Option Investor

Daily Newsletter, Saturday, 12/12/2015

Table of Contents

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

Market Wrap

Sleigh Wreck

by Jim Brown

Click here to email Jim Brown

Santa's sleigh lost traction in the growing oil slick and crashed into a falling yuan. Investors recoiled in disappointment and dumped stocks. The Santa rally may be delayed until a replacement sleigh can be found. Fortunately, Rudolph was not injured but he was traumatized by the crash in high yield bonds.

Market Statistics

Friday Statistics

The S&P gapped down -20 points at the open after China devalued the yuan again and posted a note on a website saying the currency would no longer be pegged to the dollar but to a basket of currencies. The yuan fell -.5% to a 4.5-year low at 6.45 to the dollar. This move surprised analysts since it came the week before the Fed is expected to hike rates, which would push the dollar even higher and the yuan lower.

Also pushing the markets lower at the open was news that Third Avenue Asset Management had halted redemptions on their high yield Third Avenue Focused Credit Fund. They halted redemptions because investors were fleeing at a faster rate than the fund could sell assets. Rather than sell at distressed prices the firm halted redemptions and said they would liquidate the fund in an orderly manner but it would take up to a year.

The $785 million fund had the most exposure to illiquid assets of any fund in its class. Some 85% Third Avenue's holdings are in distressed debt and that represents 12% of the fund class.

This is the first fund failure since the recession and the impact to the markets was extreme. Unfortunately, after the close Stone Lion Capital suspended redemptions on its oldest fund after being hit with "substantial redemption requests." Stone Lion capital manages $1.38 billion in distressed high yield debt with $400 million in the fund being closed.

One fund failure could be chalked up to bad management. However, the second failure on the same day is like yelling fire in a crowded theater. People will get trampled in a rush to the exits. Expect a flood of redemptions from other funds next week.

Do not look now but suddenly there is a crisis developing. There is blood in the water and the sharks are circling. Investors with cash in other high yield funds will be in panic mode on Monday and everybody will be making redemption requests to dozens of other high yield bond funds. This could be the start of a new crisis.

Before the financial crisis there was $700 billion in high yield corporate debt. Today there is nearly $1.8 trillion and a lot of that addition is high yield debt that will be under pressure next week. High Yield Statistics

In the chart below, I have contrasted the iShares High Yield ETF (HYG) in red with the S&P-500 in black. Since 2007 nine out of ten declines in HYG of 5% or more was followed by a 9% decline in the S&P. Since January, the HYG is down nearly -14%. The HYG is down -6% since the October highs.

Making matters worse is the implosion in the price of oil. Oil fell to a six-year low on Friday at $35.35 and well under the cost to produce for almost any well drilled since the recession. Energy companies are being crushed by the sharply falling cash flow and there is no end in sight until mid to late 2016. Companies are being forced to slash spending, halt drilling and layoff workers. The worst part is the high yield debt created by the energy sector. As much as 14% of the outstanding high yield debt is owned by energy companies.

Of the 35 high yield debt issuers that have defaulted so far in 2015 the energy/mining sector accounted for 57% of those defaults. Fitch Ratings expects the default rate to rise from the 5.3% at the end of October to 6-7% in the current environment. The peak was 9.7% in 1999. S&P Capital IQ quoted a recent report saying that credit quality for high yield borrowers recently hit a new low. Year to date high yield debt issuance is around $225 billion and a 13% decline from 2014 simply because the declining market has made issuance nearly impossible. New debt volume from the energy sector declined -39% compared to 2014. Nearly all the major banks have increased default reserves because of declining credit quality for energy companies and that is not even high yield. Those loans made by banks are considered decent loans.

With oil prices in free fall, those defaults are going to rise and the credit quality worsen even further. Energy companies are finally giving up on trying to conduct business as usual. Active rigs declined a whopping -28 last week to 709 with active oil rigs falling -21 to 524. We are well below the recession lows and the rate of decline is accelerating. Companies can no longer afford to drill because the oil they get in return will not pay for the wells.

The failure of OPEC to change the quota and the apparent easing of tensions between Russia and others surrounding Syria has removed support for oil prices. Even an unexpected decline in inventories of 3.6 million barrels failed to give oil a lift for more than a few minutes.

The meltdown in the high yield market and drop in equities saw investors running in a flight to quality. The yield on the ten-year treasury fell to a two-month low at 2.139% only three days before an expected Fed rate hike. That suggests the Fed has been trumped by the market and may not be able to hike rates into a potential credit crisis. You can bet there are some nervous Fed heads burning up the phone lines this weekend. Rising rates increase the cost of financing for corporations and makes them more susceptible to potential defaults.

Another problem in the high yield market is the ETFs. Multiple banks, brokerages and high profile analysts have been warning about this problem all year. The problem is lack of liquidity. High yield debt is illiquid by nature. A fund holding a portfolio of high yield investments cannot just put in a sell order and get anything close to market value. It has to be shopped and it can take weeks or even months to sell it at a fair value. However, ETF shares can be bought and sold daily as long as there are willing buyers. If everyone suddenly decides to exit their high yield ETFs and there are no buyers the price for ETF shares is going to implode even worse than the -2% drop we saw on Friday. It is entirely conceivable that we could see these ETFs decline to retest the financial recession lows.

Carl Icahn warned about this in his video back in September. On Friday he reiterated his claim that the "high-yield market is just a keg of dynamite that sooner or later will blow up."

There is no free lunch. While the zero interest rate environment created by the Fed over the last seven years may have seemed like a free lunch by everyone borrowing money for capital expenses, share buybacks and dividend payments, there is going to come a day of reckoning. The Fed put $4.5 trillion of QE into the market and to this day, they are still keeping it at that level by rolling over maturing securities into new purchases. Eventually the Fed is going to normalize rates from their current abnormally low level. The Fed has NEVER successfully embarked on a rate hike cycle without eventually crashing the equity market. There is no reason to believe that they will be able to unwind the biggest stimulus in history without causing a material market disruption. Peter Boockvar said, "Anybody that thinks the Fed can somehow extract themselves from this policy in any smooth way is delusional. When you go so far one way deep into excessive monetary policy, there's always going to be some hangover."

The potential hike expected next week is not important in itself. A quarter point is not material. The important point is that rate hikes are beginning and like a freight train they will start slow but the pace will quicken at some point in the future. Also like the train the impact will take a long time to be felt but once in full motion it will take a long time to stop if the Fed suddenly decides it acted too early and too aggressive. For this reason if the Fed does hike rates in this seriously unstable environment they will probably offer some language with the rate hike that suggests the next hike is a long way off.

Many analysts and market watchers believe the unstable markets, both credit and equity, will keep the Fed from hiking next week. The decline in the emerging market currencies is another problem for the Fed. The Brazilian real fell -2% on Friday. The South African rand fell -10% for the week. All the Asian currencies fell with the yuan on Friday.

The forecasters are about evenly divided with those expecting a hike claiming the Fed will lose all credibility if they do not hike. After the market decline over the last two weeks the Fed could lose credibility if they do hike into a market meltdown. I am just glad I will not be the one making that decision.

According to the CME's Fed Watch tool, there is an 81% chance of a hike to 50 basis points based on Fed Funds Futures.

The Fed actually caused some of the high-yield problems we have today. With rates at zero, investors were forced to take on higher risk to obtain any kind of yield on their money. Money market funds were paying nothing and CDs and similar instruments were paying next to nothing. Investors saw the 7-8% yields in the high yield markets and the lack of any material defaults in the prior years and thought, ok, I can put some money there. Those in the ETFs thought, I can exit at any time so my risk is limited. Unfortunately, there is always risk when you reach for yield.

If the Fed had "normalized" rates over the last several years, a lot of those investors would be content with the 2-3% yield they would have been getting on normal money market funds and brokerage accounts. The Fed is aware of this and while they will not actually take the blame they are desperate to hike rates so normal investors can eventually get a safe return on their money and the Fed will have some room to maneuver when the next recession appears 12-18 months from now.

On the economic front, there was some good news on Friday. The Producer Price Index for November rose +0.3% after three monthly declines totaling -1.0%. However, all the gains came from the services component at +0.5% with the goods component declining -0.1%.

Final demand declined -1.2% over the same period in 2014 with prices for goods down -4.3% over the same period. Intermediate processed goods are down -7.2% and unprocessed goods -26.6%. Core unprocessed is down -30.3% year over year. Those big numbers are the result of oil price declines.

It was hardly a surge of inflation at the producer level and the report was ignored.

Retail Sales for November rose +0.2% compared to estimates for +0.3%. Falling gasoline prices weighed on the gains and kept them from being larger. Sales excluding autos and gasoline rose +0.5%. Gasoline stations declined -0.8%, building materials -0.3%, furniture -0.3% and motor vehicles and parts -0.4%. Those were offset by a +0.7% gain in food and beverages, clothing +0.8%, sporting goods +0.8%, general merchandise +0.7%, food service +0.7% and nonstore retailers +0.6%. Excluding autos and gasoline, retail sales are up +3.6% over the same period in 2014.

Business Inventories for October were almost flat (-0.03%) after a +0.3% gain in the prior month. Analysts were expecting a +0.1% increase. The inventory to sales ratio rose again to 1.38 and sales declined -0.2%. The report was ignored.

The economics reports for the week lifted the GDPNow forecast from the Atlanta fed to +1.9% growth, up from +1.5% at the start of the week.

Consumer Sentiment for December rose slightly from 91.3 to 91.8 compared to estimates for 92.0. Some analysts were expecting more with the Moody's consensus at 94.7. The present conditions component rose from 104.3 to 107.0 and the expectations component declined from 82.9 to 82.0.

Lower gasoline prices probably offset any worries over the California terror attack.

We have a full calendar for next week but the only events that really matters are the FOMC announcement and the Yellen press conference. The others are important for the overall economic picture for Q4 as the quarter winds down but the rate hike is the key event.

Ensign Group (RNSG) announced a 2:1 split last week at the whopping high price of $49. It is rare that a company with a stock that low will split but Shenandoah Telecom did the same thing a couple weeks earlier.

BT Group completed their split on the 8th and Edwards Lifesciences split after the close on Friday. Nike is next on the list on the 23rd along with Ensign.

For the full split calendar click here.

In stock news, Towers Watson (TW) said shareholders approved the merger with insurance broker Willis Group Holdings. The merger will include a one-time cash dividend of $10 to be paid to Towers shareholders. Willis shareholders will own 50.1% of the combined company.

Adobe Systems (ADBE) reported earnings of 62 cents compared to estimates for 60 cents. This was nearly double the 36 cents in the year ago quarter. Revenue rose by +22% to $1.31 billion. Adobe said they were targeting a 20% annual growth rate through 2018 as a result of their cloud focus.

The company said it expects full year earnings to be $2.70 and revenue $5.7 billion. Analysts were expecting $3.19 and $5.93 billion. Adobe said the strong dollar was a major headwind as was the shift from one-time purchases to cloud subscriptions. Surprisingly the stock rallied 3% on the news. KeyBanc raised their price target from $90 to $110. Stephens upped their target from $100 to $115. RBC hiked from $103 to $112 and UBS from $90 to $105.

Whole Foods Market (WFM) rallied 8.6% after ITG Market Research said proprietary data indicated revenues for the current quarter were tracking towards $4.865 billion and above consensus for $4.817 billion. Same store sales were seen as -1.2% compared to estimates for -2.2%. ITG said basket growth was flat to down. I would not have expected such a big rebound from the ITG news but the stock was heavily shorted.

KMG Chemicals (KMG) reported record earnings of 42 cents and revenue of $76.7 million. That was up from 24 cents in the year ago quarter. This was the seventh consecutive quarter of double-digit earnings growth. Shares spiked +27% on the news.

Optical networking company Finisar Corp (FNSR) reported earnings of 25 cents compared to estimates for 23 cents. Revenue of $321.1 million beat estimates for $314.2 million. The company guided to earnings of 19-25 cents in the current quarter on revenue of $300-$320 million. Analysts were expecting $318 million. Shares rallied 22% on the news.

GoPro (GPRO) actually closed slightly higher on Friday despite being downgraded by Citigroup to neutral. The bank cut the price target from $75 to $22. The analyst cut earnings estimates for Q4 from 41 cents to 22 cents. Consensus is 40 cents. CLSA cut them to a sell with a price target of $26. Since GPRO is trading at $19 that did not make sense to me. Multiple analysts said the CEO's appearance on QVC selling discounted cameras was a negative indicator. "Why would he need to discount on QVC if normal retail sales were strong?"

A new camera from competitor Xiaomi YI Technology is selling for $99.95 and two reviews actually claimed it was better than GoPro in some features. Amazon Link It even has the Ambarella chips. That makes the GoPro Session 4 at $300 a tough sell. Another analyst said he did not understand the model. Once you buy one you do not need to buy another one. All that work to get a customer and then it is a one-time sale. I do not really buy that idea since I think it is addictive to some users and I am sure the "action" cameras are smashed repeatedly and require replacement. However, like any speculative product I am sure a lot of them end up on a shelf somewhere collecting dust.

Shares were up slightly on multiple analyst suggestions that Apple buy the company in 2016. Clearly, this is just wishful thinking at this point but it did cause some people to either take a new position or close their shorts. I would personally be looking for a new short entry given the signs of desperation from the CEO.


The markets are quickly moving into severely oversold territory. The 80-point drop on the S&P and nearly 600-point decline on the Dow came on heavy volume and the week closed on the lows. That is not a good sign. Art Cashin said whenever the S&P loses more than 1.5% on a Friday and closes on the lows, the following Monday is normally negative.

Friday's volume was 8.3 billion shares and 7.2 billion of that was declining volume for a 7:1 ratio. Earlier in the day is was 10:1 but there was some dip buying near the close. That was probably shorts covering ahead of the weekend. Decliners across all markets were 6,202 to 1,025 advancers. New 52-week lows spiked to 739 from 332 on Thursday. That is the highest number since the 1,029 new lows on September 29th.

The percentage of S&P stocks over their 200-day average declined nearly 8 points to 38.2% and near the lows for the quarter. Note that the percentage has been declining since July 2014.

The advance/decline line has been declining since the beginning of December and is at two-month lows.

The McClellan Oscillator is an overbought/oversold index and it is currently at the second lowest level of the year. This suggests we should be at or near a bottom for this decline. The market drop in August was much more severe and the index was only slightly lower than it is today.

The Dow Transports are leading the Dow Industrials lower. The warnings on rail car loadings and lower revenue per airline passenger mile are weighing on the transports. The contraction in the manufacturing because of the strong dollar and weak economy is pressuring the entire transport sector.

In the trucking sector average per-mile rates on the spot market declined for all three major truckload segments in November, according to data from Truckstop.com. This is the fourth consecutive month of declines. According to the Cass Freight Shipments Index, it was the worst October for shipments since 2011 and it followed the worst September since 2010. Shipments declined -4.7% month to month and -5.3% year over year. Full Article

The AAII Investor Sentiment Survey closes on Wednesday and while the market was in decline the big hit did not come until Friday. The survey saw bullish sentiment decline only 1% while neutral sentiment fell -7.7% and bearish rose +8.7%. If the market continues negative next week the numbers should be a lot more lopsided.

There is another trend that is worth mentioning. The market typically rallies on Tue/Wed into a Fed meeting. There was a study done n 2013 on what is called the "Pre-FOMC Announcement Drift." Since 1994 the S&P averages a +0.49% gain in the 24 hours before the FOMC announcement. With eight FOMC meetings a year, that is roughly a 4% gain per year on the S&P in only eight days a year.

So far in December we have had mixed results with seasonal trends. The first week was supposed to be positive and was not. The second week is supposed to be negative and it was definitely negative. Starting this week the seasonal trend is for a rally into year-end. I am reprinting the chart from the Stock Trader's Almanac that I used two weeks ago. While the early month bounce did not appear maybe we will get lucky and have a stronger than normal end of month rebound.

The S&P broke through critical support at 2,020 to close at 2,012. If Art's Friday trend is right, we should open lower on Monday and that suggests we could retest support in the 1985-1990 range as well as psychological support at 2,000.

At this point, the support at 1985-1990 is critical. A failure there could easily produce further cascade selling and take us back to the Aug/Sep lows. The drop below 2,020 gave us a lower low to go with the lower high on December 1st. In theory, this is negative but we need to take into account the calendar and the tax selling that occurs in early December. However, if the 1,985 level breaks we will be in full breakdown mode and seasonal trends will no longer be an excuse.

The Dow was ugly on Friday with more than half the components losing more than $1 and a third losing $2 or more. Goldman Sachs, the heaviest weighted Dow component lost another $5.50 and stretched its recent decline to nearly $25. This is completely contrary to expectations for a rate hike, which normally lifts banks. The Morgan Stanley layoffs and declines in trading revenue are weighing on the entire banking sector. The high-yield implosion is also impacting them because investors do not know how much exposure they have to that sector. This suggests Goldman will continue to decline.

The Dow declined to 17,230 and just above support at 17,210. There are a couple levels of support between Friday's close at 17,265 and 17,000. However, a close under 17,000 would be very destructive psychologically. Resistance is well above at 17,700.

The winners and sinners graphic below is a good example of why the Nasdaq lost -112 points on Friday. This is the top and bottom 25 out of all 3,100 of the Nasdaq stocks. Only 16 stocks gained $1 or more and the 25th largest gainer only added 65 cents. It was a massacre and there were very few survivors.

The Nasdaq Composite lost 4% for the week and 2.2% on Friday alone. The index was knocked back to just above strong support at 4,900 after touching 5,176 on December 2nd. That is nearly a 275-point decline in only 8 trading days. Last week I suggested readers might want to speculate in some QQQ calls if they could not wait for a market bottom to appear. At that time, the Nasdaq was nearing a breakout to a new high. Conditions sure changed in only a week.

We need to hope that the 4900 level holds or it could be a long drop.

The Nasdaq 100 ($NDX) did make a new intraday high on Dec 2nd at 4,739 but it was brief and sellers appeared immediately. The retest three days later topped out at 4,722 and sellers appeared immediately. Since that second attempt, the Nasdaq has only had two down days but they were both significant losers.

The FANG stocks (FB, AMZN, NFLX, GOOGL) were crushed over the last three days. This could be a prime example of tax loss selling. Investors are selling the winners to offset their losers. Eventually this will end but there were no signs of dip buying in those issues on Friday.

I would still be a speculative buyer of January QQQ calls on any rebound in the NDX and I would probably buy a dip to 4,500 even before there are signs of a rebound. The 4485-4500 support is decent and could be a bounce point.

The Russell 2000 small caps have collapsed with a -5% drop for the week. Support at 1,135 failed miserably and the index closed at 1,123 on Friday. Historically the small caps are the biggest gainers over the next two weeks. I am not holding my breath this year. The solid dive over the last seven days is very depressing and does not instill confidence.

The NYSE Composite Index ($NYA) is in free fall. This is more than likely the result of oil stocks, commodities and financial ETFs crashing. However, none of those sectors are likely to rebound next week other than possible short covering so the NYSE appears destined to retest the September lows at 9,500. That does not bode well for the other indexes.

For months, we have been preaching caution about the narrow breadth of the rally with the big cap techs leading the other indexes higher. Only 8 big cap tech stocks were responsible for 65% of the market's gains. When those stocks rolled over and were no longer supporting the market the weaker brethren collapsed. Add in the seven-year low in oil prices and commodities and the weakness spread like a virus throughout the indexes.

I have reported multiple times about the seasonal rally in the second half of December. However, I cannot remember when the Fed hiked rates in December. Typically, the December meeting is a holiday party rather than a real business meeting. The conventional wisdom is for the Fed to not rock the boat around the holidays when portfolio managers are trying to close out their positions for the year and get set up for the next year. Managers are not prepared to deal with a change in Fed policy with only one real week of trading left in the year.

This time around, Yellen and her band of brothers are determined to hike rates in 2015 and they have indicated they are likely to do it next week. That has no doubt prompted some managers to reduce their risk exposure and rebalance their allocations ahead of the event. Whether the Fed actually hikes in the face of crashing markets and a potential credit crisis is unknown. Most traders would look at the various storm clouds and bet on a pass until March or at least January.

The uncertainty caused by the Fed has crippled the equity markets all year and that is why all the major indexes, with the exception of the Nasdaq, are negative for the year. The market has celebrated recently when the Fed has made statements indicating they would probably hike rates in December. This is investors celebrating the end of uncertainty. If the Fed does not hike, the uncertainty cloud may descend upon the market again and we will get to do this dance all over again in January.

Keep your fingers crossed that the "Pre-FOMC Announcement Drift" trend returns and lifts us out of any Monday decline. Hopefully the Fed will make a market pleasing decision and the late December trend kicks in on schedule.

The quadruple witching options expiration week in December is the most bullish of the four quarterly expirations. This is another one of those seasonal trends that could work in our favor.

An Added EOY Bonus This Year!

As an added bonus this year I am including a copy of Jason Zweig's "The Devil's Financial Dictionary." I recently bought this book and loved it. I immediately decided to reward every EOY subscriber with their own copy. This is 256 pages of irreverent definitions to all the terms you hear in the market every day.

"Open this wonderful book to any page. Try not to laugh. I dare you." - James Grant, Grant's Interest Rate Observer

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Annual End of Year Subscription Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

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Random Thoughts

Because of President Obama's constant call for more gun control, consumers are buying more guns than ever. The FBI said it conducted nearly 2 million background checks in November. That was a 23% increase from November 2014. On Black Friday alone a record 185,000 background checks were completed. Smith & Wesson (SWHC) reported strong earnings and raised guidance because of the surge in gun buying. Sturm Ruger (RGR) has rallied +22% since November 1st. The recent terrorist attacks in California have caused lines to form outside gun stores with people waiting for their turn to purchase a gun.

For the first time in 20 years, more Americans oppose a ban on assault weapons than favor a ban. Full Article

A new firearms channel called Gun TV will begin broadcasting on January 20th. Gun TV

When Keurig Green Mountain was bought out for $13.9 billion, it pushed the value of all the deals for the year to a record $4.614 trillion. That was 18,603 deals on a global basis. The prior peak was in 2006-2007 at 23,577 deals for $4.610 trillion. The next highest peak was 1999-2000. Do those dates ring a bell? What do 2000, 2007 and now 2015 have in common? Those were peaks in the market prior to recessions. While we do not know about 2015 yet I reported last week that Citigroup and JP Morgan are forecasting a 65% or greater chance of a recession in the coming months.

Andrew Ross Sorkin wrote in the New York Times that a flurry of M&A lined up with a pattern of pre recession spikes. The theory was that revenue growth was slowing, cost cutting had run its course and the only avenue left for corporations to continue to grow was to merge with someone to gain access to their customers and product lines and reduce costs even further through synergies. Sorkin quoted a Citigroup study with the same conclusions. This further suggests a recession is headed our way over the next 12-18 months. Full Article

Time for VIX puts? If the seasonal trend for the end of December finally appears, it may be time to buy some VIX puts. The VIX is rarely above 20 and only for brief periods. You can buy the January $20 put for about $2.25 today and should a rally appear and the VIX return to the $15 level we saw last week that would be a winning trade. There is no guarantee a rally will appear but after the decline we had last week there is definitely a short squeeze in our future.

It is not just the U.S. markets taking a dive. All eight of the world's major indexes are in decline. Is that a just a coincidence or a sign the global economy is fading even further. This suggests it was not just tax loss selling in the U.S. since other markets suffered the same fate. The average decline for the week was -3.18%. Full Article at DSShort.com

Bomb threats forced the closure of malls and shopping areas in four states on Saturday. The Largo Mall near Tampa Florida, the Shops at Riverside in Hackensack NJ, the the Animas Mall in Farmington NM and the Embarcadero in San Francisco were closed for bomb threats and/or suspicious packages. These stories are a good reason to shop online. Full Business Insider Article

A survey of multiple strategists by Barron's suggests the equity markets will rise about 10% in 2016. The strategists gave their reasons and a few stocks they believe will do well. David Kostin, Goldman's chief strategist believes the Fed will hike 4 times in 2016 to raise rates to 1.25% to 1.5%. Kostin's picks were Visa (V) and Alphabet (GOOGL). Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Corp. liked Disney (DIS) and 3M (MMM). Stephen Auth, CIO at Federated said Avago Technologies (AVGO) and Gilead Sciences (GILD) would be winners. Full Article

Tis the season to be an Amazon temp worker. In 2012 Amazon hired 50,000 temps for the holiday shopping season. In 2013 that rose to 70,000, 2014 80,000 and this year they hired 100,000. The average hourly pay is $12.35 an hour for a job at an Amazon warehouse picking products from the shelf and stuffing shipping boxes. Amazon uses temporary staffing firms to locate, hire and manage the workers. Amazon pays them an average of $70.4 million a week during the holiday season from Thanksgiving through Christmas. Amazon has 90,000 permanent workers at its 70 warehouses and shipping hubs.

Temp workers have hand held scanners that tell them what item to pull from the shelf and at what location. Once they scan it, the computer gives them a new item and the number of seconds it is expected to take them to complete the task. Temp workers that perform well can be offered a permanent job and move up the ranks into management.

There is a 12% chance of a Solar Superstorm hitting earth over the next decade. A storm similar to the one that narrowly missed earth in 2012 would cause $2 trillion in damage and lead to the deaths of tens of millions of people. It is not just this decade. There is a 12% chance in every decade. Eventually our luck will run out. Are you prepared to live with no electricity for several years?Full Article


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"2015 was like commuting by roller coaster. This has been one of the more difficult markets I have seen in 50 years... I have spent time and time again trying to figure out what action causes what reaction and how do things fit in. And, in the past several weeks, it really has not fit."

Art Cashin


New Plays

Small Caps and Short Squeezes

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

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




iShares Russell 2000 ETF - IWM - close: 111.91 change: -2.55

Stop Loss: 111.45
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 12, 2015
Time Frame: 4 to 8 weeks
Option traders: exit prior to January option expiration
Average Daily Volume = 36 million
New Positions: Yes, see below

Company Description

Trade Description:
Stocks were hammered last week. The small caps really underperformed with the Russell 2000 small cap index plunging 60 points or -5%. The last two weeks have seen an 80-point drop (-6.7%) in the $RUT.

Last week's sell-off looks pretty ugly especially with Friday's breakdown below short-term support near 1,140 on the $RUT index. We think the weakness is overdone.

Normally the middle of December sees some tax-loss selling ahead of yearend. Last week the tax-loss selling was exacerbated by serious weakness in crude oil. Oil's plunge to new seven-year lows crushed the energy sector. There is also some general uneasiness about the Fed's likely decision to raise rates in the week ahead.

Historically the mid-December dip is a buying opportunity. The next two or three weeks is typically bullish and small caps often outperform. We want to be ready if that happens. One way to play the small caps is the Russell 2000 ETF, the IWM.

Friday saw the IWM sink -2.2% to close at $111.91. Tonight we are suggesting a trigger to launch bullish positions at $112.65. If triggered we'll try and limit our risk with a tight stop loss at $111.45, just under Friday's low.

Trigger @ $112.65

- Suggested Positions -

Buy the IWM @ $112.65

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

Buy the JAN $115 CALL (IWM160115C115) current ask $1.22
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

SolarCity Corp. - SCTY - close: 37.04 change: +0.39

Stop Loss: 33.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 12, 2015
Time Frame: 6 to 8 weeks
Option traders: Exit prior to January option expiration
Average Daily Volume = 3.7 million
New Positions: Yes, see below

Company Description

Trade Description:
If you looked at the news this weekend then you probably noticed the headlines regarding the COP 21 UN climate change conference in Paris. Almost 200 countries signed the pledge to help fight global warming. It's a long road from promises to implementation and enforcement but it does signal a big step away from burning fossil fuels in the future. That should bode well for solar power stocks.

SCTY is in the technology sector. Officially it's part of the semiconductor industry. They bill themselves as "America's #1 full-service solar provider." According to the company, "SolarCity® provides clean energy. The company has disrupted the century-old energy industry by providing renewable electricity directly to homeowners, businesses and government organizations for less than they spend on utility bills. SolarCity gives customers control of their energy costs to protect them from rising rates. The company makes solar energy easy by taking care of everything from design and permitting to monitoring and maintenance. SolarCity currently serves 19 states."

The earnings picture is improving. Their most recent earnings report was October 29th. SCTY reported their Q3 results. Wall Street was expecting a loss of ($1.94) a share on revenues of $111.4 million. SCTY blew away the EPS estimate with a loss of just ($0.20) a share. Revenues were up +95% to $113.85 million.

The company provided bullish guidance. They see Q4 installations up +58-69% over a year ago. They introduced 2016 guidance of +40% growth for full-year installations. They have also driven their cost per watt to a new low of $2.84. The company is focused on reducing overall costs even more.

The stock initially sold off on this news but shares bottomed in mid November near $25.00. That looks like a bottom with shares of SCTY up four weeks in a row now. Currently SCTY is hovering near its 50-dma and just below resistance near $38.00. A rally above $38.00 will produce a new buy signal on the point & figure chart. It could also spark some short covering.

The most recent data listed short interest at 54% of the 50 million share float. That's plenty of fuel for a short squeeze. I wouldn't be surprised to see SCTY rally into the $45-50 zone. Tonight we are suggesting a trigger to launch small bullish positions at $38.15. We want to keep positions small to limit risk because SCTY is a volatile stock. This should be considered a higher-risk, more aggressive trade.

Trigger @ $38.15 *small positions to limit risk*

- Suggested Positions -

Buy SCTY stock @ $38.15

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

Buy the JAN $40 CALL (SCTY160115C40) current ask $2.50
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Race Lower On Friday

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market ended the week on a sour note with equities plunging in a widespread decline. The major indices lost -2% (or more). The VIX volatility index soared +26% to new two-month highs.

ADSK, PAYX, and TSS were stopped out.
QRVO has been removed.

Bearish trades on GME and HOG were opened.

We've adjusted the entry point on SBUX.

Current Portfolio:

BULLISH Play Updates

Activision Blizzard, Inc. - ATVI - close: 37.22 change: -1.16

Stop Loss: 36.40
Target(s): To Be Determined
Current Gain/Loss: -2.4%
Entry on December 04 at $38.15
Listed on December 03, 2015
Time Frame: Exit prior to ATVI earnings in early February
Average Daily Volume = 10.0 million
New Positions: Yes, see below

12/12/15: ATVI dipped toward support near its late November lows and bounced. Even with the midday rebound ATVI still lost -3.0%. The move looks like short-term panic selling due to the market's accelerated decline on Friday. The trend for ATVI is still bullish. However, I will point out that on the weekly chart ATVI has now produced a bearish engulfing candlestick reversal pattern. This signal needs to be confirmed so I wouldn't abandon ship yet.

On the daily chart (see below) you'll notice ATVI found support at its trend line of higher lows. I would use a rally above $37.50 as a new bullish entry point.

Trade Description: December 3, 2015
The movie industry gets a lot of press but the video game market is much bigger. One of the biggest companies in this arena is ATVI and they're about to get a lot bigger.

ATVI is part of the technology sector. According to the company, "Activision Blizzard, Inc. is the largest and most profitable western interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty, Call of Duty Online, Destiny, Skylanders, World of Warcraft, StarCraft®, Diablo®, and Hearthstone. Headquartered in Santa Monica, California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world."

Revenues for a video game company like ATVI tend to be lumpy based on new releases throughout the year. The company has managed to beat Wall Street's estimates on the bottom line the last four quarters in a row.

On November 2nd, 2015, ATVI announced they had signed a $5.9 billion deal to buy King Digital Entertainment (symbol: KING). This deal should give ATVI a huge boost in its mobile gaming footprint and could add a significant chunk to earnings in 2016. A Wedbush analyst believes the mobile gaming market is about $24 billion and growing at up to 20% a year for the next five years. They see the KING acquisition as a great fit for ATVI.

Several days later, on November 11th, ATVI announced that their new Call of Duty: Black Ops III game was the biggest entertainment launch of the year with a three-day opening weekend sales above $550 million. That surpassed any other entertainment launch of the year including books, music, or movies (surpassing the movie Jurassic World's massive opening weekend).

Recently a Cowen analyst said videogames are going to be another hot seller this year and they listed ATVI as their top pick in the industry. Multiple analysts have upgraded their stock price on ATVI following the KING acquisition news. Shares of ATVI have shown significant strength this year. The stock is trading at all-time highs and up +86% year to date. The point & figure chart is bullish and forecasting at $49.50 target.

Today's widespread market decline sparked some profit taking in ATVI. The stock found support at its rising 10-dma. If shares bounce from here we want to jump on board. Tonight we are suggesting a trigger to launch bullish positions at $38.15.

- Suggested Positions -

Long ATVI stock @ $38.15

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

Long FEB $40 CALL (ATVI160219C40) entry $1.47

12/04/15 triggered @ $38.15
Option Format: symbol-year-month-day-call-strike


Microsoft Inc. - MSFT - close: 54.06 change: -1.21

Stop Loss: 53.20
Target(s): To Be Determined
Current Gain/Loss: -1.0%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

12/12/15: The stock market's broad-based sell-off on Friday pushed MSFT toward short-term support near the $54.00 level. If you're looking for a new entry point I would wait for a rally above Friday's intraday high ($55.10).

Trade Description: November 3, 2015:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

- Suggested Positions -

Long MSFT stock @ $54.60

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

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

12/01/15 new stop @ $53.20
11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike


Netgear Inc. - NTGR - close: 43.65 change: -0.37

Stop Loss: 43.25
Target(s): To Be Determined
Current Gain/Loss: -4.2%
Entry on December 04 at $45.55
Listed on December 02, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 468 thousand
New Positions: see below

12/12/15: I'd like to think that after five down days in a row NTGR is due for a bounce. Shares hit an intraday low of $43.29 before bouncing on Friday. If there is any follow through lower we will likely be stopped out at $43.25.

No new positions at this time.

Trade Description: December 2, 2015:
Shares of NTGR have delivered an impressive reversal in the last couple of months. Analysts believe the company is poised to carve out its niche of the Internet of Things (IoT). Meanwhile new products have helped NTGR's retail business soar.

NTGR is in the technology sector. According to the company, "NETGEAR is a global networking company that delivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless, Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in each geographic region in which the Company's products are sold. NETGEAR products are sold in approximately 39,000 retail locations around the globe, and through approximately 31,000 value-added resellers. The company's headquarters are in San Jose, Calif., with additional offices in approximately 25 countries."

Shares of NTGR are up +57% from their 2015 lows near $28.50. Most of that was thanks to a +40% surge in the month of October. That was due to a strong Q3 earnings report.

Wall Street was expecting Q3 earnings of $0.51 a share on revenues of $322 million. NTGR beat estimates on both counts. Earnings were $0.67 a share. Revenues fell -3.2% but came in at $342 million. Their operating margin surged from 7.1% in Q2 to 10.3% in Q3.

Patrick Lo, Chairman and Chief Executive Officer of NETGEAR, commented, "Our financial results for the third quarter of 2015 exceeded expectations, driven by strength in North America and a robust back-to-school season. Our revenue in Q3 was further augmented by higher than normal demand from our service provider customers. The Retail Business Unit had an all-time record quarter in sales, powered by our fast-growing Arlo and Nighthawk product lines. The success of both product lines continued to drive up average selling prices for NETGEAR retail products, and led to a healthy 24.9% year-over-year increase in revenue for the Retail Business Unit for Q3. We were also pleased with the sequential growth shown by the Commercial Business Unit, which was led by our switching products. With many new products in the pipeline, we see the momentum of our switching products rolling into the coming quarters. Meanwhile, we continued to closely manage the Service Provider Business Unit with a focus on profitability."

Wall Street analysts have been raising estimates since NTGR's Q3 report. The big move in the stock has generated a huge buy signal on the point & figure chart, which is now forecasting a long-term target at $77. The last few weeks have seen NTGR consolidate sideways under the $45.00 area. This is significant since $45.00 (actually $45.31) was the all-time high from July 2011. A breakout past resistance at $45.00 is in progress. Today's intraday high was $45.38. Tonight we are suggesting a trigger to launch bullish positions at $45.55.

- Suggested Positions -

Long NTGR stock @ $45.55

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

Long JAN $45 CALL (NTGR160115C45) entry $1.80

12/04/15 triggered @ $45.55
Option Format: symbol-year-month-day-call-strike


Starbucks Corp. - SBUX - close: 59.82 change: -2.05

Stop Loss: 58.65
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 08, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 8.8 million
New Positions: Yes, see below

12/12/15: SBUX was holding up pretty well last week. That changed on Friday with a -3.3% plunge. We see the pullback as an opportunity. However, we'd like SBUX to show some strength before jumping in so instead of buying the dip we are adjusting our entry trigger down to $60.45. I'm also adjusting our stop loss from $58.95 down to $58.65, just below the 100-dma

Trade Description: December 8, 2015:
Do you know someone giving or getting a Starbucks gift card for the holidays this year? Odds are you do (see below). The recent action in SBUX looks like another bullish entry point.

We have traded SBUX more than once this year. Here is an updated play description and entry point on the stock:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Sales Growth:

SBUX is a big company and yet they continue to deliver strong earnings and revenue growth. Their Q2 2015 results, released in April, saw revenues up +17.8%. Q3 results, announced in July, saw revenues up +17.5%. Their Q4 results were announced on October 29th. Revenues grew +17.5% again. The company has been killing it with strong same-store sales. Q1's global same-store sales were +7%. Q2's same-store sales were also +7%. Q3's rose to +8%. What's impressive is SBUX is able to deliver this sort of sales growth in spite of the strong dollar and its negative foreign currency impact.

SBUX management provided guidance for Q1 2016 with earnings just below analysts' estimates. They still see double-digit revenue growth next year. The company plans to open about 1,800 new locations in fiscal 2016.

SBUX continues to build out their technology improvements. They see millions of orders a week on their mobile transactions platform. Currently they are testing a delivery service in Seattle.

It's also worth mentioning that the holiday season is normally a strong one for SBUX. Last year one in seven Americans received a Starbucks gift card.

We should also note that there is currently an E. Coli scare going around. Chipotle (CMG) is getting hammered on this story. Other companies like Costco and Starbucks have also had issues with E. Coli in a few products recently but thus far the impact has been very limited for SBUX.

Technically SBUX is in an up trend. It is also one of the best performing stocks in the S&P 500 this year with SBUX up +50% year to date. The point & figure chart is forecasting at $68.00 target. The stock peaked in late October and has spent the last few weeks consolidating sideways. The dips below $60 found support near prior resistance and now SBUX has built a potential bullish double bottom pattern. Tonight we are suggesting a trigger to launch bullish positions at $62.65.

Trigger @ $60.45

- Suggested Positions -

Buy SBUX stock @ $60.45

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

Buy the FEB $65 CALL (SBUX160219C65)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

12/12/15 Entry adjustment - move the trigger from $62.65 to $60.45. Adjust the stop loss down to $58.65.
Option Format: symbol-year-month-day-call-strike


Yelp Inc. - YELP - close: 29.65 change: -1.18

Stop Loss: 28.85
Target(s): To Be Determined
Current Gain/Loss: + 6.8%
Entry on November 18 at $27.75
Listed on November 17, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: see below

12/12/15: YELP has been churning sideways in the $29.00-32.00 zone for almost three weeks. The market's big drop on Friday sparked a -3.8% plunge in YELP but the stock remains inside its trading range - at least for now. Shares look headed for short-term support in the $29.25-29.50 zone.

No new positions at this time.

Trade Description: November 17, 2015:
It has been a rough ride for YELP investors. The stock is down -50% year to date and off -72% from its all-time highs set in 2014. Yet the action lately is starting to look like all the bad news is priced in.

YELP is considered part of the technology sector. According to the company, "Yelp Inc. (http://www.yelp.com) connects people with great local businesses. Yelp was founded in San Francisco in July 2004. Since then, Yelp communities have taken hold in major metros across 31 countries. Approximately 83 million unique visitors visited Yelp via their mobile device1, including approximately 18 million unique devices accessing the Yelp app2, and approximately 79 million unique visitors visited Yelp via a desktop computer3 on a monthly average basis during the second quarter of 2015. By the end of the same quarter, Yelpers had written approximately 83 million rich, local reviews, making Yelp the leading local guide for real word-of-mouth on everything from boutiques and mechanics to restaurants and dentists."

The earnings picture has struggled this year. YELP's Q1 and Q2 reports both missed analysts' estimates. YELP also guided lower each time. Then there was news in July that YELP had given up on trying to sell itself because they couldn't find a buyer.

The revenue picture improved in the third quarter. YELP reported its Q3 results on October 28th. Earnings of $0.03 a share missed estimates of $0.06. Yet revenues were up +40% to $143.6 million, which was better than expected. Management then raised their 2015 guidance.

On November 13th shares of YELP received a big upgrade from RBC Capital Markets who raised their outlook to "outperform" and upped their price target from $34 to $42. Meanwhile recent news that InterActiveCorp (IACI) had offered to buy Angie's List (ANGI) might restart the M&A speculation on YELP since ANGI and YELP are in similar businesses.

Technically shares of YELP definitely appear to have formed a bottom over the last three months. The rally from its October lows has generated a buy signal on the point & figure chart that is forecasting a long-term target of $37.00. Right now YELP is flirting with a breakout past its early August peak. A breakout could spark some short covering. The most recent data listed short interest at 22% of the 60.8 million share float.

We are listing YELP as an aggressive, higher-risk bullish trade. The stock can be volatile so readers may want to limit their position size. Tonight we are suggesting a trigger to launch positions at $27.75.

*small positions to limit risk*- Suggested Positions -

Long YELP stock @ $27.75

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

Long 2016 JAN $30 CALL (YELP160115C30) entry $1.47

12/05/15 new stop @ 28.85
11/21/15 new stop @ 27.90
11/18/15 triggered @ $27.75
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Columbia Sportswear - COLM - close: 44.91 change: -0.44

Stop Loss: 48.05
Target(s): To Be Determined
Current Gain/Loss: -0.4%
Entry on December 08 at $44.75
Listed on December 07, 2015
Time Frame: Exit prior to earnings in February
Option traders exit prior to January expiration
Average Daily Volume = 284 thousand
New Positions: see below

12/12/15: COLM reversed under its 10-dma and dropped to new multi-month lows on Friday. I am suggesting readers use Friday's decline as a new entry point for bearish positions although traders may want to wait for another decline below $44.60 before initiating positions.

Trade Description: December 7, 2015:
The pace of consumer spending has been disappointing this year. Overall retail sales have been slow. Plus the warmer weather has been a major set back for outerwear and winter clothing a lot of retailers are dealing with high levels of unsold inventory.

COLM is in the consumer goods sector. According to the company "Columbia Sportswear Company has assembled a portfolio of brands that connect active people with their passions, making it a leader in the global active lifestyle apparel, footwear, accessories and equipment industry. Founded in 1938 in Portland, Oregon, the company's brands are today sold in approximately 100 countries. In addition to the Columbia® brand, Columbia Sportswear Company also owns the Sorel®, Mountain Hardwear®, prAna®, Montrail® and OutDry® brands."

Bullish COLM investors have got to be frustrated. It's true that a lot of retailers have struggled. Yet COLM has had pretty good results this year. Their Q4 report from 2014, announced in February, was above estimates and management raised guidance. The stock soared on the bullish report and guidance.

Their Q1 results, on April 30th, beat estimates and guidance was in-line. Then on July 30th, COLM reported their Q2 results. Again earnings and revenues beat estimates by a wide margin. Management raised their guidance again. Shares of COLM exploded to new all-time highs and almost hit $75.00. That has proven to be the peak.

Since COLM's report in July the market has begun selling COLM's stock. The up trend reversed with COLM sinking under a bearish pattern of lower highs and lower lows. They reported their Q3 results on October 29th. They beat estimates again and raised their full-year guidance. The stock gapped higher nearly $10 the next day only to reverse lower.

Dick's Sporting Goods (DKS) really shook up the retail industry when they reported their earnings on November 17th. DKS missed Wall Street estimates on both the top and bottom line and DKS guided lower. The company blamed warm fall weather on their disappointing results. DKS also warned that Q4 would likely be very promotional, which would hurt margins. A few days later Bank of America Merrill Lynch downgraded COLM from "buy" to "neutral" over similar worries.

Technically COLM is in a bear market. The point & figure chart is forecasting at $36.00 target. COLM bounced off the $45.00 level in November. That bounce has failed. Now shares are about to breakdown under key support at $45.00. We are suggesting a trigger to launch bearish positions at $44.75.

- Suggested Positions -

Short COLM stock @ $44.75

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

Long JAN $45 PUT (COLM160115P45) entry $2.80

12/08/15 triggered @ $44.75
Option Format: symbol-year-month-day-call-strike


GameStop Corp. - GME - close: 30.00 change: -2.01

Stop Loss: 32.25
Target(s): To Be Determined
Current Gain/Loss: +0.7%
Entry on December 11 at $30.22
Listed on December 10, 2015
Time Frame: 6 to 8 weeks
Option traders exit prior to January expiration
Average Daily Volume = 2.1 million
New Positions: see below

12/12/15: Our new bearish trade on GME is open but ouch! Shares dropped a bit further than expected at the open.

On Thursday night we suggested a trigger to launch bearish positions at $31.40. I removed our normal disclaimer to avoid launching positions if shares gap down more than $1.00 past our entry trigger. Sure enough GME gapped down and it was more than $1.00 past our trigger. The stock gapped down -$1.79 at $30.22. GME immediately bounced back to $31.35 and then rolled over again.

The $30.00 level is potential round-number support but I do expect it will break. Prior lows in the $31.50-32.00 zone should be new overhead resistance. Tonight we are adjusting the stop loss to $32.25.

Trade Description: December 10, 2015:
The future of video game purchases is digital downloads. That is why shares of GME have struggled the last couple of years. Their retail business model is in serious jeopardy.

GME is in the services sector. According to the company, "GameStop Corp., a Fortune 500 and S&P 500 company headquartered in Grapevine, Texas, is a global, multichannel video game, consumer electronics and wireless services retailer. GameStop operates more than 6,800 stores across 14 countries. The company's consumer product network also includes www.gamestop.com; www.Kongregate.com, a leading browser-based game site; Game Informer® magazine, the world's leading print and digital video game publication and the recently acquired Geeknet, Inc., parent company of ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products. In addition, our Technology Brands segment includes Simply Mac and Spring Mobile stores. Simply Mac, www.simplymac.com, operates 72 stores, selling the full line of Apple products, including laptops, tablets, and smartphones and offering Apple certified warranty and repair services. Spring Mobile, http://springmobile.com, sells post-paid AT&T services and wireless products through its 590 AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 69 Cricket branded stores in select markets in the U.S."

The company's earnings results have been mixed. Their Q2 report, announced on August 27th, came in better than expected. GME beat analysts' estimates on both the top and bottom line. Management raised their 2016 guidance. Guess what? Traders sold the news anyway.

Fast-forward to November. The stock has already reversed under major resistance near $48 again. Shares plunge on November 13th following an analyst downgrade. Ten days later GME reports their Q3 earnings results. Their profit was $0.54 a share. Not only is that 5% decline from a year ago but it's five cents below estimates. Revenues were down -3.6% to $2.02 billion, another miss. Hardware sales plunged -20% in the third quarter. Software sales were down -9%. GME's comparable store sales fell -1.1%, which was below guidance. If that wasn't enough management lowered their Q4 guidance below Wall Street estimates. Following this Q3 report the stock garnered several analyst downgrades.

One of GME's biggest challenges is digital downloads where customers do not have to leave their home (or dorm room) to purchase new games. They can just purchase it online over the Internet and have it immediately downloaded and start gaming. Not only does this jeopardize GME's new game sales but it also hurts a major portion of their business, which is reselling used games. If fewer people are buying hard copy discs of their video games then that means fewer people selling their used games back to GME, which the company resells at a healthy margin.

The trend of digital downloads started years ago but they are growing in popularity. The bearish story on GME is not a secret. That's probably the biggest risk. There are already a lot of bears in the name. The most recent data listed short interest at 53% of the 103 million share float. That much short interest can make the stock volatile to any potentially positive headlines. I think the bears are right and GME is headed lower as their business continues to struggle.

Another risk is valuation. The stock has fallen -33% in the last few weeks. Most of the analyst action in GME has been bearish with several downgrades. The stock currently trades with a P/E around 8.6. Eventually some analyst firm might decide to upgrade it on a valuation basis and the stock could see a short-term rally on this sort of headline. Fortunately traders usually sell the rallies in GME.

Currently GME is flirting with a breakdown below major support in the $31.50-32.00 area. A breakdown here could see the current downtrend accelerate. The point & figure chart is bearish and forecasting at $19.00 target. Tonight we are suggesting a trigger to open bearish positions at $31.40. Please note that this is an aggressive, higher-risk trade. GME can be a volatile stock. I am removing our normal entry point disclaimer regarding gap downs. Due to potential volatility traders may want to use the options instead of trying to short the stock. I am listing the January puts. You might want to consider the April puts (next available month).

- Suggested Positions -

Short GME stock @ $30.22

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

Long JAN $30 PUT (GME160115P30) entry $2.44

12/11/15 triggered on gap down at $30.22, suggested entry was $31.40
Option Format: symbol-year-month-day-call-strike


Harley-Davidson, Inc. - HOG - close: 45.63 change: -0.69

Stop Loss: 48.25
Target(s): To Be Determined
Current Gain/Loss: +0.3%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 3.15 million
New Positions: see below

12/12/15: The market's widespread decline on Friday pushed HOG to new lows. Shares hit our suggested entry point at $45.75. I would consider new bearish positions at current levels.

Trade Description: December 9, 2015:
HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

- Suggested Positions -

Short HOG stock @ $45.75

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

Long FEB $45 PUT (HOG160219P45) entry $2.59

12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike


Leucadia National Corp. - LUK - close: 16.63 change: -0.59

Stop Loss: 17.55
Target(s): To Be Determined
Current Gain/Loss: +6.0%
Entry on November 30 at $17.70
Listed on November 28, 2015
Time Frame: 6 to 9 weeks
Average Daily Volume = 2.1 million
New Positions: see below

12/12/15: The sell-off in LUK accelerated on Friday. Shares fell -3.4% to close at new multi-year lows. Tonight we are moving the stop loss down to $17.55.

No new positions at this time.

Trade Description: November 28, 2015:
Investors appear to have soured on shares of LUK. The stock is down -20% year to date but it's off -29% from its July 2015 highs. LUK just ended the week at new five-year lows.

LUK is considered part of the financial sector. One of their biggest businesses is their Jefferies Group investment brokerage. Jefferies is only one in a long list of companies that LUK owns. You could argue LUK is more of a holding company or a conglomerate and a very diverse one at that.

Here's a list of some of LUK's businesses:
Berkadia, a full-service mortgage bank
FXCM, an online foreign exchange trading platform (NYSE:FXCM)
HomeFed, a real estate developer (65% owned by LUK)
Foursight Capital, an Auto loan originator and servicer
Leucadia Asset Management, a diversified alternative asset management platform
Folger Hill, a multi-manager discretionary long/short equity hedge fund platform
Topwater Capital, a highly-scalable multi-manager and multi-strategy liquid securities fund
Jefferies, a leading, client-focused global investment banking firm
Jefferies LoanCore, a joint venture between Jefferies and GIC Private Ltd (f.k.a. Government of Singapore Investment Corporation), is a finance company focused on originating and securitizing commercial mortgage loans
National Beef, a beef processing company that processes ~3 million fed cattle per year representing ~12.5% market share
HRG Group, a diversifed holiday company (NYSE: HRG) that operates in four business segments: consumer products - Spectrum Brands (NYSE: SPB, ~58% ownership); insurance - Fidelity & Guaranty Life (NYSE: FGL, ~81% ownership (1)); FrontStreet Re (100% ownership); Energy - Compass Production (~100% ownership); Asset Management (de minimis net book value).
Garcadia, 26 auto dealerships
Vitesse Energy
Juneau Energy
Linkem, a fixed wireless broadband internet provider in Italy
Conwed, a leading manufacturer of extruded, oriented and knitted plastic netting
Idaho Timber
Golden Queen (gold and silver mine)
(more details about LUK
company .pdf
The earnings picture for LUK has taken a drastic turn for the worse. Their Q1 report, announced March 17th, showed earnings of $11.7 million versus $112 million a year ago. Q1 revenues were down -34%. LUK delivered similar results with their Q2 earnings, announced August 5th. Earnings per share were $0.11 compared to $1.12 a year ago. Revenues were flat at $2.84 billion. Their most recent earnings report was November 5th, 2015. LUK reported their Q3 results, which was a loss of ($0.47) a share versus a profit of $0.14 a year ago. Revenues plunged -21% to $2.36 billion. You can see why investors might be selling the stock.

Management has been trying to take advantage of their low stock price with an aggressive stock buyback program but it's not making much difference. Technically shares of LUK are in a bear market and showing significant relative weakness.

The point & figure chart is very bearish and forecasting an $11.00 target. The last few days LUK has been trying to hold short-term support near $18.00 but that appears to have failed. Tonight we are suggesting a trigger to launch bearish positions at $17.70.

- Suggested Positions -

Short LUK stock @ $17.70

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

Long MAR $18 PUT (LUK160318P18) entry $1.20

12/12/15 new stop @ 17.55
11/30/15 triggered @ $17.70
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 23.32 change: +3.04

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: - 6.9%
2nd position Gain/Loss: +19.6%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: to be determined
Average Daily Volume = 50 million
New Positions: see below

12/12/15: The stock market's decline on Friday really spooked investors. There was a surge of buying for put options and the volatility index spiked +26%. The VXX followed with a +15% rise of its own.

No new positions at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike



Autodesk, Inc. - ADSK - close: 61.10 change: -2.14

Stop Loss: 61.75
Target(s): To Be Determined
Current Gain/Loss: -5.4%
Entry on December 04 at $65.25
Listed on December 01, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: see below

12/12/15: The stock market's widespread sell-off on Friday hit ADSK pretty hard. Shares broke down below technical support at the 20-dma and plunged to a -3.3% decline. The stock hit our stop loss at $61.75.

*small positions to limit risk* - Suggested Positions -

Long ADSK stock @ $65.25 exit $61.75 (-5.4%)

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

JAN $67.5 CALL (ADSK160115C67.5) entry $1.54 exit $0.50 (-67.5%)

12/11/15 stopped @ 61.75
12/04/15 triggered @ $65.25
Option Format: symbol-year-month-day-call-strike


Paychex, Inc. - PAYX - close: 52.25 change: -0.86

Stop Loss: 52.45
Target(s): To Be Determined
Current Gain/Loss: -1.3%
Entry on November 11 at $53.15
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings on December 22nd
Average Daily Volume = 2.3 million
New Positions: see below

12/12/15: PAYX has been trading off its technicals lately. Shares tagged short-term resistance at its 10-dma on Friday morning (near $53.50) and reversed lower. The stock fell toward its next level of support, the simple 50-dma, near $52.00. Our stop loss was hit at $52.45.

- Suggested Positions -

Long PAYX stock @ $53.15 exit $52.45 (-1.3%)

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

JAN $55 CALL (PAYX160115C55) entry $0.80 exit $0.40 (-50.0%)

12/11/15 stopped out
11/11/15 triggered @ $53.15
Option Format: symbol-year-month-day-call-strike


Qorvo, Inc. - QRVO - close: 56.19 change: -1.31

Stop Loss: 55.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 05, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 2.2 million
New Positions: see below

12/12/15: We are giving up on QRVO. There was no follow through on its midweek bounce. Shares underperformed on Friday with a -2.2% decline. Our trade never opened. Tonight we are removing QRVO as a candidate.

Trade did not open.

12/12/15 removed from the newsletter, suggested entry was $60.25


Total System Services, Inc. - TSS - close: 53.74 change: -2.35

Stop Loss: 54.85
Target(s): To Be Determined
Current Gain/Loss: -0.5%
Entry on November 21 at $55.15
Listed on November 19, 2015
Time Frame: 6 to 9 weeks
Average Daily Volume = 1.4 million
New Positions: see below

12/12/15: Up until Friday shares of TSS were doing a pretty good job of ignoring the market's weakness. Shares were content to just consolidate sideways near its highs. Then on Friday morning the stock was downgraded. The combination of the downgrade and the market's accelerated decline sparked a big drop in TSS. Shares fell -4.1% and hit our stop at $54.85 in the process.

- Suggested Positions -

Long TSS stock @ $55.15 exit $54.85 (-0.5%)

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

FEB $55 CALL (TSS160219C55) entry $2.60 exit $2.15 (-17.3%)

12/11/15 stopped out
12/01/15 new stop @ 54.85
11/20/15 triggered @ $55.15
Option Format: symbol-year-month-day-call-strike