Option Investor

Daily Newsletter, Saturday, 1/31/2015

Table of Contents

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

Market Wrap

Thank Visa, Google, Biogen and Amazon

by Jim Brown

Click here to email Jim Brown

The Dow lost -252 on Friday but it would have been a -302 loss if not for Visa's $7 gain that added about 50 Dow points. Ditto on the Nasdaq if not for Google's +24 point gain, Biogen's +36 and Amazon's +43 points.

Market Statistics

Earlier in the Day Visa was up +15 and adding about +115 Dow points but once the selling accelerated into the close that gain was cut to +$7. Google's gains were cut -5 to +24 and Amazon lost -5 to gain +43. Those big gains kept the major indexes from declining further into the red. The Dow lost -251 to close at a six week low. Even a +7% spike in crude prices could not rescue the markets from a very bad day.

January was not a good month for the markets with the major indexes averaging about a -3% loss. Biotechs were the big winners with energy, semiconductors and financials the big losers.

A lot of the market negativity on Friday came from the economic reports. The GDP for Q4 was much weaker than expected and losing almost half of the Q3 gains. The Q4 GDP came in at +2.6% growth, less than the consensus estimates for +3.1% growth and Moody's estimate for +3.4% growth. This was far less than the +4.97% growth in Q3 but nobody expected that to continue. Consumer spending rose +2.87%, up from +2.2% in the prior quarter, but fixed investment gains declined from +1.21 to +0.37%. An unexpected buildup in inventories also boosted the headline number by +0.82% but it will detract from future quarters. A buildup in inventories can occur when manufacturers are expecting stronger demand ahead or when demand slows and retailers are not ordering as much product as before. Final sales, which excludes the impact of inventories, rose +1.8% after gaining +5% in Q3.

Net exports subtracted -1.02% as a result of the strong dollar. Government spending declined and subtracted -0.4% from the headline number. Disposable income rose +3.8% after a +2% rise in Q3.

We will see two more revisions of the Q4-GDP in the coming months and the revisions are typically volatile. We will not see Q1 GDP until late April and expectations are for another decline in growth. Almost all of the recent economic reports have shown a decline in activity and the drop in energy spending will also weigh on the GDP.

This report confirmed what many analysts had feared regarding the slowing U.S. economy. This report along with the many earnings misses due to the strong dollar helped push the indexes lower on Friday.

The Employment Cost Index for Q4 posted a minor decline in the headline number from +0.7 to +0.6% and a three-month low. Wage growth slowed from +0.8% in Q3 to +0.5%. Benefit costs were flat at +0.5% growth. Compensation is up +2.3% for the full year and flat with the Q3 rate. That is actually the highest rate in more than two years. Benefit costs for the full year rose +2.6% and also a multiyear high.

The weakening of the economic numbers drove treasuries higher and yields lower. The yield on the 30-year declined to 2.251% and a 65 year low. Treasury yields are still telling us there is trouble ahead.

The final revision of Consumer Sentiment for January declined only slightly from 98.2 to 98.1 and remains at an 11-year high and up +4.5 from December. The current conditions component rose from 104.8 to 109.3 and the expectations component rose from 86.4 to 91.0. Consumers are very happy about the decline in gasoline prices plus 40% reported their incomes were higher than last year. That is up from 34% of the respondents in December. The holiday bonus payouts must have been higher than expected.

Those respondents expecting business conditions to be better in 2015 increased from 29% in December to 37% in late January.

Next week is payroll week. The worry over the Friday payroll numbers will hang over the market all week. The ADP report on Wednesday could soften some of those fears if the number is decent.

The Manufacturing ISM on Monday could be a pothole if it comes in much weaker than expected. This is a national report and the various regional reports have been showing weaker results.

There were several new splits announced last week. Visa was the biggest company with a 4:1 split for six weeks from now. This will definitely be tradable once the Friday bounce fades. Hanes Brands is also a 4:1 for March 3rd and should also provide a split run if the market cooperates. Rollins is a 3:2 split and that ratio does not normally provide much in the way of a ramp into the split. I would bet on Visa and Hanes for the best performance.

Visa (V) reported earnings of $2.53 compared to estimates of $2.49 and revenue rose +7% to $3.38 billion. Transaction volume rose from $1.84 trillion to $1.90 trillion. The company affirmed 2015 estimates but warned they expected at least a 2% impact from the strong dollar. About 60% of Visa's volume is outside the USA. The CEO said the use of credit cards was unusually strong during the holiday quarter. Also, he said they were seeing the results of the lower gasoline prices in the payment/shopping trends of card holders. Fifty percent of the savings was actually being saved with 25% going towards paying down debt and 25% spent on groceries, restaurants and clothing. Visa shares spiked +15 at the open to supply about +110 Dow points but faded at the close to +7 and +50 Dow points. The company also announced a 4:1 split, which will remove some of the volatility in the Dow when Visa shares decline from $260 to $65. Visa will go from the heaviest weighting in the Dow to number 20. Goldman Sachs will become the top dog in terms of weighting.

Amazon (AMZN) shocked investors with a huge profit for Q4. Earnings were 45 cents compared to estimates for 23 cents. That translates into $214 million in net income compared to losses in the prior two quarters. Revenue rose +15% to $29 billion and gross margin was 30%. Sales increased +20% to $89 billion for the full year. Amazon took a monster hit of $895 million from the strong dollar.

The company said its Prime memberships grew by 53%. They added more than 10 million Prime members since Thanksgiving. Some analysts estimate they have between 40-45 million Prime customers but Amazon does not release the numbers. The average Prime member spends $1,500 a year and a regular Amazon customer spends about $625 per year.

Amazon said its Amazon Web services (AWS) grew 90% in Q4 and topped 1 million customers. Starting in Q1 they will breakout the revenue/income for AWS rather than lumping it into the "other" category. Amazon obtained a bank loan of $2 billion and sold $6 billion in debt in order to continue building out datacenters and regional distribution hubs for faster shipments. There are some analysts who believe Amazon will eventually spinoff AWS and with gross margins of 90% and user growth in the 90% range it would likely be worth somewhere over $30 billion compared to Amazon's total market cap of $145 billion.

They guided for Q1 for sales of $21.9-$22.9 billion compared to estimates for $23 billion. Because Amazon spends/builds frantically in the first two quarters when online buying is slow they guided to a -$450 million loss to +$50 million in profits in Q1.

Amazon makes up 4.03% of the Nasdaq 100.

Google (GOOG) reported earnings Thursday evening of $6.88 compared to estimates for $7.08 but investors did not seem to care. The CFO blamed the strong dollar for the lower than expected performance. Revenue minus traffic acquisition fees was $14.48 billion and lower than the $14.61 billion estimate. Google's share of the advertising pie is still shrinking. Facebook's share rose from 5.4% in 2012, 17.5% in 2013 and 21.7% in 2014. In 2013 Google owned about 50% of the market but that is declining as Facebook and Bing continue to grow. Expenses rose +22% with 46% of that in R&D for things like self-driving cars.

Investors seemed to applaud the results with Google shares rising +24 to $537. This is still below decent resistance at $550. Google makes up 7.22% of the Nasdaq 100. Apple is 11.55%.

Biogen Idec (BIIB) reported earnings of $4.09 compared to estimates of $3.76. Earnings nearly doubled the year ago quarter. Revenue of $2.64 billion fell short of estimates at $2.65 billion. The company projected earnings for 2015 of $16.60-$17.00 compared to analyst estimates of $16.37. Shares exploded higher with a 10% gain of +$36. Biogen is 1.07% of the Nasdaq 100.

Intuitive Surgical (ISRG) reported earnings of $4.92 compared to estimates of $4.38. However, despite a 10% growth in robotic surgeries in Q4 the company warned that growth in 2015 could range from 7% to 10%. Expenses rose +10% while surgical profits declined -12% due to increasing competition. With a PE of 45 this was not good enough and investors dumped the stock. ISRG is not in the top 25 highest weighted companies in the Nasdaq 100 so the $10 decline was not a material influence.

Paccar (PCAR) reported earnings of $1.11 compared to estimates of $1.09. Revenue of $5.12 billion also beat estimates of $4.96 billion. The company said lower fuel prices were stimulating a boom in truck sales. Despite the positive results shares collapsed with a -6% loss.

Intercept Pharmaceuticals (ICPT) said its obeticholic acid (OCA) product had received "breakthrough therapy" designation from the FDA. The product treats the life threatening liver disease NASH. The designation will allow ICPT to speed the drug through the final trials and into the market. The drug reverses liver damage due to NASH. Shares rallied $30 on the news.

Dow component Chevron (CVX) reported earnings that declined -28% to $1.85 but that still beat expectations of $1.63. Revenue fell -18% to $46.09 billion and well above estimates of $30.65 billion. Production was flat at 2.58 mbpd. Prices received per BOE declined from $90 to $66 in the U.S. and down from $101 to $68 internationally. Chevron announced a capex budget of $35 billion that was down -13% from 2014. The company said it was going to halt its share buyback until oil prices improved. Chevron shares were down only fractionally.

The earnings calendar for next week is heavily weighted towards Wednesday and Thursday. However, Exxon on Monday is the bellwether for the energy sector. How they handled their capex decisions will be critical news for investors. Disney and UPS highlight Tuesday. More than 100 S&P companies report this week and three Dow components.

In other news Shell said it would cut $15 billion in spending over the next three years. Conoco said it was cutting capex spending even further than previously announced, down from $13.5 billion to $11.5 billion.

Shake Shack (SHAK) priced its IPO on Thursday night at $21. Shares rocketed to $52.50 at the open before falling back to close at $45.90 and a +118% gain. This is an amazing open considering they only have 63 stores. The $1.6 billion valuation at the close equates to about $27 million per store. That is a price to sales ratio of 15:1 compared to Chipotle (CMG) at 6:1. SHAK started in Madison Square Park in Manhattan in 2008. Store locations grew during the recession but locations outside Manhattan are far less profitable. For the first nine months of 2014 the company only generated $84 million in revenue while net income of $3.5 million was -21% below 2013 levels. They burned $7 million in cash in the first 9 months and had only $6 million as of Sept 30th. Net profit margins are only 4.2% and very low considering the post IPO valuations. McDonalds averages 17% profit margins but most of their 36,000 stores are run by franchisees.

The IPO will transfer 31.6% of the parent corporation ownership in Shake Shack to Shake Shack. The funds from the IPO will be used to repay a $22 million loan to the parent SSE Holdings Inc. Cash payments from Shake Shack will also be made to the existing 68.4% of owners as a tax avoidance strategy to Continuing SSE Equity Owners. They don't disclose the amount of the payments but they will be large and that will subtract from the available cash left to build the business. Lastly, the post IPO valuation of more than $1 billion now requires them to report earnings using GAAP methods and that will eliminate a lot of the nonstandard terms they used in the prospectus to discuss earnings and expenses. Things like "adjusted EBITDA," "Shack-onomics" and "cash-on-cash return" will now have to be stated in normal accounting terms. The potentially negative impact of this change was also mentioned in the prospectus.

I know Shake Shack is a cult like favorite in New York but I would be looking for any way possible to short it once the IPO buzz wears off.

A rally in crude prices tried to lift the market late in the day but the general negativity from economics and earnings was too much to overcome. The +7% spike in crude prices was blamed on news that ISIS had launched a surprise attack on Iraqi Kurdish positions on the outskirts of Kirkuk on Friday. A senior Kurdish commander and at least five of his men were killed. The assault on Kirkuk was one of the most aggressive on record by ISIS. The surge by ISIS into Kirkuk surprised everyone given the beating they have been taking from coalition air assets.

Kirkuk is a critical area for export of oil from Iraq with those fields exporting oil through a pipeline through Turkey.

I am doubtful this news will amount to anything but it may have been the spark that touched off some serious short covering in the futures market. With numerous analysts still expecting to see WTI decline into the $30s there were a lot of shorts in the market. The afternoon spike was clearly a short squeeze that once started tended to feed on itself.

However, note that the rebound started on Thursday and faded somewhat at Friday's open. When the morning dip was bought the afternoon short squeeze was born.

The active rig count plunged by -90 to a five year low at 1543. That was the biggest weekly decline since the financial crisis. That brings the number of rigs cut to -388 since the end of September. That is a -20% decline and the pace is accelerating.

Canadian rigs are down -214 to 608 (-26%) from last year's level at 822.

With the massive cuts in capex spending, 20% decline in active rigs and the expected production declines 3-6 months from now we are probably at or near a bottom in the energy crash. I believe this is a twice a decade buying opportunity in energy stocks.

Since June investors have lost -$393 billion on energy stocks. Over $350 billion of that loss came from declines in 76 energy companies that Bloomberg tracks. Another $40 billion loss came from high-yield bonds issued by energy companies. Oil and gas E&P companies have invested more than $1.4 trillion into the sector over the last five years. There were $286 billion in joint ventures, investments and spinoffs. There were $353 billion in initial public offerings and companies borrowed $786 billion in bonds and loans.

We are just starting to see the earnings reports from the energy sector and there will be a lot of ugly in the weeks ahead. Those with the best reports will be the best candidates for long term positions. Those with the worst reports, falling cash balances, high debt and expensive production will be the ones to short and or be acquired.


There are so many problems with the market I don't know where to start. The market runs on two things. Those are earnings and economics. The decline in the global economy is accelerating. The Eurozone is falling further into deflation status and the ECB QE program will not begin until March. Prices in the Eurozone declined -0.6% year over year in January and a steeper decline than the -0.5% drop expected by analysts. This follows the December decline into deflation of -0.2% and the weakest since 2009.

Germany reported it also slipped into deflation with a -0.3% year over year decline in prices in January. The drop in Germany means that not only the periphery is in decline but also the core since Germany was the strongest economy in Europe. The Danish central bank cut its rates for the second time in a week. They cut the rate paid to commercial banks for excess funds parked at the central bank to -0.5%. It was already negative but now even more negative. That means banks have to pay the central bank to hold their excess cash. The Danish Krone is still pegged to the euro so expect another currency upset like we saw from Switzerland as the euro continues to fall.

Energy prices are aggravating the decline in overall prices in Europe. In January energy prices fell -8.9% after a -6.3% decline in December. While that may be good deflation since lower energy prices are stimulative it also reduces the cost of everything else because of lower input costs. Unemployment in the Eurozone declined from 11.5% to 11.4% and the lowest level since 2012.

The Baltic Dry Index declined to its lowest level in 26 years indicating a severe lack of cargoes to be shipped. The Baltic is the base rate for renting a cargo ship for dry cargoes such as grain, fertilizer, mineral ore, coal, etc. The demand for shipping is not just at the low for the economic cycle but a multi-decade low.

It is hard to build a market case for a rebounding economy when there is almost no demand for commodity shipping. The commodity index rebounded +2.9% on Friday only because of the short squeeze in oil of +7%. It is still at six year lows. If there is no commodity demand there is no economic growth.

Baltic Dry Index

Commodity Index

The S&P is in decline mode and the internals are terrible. At the close on Friday only 35.8% of the S&P-500 stocks are trading above their short term 50 day average. On the longer term 62.6% of the S&P is trading above their 200-day average but that number is dropping rapidly and is very close to being the second weakest since reading since 2012. There is no way you can build a bullish case for the market on these internals.

On the earnings front the overall results have actually been good but the earnings misses by numerous high profile companies has resulted in quite a few declines. As of Friday 227 S&P companies have reported. According to Factset an abnormally large 79% have beaten on earnings with a more realistic 58% beating on revenue. Stock buybacks have been a major factor in many of the earnings beats. When you can't increase your earnings buy back stock and reduce the number of shares to increase your earnings per share.

So far 80% of companies giving guidance for Q1 have issued negative guidance. That is far in excess of the average at 68%. Only 19% of companies have issued positive guidance. This is very low historically. Nearly every company with any international sales is guiding to the low end of their prior estimates because of the strong dollar.

Earnings growth for Q4 is now at +2.1%. Apple's earnings accounted for HALF of the S&P earnings gains last week. Without Apple the Q4 earnings growth rate would only be +0.2%.

The forecast for Q1-2015 earnings is now negative. Q1 is likely to be the first quarterly decline in earnings since Q3-2012. On September 30th analysts were expecting Q1 earnings growth to be +9.9%. By December 31st that had declined to +4.2% growth. Today the consensus estimate is for a decline in earnings of -1.6%. A lot of this weakness is coming from the energy sector. On September 30th energy earnings estimates for Q1 stood at +3.3%. On December 31st that had dropped to -28.9% and as of today it has fallen to -53.8%.

Bespoke Investment Group posted the following chart showing the spread between positive and negative guidance is the worst since 2008. Actually the spread over the last three years has not been pretty. There are numerous indicators of earnings fundamentals but this one is definitely attention getting.

With Q4 earnings growth about to go negative, Q1 estimates already negative and Q2 estimates probably going negative as well it is very likely earnings are going to have a negative impact on the market and it could be lasting.

QE in Europe has already helped the European markets and eventually it should lift the economy. However, it took multiple QE programs across five years for the U.S. economy to recover and it was the slowest recovery on record. The European QE will be less effective because it is a collection of countries with different economies and different central banks using differing amounts of QE. There is no common treasury bond in Europe like there is in the USA. The impact of QE will be less and may take longer to produce any measurable change.

Meanwhile the U.S. economy is stumbling along. Any week now we could get a series of economic reports that show the U.S. is falling back into recession and with the Fed already at zero interest it is not prepared to fight a new recession.

My hope is that the low oil prices will generate a consumer spending boom that prevents the U.S. from falling back into recession. Hopefully the $1.28 per gallon that consumers are saving today from the same period in 2014 will bolster the economy. Based on the 9 million barrels per day of gasoline consumed that represents a savings of $484 million a day, $3.387 billion a week and $176 billion a year on gasoline alone. With distillate demand slightly over half of gasoline demand that represents another $90 billion in annual savings on diesel, heating oil and jet fuel.

Since we have not seen any evidence of an increase in consumer spending we will have to wait until spending habits change before projecting economic gains. Analysts tell us it takes 3-6 months at the new gasoline prices before spending habits change. However, Ford said sales of F150 pickups exceeded manufacturing capacity at the present time. That is clearly a result of lower fuel prices. We need to see that carry forward into the general economy before getting too bullish on the 2015 outlook.

The S&P returned to the 1,990 level on Thursday and almost hit it again on Friday. Since January was a bad month in the market and last week was month end we would normally expect traders/funds to be closing out losing positions into month end with hopes of entering new positions as the new month begins.

Also, the first three days of any month are typically the best three days of the month because of new retirement contributions being put to work. This suggests we could start next week on a positive note. If by chance we start out with a continued decline I fear we are going to decline sharply once the support at 1,985 is broken. The 150-day average at 1,996 was broken at the close on Friday but only by one point. This average has been support since early December.

The next material support level after 1,985 is 1,906. Resistance is solid at 2,065.

The Dow closed at a six-week low and appears headed for a retest of 17,000 and possibly 16,360. The chart has clearly broken down as a result of too many Dow stocks missing on earnings and taking big losses. The Dow chart is no longer bullish. The pattern of lower highs and lower lows is intact and a dip to 17,000 will only emphasize that even more. There are three Dow components reporting earnings next week along with 100 S&P companies.

Visa's gains added about 50 Dow points or the Friday decline would have been a lot worse.

Support at 17,000 is crucial or we face the real possibility of a serious breakdown. Short term resistance is 17,400 and 17,500.

Only 12 of the Nasdaq 100 (actually 107 stocks) were positive on Friday. The strong performance of AMZN, GOOG, GOOGL and BIIB kept the index from returning to the mid-January lows at 4,100.

The Nasdaq 100 lost -33 points on Friday and -129 for the week. As mentioned above were it not for those four big caps the damage would have been a lot worse. However, the number of multi-dollar losers on the Nasdaq Composite still far outweighed the winners.

The NDX has support at 4,085 and resistance at 4,215.

The Nasdaq Composite has support at 4,545 and resistance at 4,700.

The Russell 2000 lost the least of any major index at -1.98%. In theory fund managers may be less afraid of future earnings from the small caps because they have minimal exposure to the strong dollar and overseas sales. The small caps may be the safest place to ride out the economic weakness in Europe. However, once the big caps pick a direction by violating critical support the small cap babies will be thrown out with the big cap bath water. There is no safe harbor once a confirmed market decline appears.

The Dow Transports ($TRAN) closed at a three-month low at 8,649. There have been several intraday dips below that level but this is the lowest close since October 30th. With oil prices hitting a six-year low last week the transports should have been stronger. However, they declined steadily all week and are in a confirmed decline. The 100-day average has been support since August 2013 and that has failed. The weakness in shipments and the worry that oil prices will rise soon is weighing on the index. With the transports at a three month low any continued decline will be an anchor for the Dow.

The NYSE Composite is on the verge of a breakdown below 10,400. The index is already in a confirmed downtrend and a break below the December lows at 10,400 would be significantly bearish. The NYSE is struggling because of a lot of small banks and energy companies and both sectors are in the penalty box for declining earnings.

For next week the first three days could see a bounce as a result of the -500 point Dow decline last week and the influx of month end retirement funds. However, since it is payroll week and last week was so negative fund managers may elect to wait for the Nonfarm smoke to clear before adding to or establishing new positions. When the market is in a steep decline managers tend to drag their feet on putting new money to work. The S&P had two down months back to back for the first time since 2012. That is a red flag warning.

I would be cautious about new long positions until the market finds a bottom. There is no rush to invest. There is always another day to trade as long as you have capital to invest.

Random Thoughts

Ignore the Super Bowl Indicator and most other random indicators of the same vein. This will be the 49th Super Bowl. They have been played by different teams, in different locations in all kinds of weather. There is NO relation to the market despite what some analysts will predict. Claiming years when the NFC wins as a predictor of a strong market is hogwash. If you manipulate any data long enough you can always find a temporary relationship despite the coincidence being entirely random. Stick with your charts for market direction.

The Mexican Peso is in free fall at 15 to the dollar and a nine-year low. The Brazilian Real is at 10-year lows against the dollar. The only thing they have in common is that they are large producers of oil and the black gold has turned into a slippery slope for foreign currencies.

Comments from Philly Fed President Charles Plosser on the Fed managing expectations:

"It may work out just fine, but there is a risk to that strategy, and the risk is that we wait until the point where markets force us to raise rates and then we have to react quickly and aggressively. I believe that if we wait too long, then we run the risk of falling very far behind the curve or disrupting the economy by rapid rate increases.

The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems. It can try for a while but the problem then is that it's only temporarily effective, and when you can't do it anymore you get the explosion in the Swiss market.

One of the things I have tried to argue is look, if we believe that monetary policy is doing what we say its doing and depressing real interest rates and goosing the economy and we are in some sense distorting what might be the normal market outcomes. At some point we are going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We are not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can't do this forever. And that is going to cause volatility and disruption.

I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen.

I do worry about the longer-term implications for the institution. Part of my criticism has been that we have pushed the boundaries into fiscal rather than monetary policy. That has brought us praise and opprobrium. Perhaps justifiably on both counts. I do wonder as I look down the road five or 10 years, how will that shape the institution? What happens to our independence? What happens to our ability to do things effectively? Given all that we have done — maybe it was all for the best, but even if it was — are there going to be longer-term ramifications that we may end up regretting later?"

On Wednesday the Fed boosted its assessment of the economy and repeated its pledge to be "patient" on raising interest rates. The word patient is commonly considered as a code word for two meetings. As long as they keep using that word it will be at least two more meetings before they raise rates. The committee characterized the economic expansion as "solid" rather than the term "moderate" they used in December. Interesting that economic reports are weakening but the Fed is upgrading their outlook.

The problem is that the Fed wants to raise rates. They realize the long term problem of very low rates and they really want to raise them. Unfortunately the U.S. and the global economy are not cooperating. Oil prices are too low and the dollar is too strong. This is going to prevent them from raising rates long into the future until those conditions change. Once the Fed hikes rates the dollar will spike even higher and further harm U.S. companies doing business overseas. A stronger dollar will further depress commodities and increase deflation pressures.

The Fed acknowledged the problems overseas when they said they would take "international developments" into account when considering a rate hike. That language in the Fed statement helped send treasury yields even lower. The last time the Fed mentioned "international developments" was in January 2013.

The Fed is in a box and the spring under the low rates is being wound tighter as every month passes. Like Plosser mentioned in the comments above, if the Fed waits until it is forced to raise rates then the speed and severity could be very harmful to the market and the economy. They need to raise rates soon but they can't. They are trapped by economic conditions. This is an economic time bomb and the clock is ticking.

The economic recovery is far from solid and if the Fed raises rates they could knock the economy back into a recession. If they don't raise rates the current asset bubble could end up being worse than the 2008 financial crisis. There is no easy button for the Fed.

Be glad you are watching the Super Bowl from the comfort of your home. Ticket prices averaged about $3,900 a week ago according to ticket search engine SeatGeek. On Monday they rose to $4,500. On Wednesday they rose to $5,140 and on Friday they hit $6,191. As of Saturday the cheapest ticket on SeatGeek was $8,000. Since brokers sell tickets to customers without actually owning the tickets the race is on to fill those orders. They get a quote first, sell the tickets to customers, collect the money and then attempt to buy the tickets to fill the order. This is the Super Bowl version of a short squeeze.

Add in plane tickets, hotel rooms, taxi fares or car rentals, meals and drinks and this is some very expensive entertainment. So set back, order some pizza and have some friends over. You will still be saving a lot of money by staying home and the weather inside is always perfect and you can pause the TV while you go for drinks or a pit stop down the hall.

The new Prime Minister of Greece Alexis Tsipras is invoking the nuclear option in dealing with the EU, ECB and IMF otherwise known as the Troika. Tsipras said "Greece will not seek an extension of the bailout agreement" and "We don't plan to cooperate with that committee." Greece has already accepted 245 billion euros in bailout aid from the Troika in exchange for progressively stronger austerity programs. Tsipras told his cabinet he would not abandon his campaign promises to the Greek people and would no longer agree to a policy of submission to the Troika. His campaign promises halt all the austerity measures and have started a democratic revolution. Tsipras is betting the Troika will not let the outstanding debt breakup the monetary union over the bailout funds. If Greece refuses to repay the debt the EU has no options other than ejecting Greece from the EU. However, they will not want to see the EU fractured by a Greek exit but they also can't be seen as giving into the demands of the newly elected government. Tsipras knows this and as of today he is holding all the cards. Eventually a "mutually agreed" settlement will be made because there is no other option.

Are you planning on retiring soon? Every day more than 10,000 baby boomers turn 62, the average age where people actually retire according to a Gallup Poll. By 2030 one in five Americans will be over the age of 62. Fidelity Investments found that a couple who retires at 65 needs an average of $220,000 to cover out of pocket medical expenses over the course of their retirement. This includes things like hearing aids, eye exams, glasses, dental care, nursing and rehabilitative care. That does not cover nursing homes or assisted living facilities that cost from $42,000 to $77,000 a year to start. Gallup said senior citizens retiring now are in denial over the cost of their future healthcare. They assume Medicare will cover everything and that is the wrong assumption.

The stock Trader's Almanac pointed out that when the markets lose ground in January the month of February is down more often than not and the average performance was solidly negative. When Santa fails to call bears will come to Broad and Wall. Santa definitely was a no show this year and that brings us to another market adage. As January goes, so goes the year. With January down an average of -3% across all the indexes it sets up a test of that adage. With economics and earnings declining the outlook is negative for February.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"There’s just one simple step to making a small fortune by using Elliott Wave Theory: start with a large fortune."

Tim Knight (Slope Of Hope)


New Plays

This Brand Is Broken

by James Brown

Click here to email James Brown


Abercrombie & Fitch Co - ANF - close: 25.52 change: -0.57

Stop Loss: 27.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on February -- at $---.--
Listed on January 31, 2015
Time Frame: exit PRIOR to earnings in late February
Average Daily Volume = 2.6 million
New Positions: Yes, see below

Company Description

Why We Like It:
The bear market in shares of ANF continue. ANF used to be one of the hottest brands for the much coveted teenage market. Unfortunately for ANF shareholders the company failed to keep up with the changing tastes of its audience.

For anyone who doesn't know who ANF is here is a bit from the a company press release, "Abercrombie & Fitch Co. is a leading global specialty retailer of high-quality, casual apparel for Men, Women and kids with an active, youthful lifestyle under its Abercrombie & Fitch, abercrombie, Hollister Co. and Gilly Hicks brands. At the end of the third quarter, the Company operated 834 stores in the United States and 166 stores across Canada, Europe, Asia, Australia and the Middle East. The Company also operates e-commerce websites at www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com and www.gillyhicks.com."

The company has been struggling with weak same-store sales for months, if not years, across all of its brands. Back in November 2014 they company issued an earnings warning (you can see the gap down on the daily chart). They reported earnings on December 3rd that was one cent above analysts' newly lowered estimates. Quarterly revenues were down -11.8%. Management then guided lower yet again.

ANF lowered their 2015 guidance from the $2.15-2.35 range to $1.50-1.65 a share. They continue to expect same-store sales to be negative an in the mid to high single digit percentages.

On December 9th the stock popped from multi-year lows after it was announced that ANF's CEO Michael Jeffries, a man whom many considered to be a terrible CEO, had abruptly retired. The rally from this headline didn't last very long.

It's interesting that consumer sentiment is currently at 11-year highs but we're not seeing that translate into consumer spending. Many have been expecting (hoping) that all the money consumers are saving at the gasoline pump, thanks to oil at six-year lows, would be spent on other items. Thus far we are not seeing any big trends that consumers are spending their savings and it's definitely not going toward teen apparel retailers.

There is a lot of short interest in this stock thanks to the bearish outlook for the company. This time the bears might be right. The most recent data listed short interest at 35% of the 68.1 million share float. That does raise the risk of a short squeeze should ANF suddenly bounce.

Another risk for the bears in ANF is M&A headlines. Now that the old CEO is gone there has been some speculation that ANF is a takeover target. The company also might be a target for a leveraged buy out offer to take ANF private. While this is a risk we can't time it. Any such news, if it ever happens, could be months or years away.

Right now ANF continues to underperform the market and is currently down -10% in 2015. The point & figure chart is forecasting a $17.00 target. Looking at the long-term chart the nearest support might be the $22.50 area or the $17 area.

Tonight I am suggesting a trigger to open bearish positions at $24.90.

Trigger @ $24.90

- Suggested Positions -

Short ANF stock @ (trigger)

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

Buy the MAR $25 PUT (ANF150320P25) current ask $1.75

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks See Widespread Declines

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market turned lower on Friday with widespread declines. Worries about Greece's impact on the EU and a disappointing U.S. GDP number did not help the bulls.

We have updated several stop losses tonight.

Current Portfolio:

BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 49.89 change: -0.80

Stop Loss: 48.65
Target(s): To Be Determined
Current Option Gain/Loss: -2.4%
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

01/31/15: The profit taking in BURL has produced a streak of three down days in a row. Friday's drop below what should have been support at $50.00 is a potential warning signal for traders. The next level of support could be $48 or even the 50-dma near $47.00. We don't want to ride BURL that low. Tonight we are raising the stop loss up to $48.65.

I am not suggesting new positions at this time.

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

01/31/15 new stop @ 48.65
01/23/15 triggered @ 51.10
Option Format: symbol-year-month-day-call-strike


Sprouts Farmers Market - SFM - close: 36.41 change: -0.04

Stop Loss: 35.75
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: exit PRIOR to earnings on February 25th
Average Daily Volume = 1.0 million
New Positions: see below

01/31/15: Shares of SFM weathered the market's weakness last week pretty well. The stock has been consolidating sideways in the $36-37 range the last few days. While the relative strength is encouraging we do not want to launch new positions at this time.

The $36.00 level is short-term support and the rising 10-dma, currently near $35.85, should also be short-term support. Tonight we are moving the stop loss to $35.75.

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

01/31/15 new stop @ 35.75
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


Tekmira Pharmaceuticals - TKMR - close: 25.61 change: -0.65

Stop Loss: 23.90
Target(s): To Be Determined
Current Option Gain/Loss: -1.9%
Entry on January 27 at $26.10
Listed on January 26, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 2.7 million
New Positions: see below

01/31/15: January was a rough month for the U.S. stock market. TKMR bucked that trend with a +69% gain in January. Shares managed to post a gain last week as well. TKMR is currently up six weeks in a row. As long as the bullish trend of higher lows remains in place there is no reason it can't make it seven weeks in a row. However, that does not mean I would launch new positions right here. Let's wait and see if TKMR recovers from Friday's dip.

Tonight we are raising the stop loss to $23.90.

Earlier Comments: January 26, 2015:
Biotech stocks were strong performers last year. They have continued to rally in 2015. One biotech that is outpacing its peers this year is TKMR.

The company made a lot of headlines last year with its experimental treatments for Ebola. According to the company, "Tekmira Pharmaceuticals Corporation is a biopharmaceutical company focused on advancing novel RNAi therapeutics and providing its leading lipid nanoparticle (LNP) delivery technology to pharmaceutical and biotechnology partners. Tekmira has been working in the field of nucleic acid delivery for over a decade, and has broad intellectual property covering its delivery technology."

The Ebola panic has faded but TKMR is still working on a treatment. The company's TKM-Ebola treatment is in phase-one clinical trials thanks to a $140 million deal with the U.S. Defense Department.

Ebola is not driving the rally in TKMR this year. TKMR's recent strength is thanks to M&A news. On Sunday, January 11th the company announced they were merging with OnCore Biopharma. According to the press release, TKMR "and OnCore Biopharma, Inc., a biopharmaceutical company dedicated to discovering, developing and commercializing an all-oral cure for patients suffering from chronic hepatitis B virus (HBV) infection, announced today that they have agreed to merge to create a new leading global HBV company focused on developing a curative regimen for hepatitis B patients by combining multiple therapeutic approaches."

Why is this significant? Hepatitis B affects a lot of people. TKMR's press release discussed the disease saying, "Hepatitis B is a serious infection of the liver caused by the hepatitis B virus (HBV) and is considered a major global health problem. Hepatitis B infection can cause chronic liver disease, which increases a patient's risk of death from liver cirrhosis and liver cancer. Estimates from the Centers for Disease Control and Prevention (CDC) indicate that up to 350 million people globally may be chronically infected with hepatitis B and, according to the World Health Organization (WHO), more than 780,000 people die every year due to hepatitis B. Most currently available therapies aim to suppress this viral infection but do not lead to a cure in the overwhelming majority of patients."

The stock market applauded the merger news and shares of TKMR soared +57% on Monday, January 12th. I'm sure a lot of that was short covering. The most recent data listed short interest at almost 10% of the 21.1 million share float. I suspect that data is out of date today.

It is interest how TKMR has not seen that much profit taking after such a big move. Traders have been buying the dips the last several days. Now TKMR is hitting new three-month highs. Shares look poised to rally toward resistance near $30.00.

Tonight we are suggesting a trigger to launch bullish positions at $26.10. I want to caution readers that biotech stocks are always a higher-risk, more aggressive trade. The right or wrong headline can send a biotech stock crashing or soaring overnight and TKMR is a perfect example with the move on January 12th. I am suggesting small positions to limit risk. You may want to consider call options as another way to limit your risk.

*small positions* - Suggested Positions -

Long TKMR stock @ $26.10

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

Long MAR $27.50 CALL (TKMR150320C27.50) entry $1.60

01/31/15 new stop @ 23.90
01/27/15 triggered @ 26.10
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Canadian Solar Inc. - CSIQ - close: 20.39 change: +0.58

Stop Loss: 21.05
Target(s): To Be Determined
Current Option Gain/Loss: -4.8%
Entry on January 29 at $19.45
Listed on January 28, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 3.5 million
New Positions: see below

01/31/15: Our CSIQ trade could be in trouble. The stock was showing way too much relative strength on Friday with a +2.9% gain. Shares did struggle with resistance near $20.75, which is good news if you're bearish. The stock remains under its longer-term trend of lower highs (see chart). I am not suggesting new positions at this time.

Earlier Comments: January 28, 2015
Solar stocks have been hammered over the last few months. CSIQ has been underperforming its peers. Currently year to date in 2015 CSIQ is already down -2.89%.

According to a company press release, "Founded in 2001 in Ontario, Canada, Canadian Solar is one of the world's largest and foremost solar power companies. As a leading manufacturer of solar photovoltaic modules and provider of solar energy solutions, Canadian Solar has an industry leading and geographically diversified pipeline of utility-scale solar power projects as well as a track record of successful solar deployment boasting over 8 GW of premium quality modules installed in over 70 countries during the past decade. Canadian Solar is committed to providing high-quality solar products and solar energy solutions to customers around the world."

Oil's plunge has been labeled the main reason for solar stock declines. On Wall Street there is some weird relationship between lower oil prices and falling solar stocks. Crude oil is mainly used for transportation, after it has been refined. While solar energy is used to generate electricity. There does not seem to be a direct relationship but solar stocks continue to sink as oil prices fall. Inside the U.S. oil is used for maybe 1% of electricity consumption. We would be better off comparing solar to coal. Coal still accounts for about 30% of U.S. energy production and coal prices have been falling the last three years.

Technically CSIQ looks pretty ugly. Shares are in a bearish trend of lower highs and lower lows. They just recently broke through what should have been support at their 2014 lows. Now CSIQ is flirting with a breakdown under round-number support at the $20.00 level. The last few days appear to have formed a bear-flag consolidation pattern (counter-trend rally). The point & figure chart is very bearish and forecasting an $11 target.

Tonight I am suggesting a trigger to open bearish positions at $19.45. We'll try and limit our risk with a stop loss at $21.05. More conservative traders could use a stop closer to today's high instead (20.68). You might want to keep your position size small. CSIQ has been volatile in the past. The most recent data listed short interest at 13% of the small 37.9 million share float. You may want to use put options to limit your risk.

- Suggested Positions -

Short CSIQ stock @ $19.45

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

Long MAR $20 PUT (CSIQ150320P20) $2.40

01/29/15 triggered @ 19.45
Option Format: symbol-year-month-day-call-strike


Discovery Communications - DISCA - close: 28.99 change: -0.76

Stop Loss: 30.85
Target(s): To Be Determined
Current Option Gain/Loss: +5.2%
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

01/31/15: It looks like the down trend in DISCA has resumed. Shares underperformed the broader market on Friday with a -2.5% decline. DISCA looks ready to break down under its January lows.

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


Greif, Inc. - GEF - close: 38.20 change: -1.17

Stop Loss: 41.60
Target(s): To Be Determined
Current Option Gain/Loss: +4.4%
Entry on January 26 at $39.94
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 177 thousand
New Positions: see below

01/31/15: GEF continues to show relative weakness with a -2.9% drop on Friday. These are new multi-year lows. Traders may want to start ratcheting down their stop loss.

Earlier Comments: January 24, 2015:
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.

- Suggested Positions -

Short GEF stock @ $39.94

01/26/15 trade began this morning. GEF opened at $39.94


Range Resources Corp. - RRC - close: 46.27 change: +0.78

Stop Loss: 48.75
Target(s): To Be Determined
Current Option Gain/Loss: -3.4%
Entry on January 30 at $44.75
Listed on January 29, 2015
Time Frame: Exit PRIOR to earnings on February 24th
Average Daily Volume = 2.8 million
New Positions: see below

01/31/15: Our aggressive, bearish trade on RRC is not off to a good start. Shares did continue lower as expected and hit our suggested entry point at $44.75. However, the stock bounced and displayed relative strength on Friday with a +1.7% gain. The $48.00 level should be short-term resistance and nimble traders could use a failed rally near $48.00 as a new bearish entry point.

Earlier Comments: January 29, 2015
RRC is in the basic materials sector. They explore and develop oil and natural gas assets. According to the company, "Range Resources Corp. is a leading independent oil and natural gas producer with operations focused in Appalachia and the Midcontinent region of the United States. The Company pursues an organic growth strategy targeting high return, low-cost projects within its large inventory of low risk, development drilling opportunities. The Company is headquartered in Fort Worth, Texas." The company recently stated their proved reserves at the end of 2014 rose +26% for the year to a record high of 10.3 T cfe (trillion cubic feet equivalent).

Unfortunately for RRC and its investors natural gas prices have been declining for a long time. Natural gas futures are currently trading at two-year lows, below $3.00 MMBtu (million British thermal units). The industry was already facing oversupply concerns. Now forecasts suggest demand will be less than expected.

The price of natural gas is influenced by the weather. In spite of the blizzard that hit the east coast this past week the U.S. could actually see a mild winter, which would drive down natural gas consumption and thus prices would fall. Of course we are talking about the weather. Forecasts could change. I remember last fall they were forecasting 2015 to be an exceptionally cold winter following 2014's uncommonly cold winter. Yet now they're talking about a mild winter for 2015 (what's left of winter).

Another issue is the overall trend for commodity prices. The surging dollar makes commodities cheaper and this is exacerbated the sell-off in oil and gas. The oil and gas industry is also dealing with a price war with Saudi Arabia who is willing to undercut its competitors to drive them out of the oil business. While RRC is mostly natural gas the issue is affecting everyone.

There have been some bullish calls on the energy sector and a few analysts have suggested that the big natural gas names, including RRC, could be bargains at current levels. Goldman Sachs believes RRC will eventually emerge from this energy sector crash as a winner due to their large size. That does not mean that RRC's stock won't collapse toward its 2009 or 2010 lows before finding a bottom.

Technically RRC is in a bear market, having been cut in half from its 2014 highs. The point & figure chart is bearish and forecasting at $29.00 target. The stock's recent attempt at a bounce struggled for days with resistance (a.k.a. broken support) near $50.00. Now RRC looks ready for the next leg lower.

I am labeling this a slightly more aggressive trade. Tonight's trade that RRC will continue to sink is a bet that shares will break the trend line you see on the weekly chart below. We'll start with a trigger to launch positions at $44.75.

- Suggested Positions -

Short RRC stock @ $44.75

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

Long MAR $45 PUT (RRC150320P45) entry $3.80

01/30/15 triggered @ 44.75
Option Format: symbol-year-month-day-call-strike


Virgin America Inc. - VA - close: 33.54 change: -2.77

Stop Loss: 36.65
Target(s): To Be Determined
Current Option Gain/Loss: +8.0%
Entry on January 28 at $36.45
Listed on January 27, 2015
Time Frame: 2 to 4 weeks
Average Daily Volume = 2.5 million
New Positions: see below

01/31/15: Wow! After Thursday's oversold bounce the sell-off in shares of VA resumed with a vengeance on Friday. The stock reversed into a -7.6% decline. The put option on this trade has already doubled in value. Tonight we are moving the stop loss down to $36.65.

Earlier Comments: January 27, 2015:
The IPO honeymoon period for shares of VA might be ending soon. The company's stock hit the market on November 13th with about 13.3 million shares priced at $23.00 each. VA opened at $27.00 and rallied to $30.00 on its first day of trading. Six weeks later VA was testing the $40.00 level.

According to the company's marketing material, "Virgin America is a California-based airline that is on a mission to make flying good again, with brand new planes, attractive fares, top-notch service, and a host of fun, innovative amenities that are reinventing domestic air travel. The Virgin America experience is unlike any other in the skies, featuring mood-lit cabins with fleetwide WiFi, custom-designed leather seats, power outlets, and a video touch-screen at every seatback offering guests on-demand menus and countless entertainment options." VA currently has a fleet of more than 50 Airbus single-aisle planes.

Airline stocks have been big winners the last year and a half. The rally in airline stocks off the group's 2014 October low has been exacerbated by plunging oil prices. Jet fuel is a huge expense for this industry so falling oil is a significant tailwind toward company profits.

Many airlines to try reduce their risk of jet fuel price volatility with fuel hedges. The use of hedges can be a two-edged sword and that appears to be cutting into VA's profits. The company confessed last week that its fuel hedges are killing its margins. Today the spot price for jet fuel is around $1.60 a gallon. VA is locked into prices in the $2.48-2.75 for 66 percent of its fuel needs for the current quarter.

VA also announced they raised their employee pay, which will likely hurt margins as well.

Shares are down sharply on this news although VA managed a bounce today. The point & figure chart has already turned bearish and is forecasting at $32 target.

The intraday low today was $36.76. We are suggesting a trigger to open bearish positions at $36.45. However, more conservative traders may want to wait for VA to break the trend line of higher lows (see chart) before initiating positions.

Please note that this could be a short-term trade. VA has not confirmed its earnings date yet but I suspect they will announce in February. We'll try to avoid holding over their earnings announcement. When that information becomes available we'll adjust our time frame.

- Suggested Positions -

Short VA stock @ $36.45

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

Long FEB $35 PUT (VA150320P35) entry $1.40

01/31/15 new stop @ 36.65
01/28/15 triggered @ 36.45
Option Format: symbol-year-month-day-call-strike


Zulily, Inc. - ZU - close: 18.50 change: +0.29

Stop Loss: 18.65
Target(s): To Be Determined
Current Option Gain/Loss: +28.6%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: Exit PRIOR to earnings on February 11th
Average Daily Volume = 1.3 million
New Positions: see below

01/31/15: ZU has already been a big loser this year with shares down more than -20% in 2015. The stock managed an oversold bounce on Friday and closed up +1.5%. The intraday high was $18.57. Our stop loss is currently at $18.65. If there is any follow through on Monday we'll see ZU hit our stop loss. I am not suggesting new positions.

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%)

01/29/15 new stop @ 18.65
01/28/15 new stop @ 20.15
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