Current Option Gain/Loss: -5.0%
Entry on January 21 at $53.95
Listed on January 20, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 501 thousand
New Positions: see below

01/24/15: TRCO hit our stop loss on Friday. I don't see any specific news behind the relative strength (+3.58%). It looks like after shares broke through short-term resistance at $56.00 the stock may have seen some short covering.

- Suggested Positions -

Short TRCO stock @ $53.95 exit $56.65 (-5.0%)

01/23/15 stopped out
01/21/15 triggered @ 53.95