Option Investor

Daily Newsletter, Saturday, 12/19/2015

Table of Contents

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

Market Wrap

Quadruple Flushing

by Jim Brown

Click here to email Jim Brown

December's quadruple witching option expiration turned into a quadruple flushing as all the S&P sectors sold off hard. Dow components Disney and Boeing received downgrades and Goldman Sachs crashed with a sector downgrade for a total of about -115 Dow points.

Market Statistics

Friday Statistics

The Force was not with the markets on Friday as key stocks collapsed and forecasts were lowered. In addition to analysts applying their Lightsabers to earnings and price targets the first Fed head since the FOMC decision came out to trash the market with his comments.

Richmond Fed president Jeffery Lacker said four rate hikes in 2016 "would be gradual" and the Fed could hike at any meeting. He also said the rate hike forecast was the sign of an improving economy but unfortunately that is not what the economic reports are saying.

Shortly after Lacker's comments the San Francisco Fed president John Williams said the Fed will hike gradually in 2016 but will not follow any predictable pattern. "Every meeting will be live in terms of adjusting policy one way or another." Also, "There was a value to having the first hike at a (quarterly) press conference meeting but in the future I don't think that is as much of an issue."

Analysts had been troubled by the multiple uses of the word gradual in the Fed statement but the implication of four hikes in the dot plots. Analysts thought the dots would move lower over 2016 to signal fewer rate hikes. The dots come from the individual expectations for interest rates from each of the FOMC members.

The dot plot today is showing an average estimate for 1.4% at the end of 2016. Ten of the 17 FOMC members are expecting 1.5% or higher by the end of 2016. The market is expecting slightly less than 1%.

The Lacker/Williams comments caused another wave of selling in the afternoon.

Bloomberg Chart

The economics on Friday continued the recent trend of weakness. The Kansas Fed Manufacturing Index for December declined from +1 to -9 and a four-month low. The rebound to positive territory in November was completely erased and we are back to the June lows.

Production declined from +3 to -8, new orders from +5 to -5 and inventories fell from -6 to -17. Employment declined from -8 to -17 and the eighth consecutive monthly decline. The only positive improvement was the backorders, which rose from -17 to -2 and a nine-month high even though it is still in contraction.

Moody's Chart

I do not understand how the Fed can claim the economy is improving when the economic reports are worsening. The Kansas manufacturing above is just one example. The Philly Fed manufacturing report on Thursday declined from +1.9 to -5.9 and to the lows for the year, down from a high of 15.2 in June. Industrial production for November on Wednesday fell from -0.2% to -0.6% and the steepest monthly drop in four years. Wholesale Trade declined from +0.5% to -0.1%.

The Atlanta Fed's real time GDPNow forecast for Q4 GPD is now predicting +1.9% growth and will probably be lowered when it is updated again on the 23rd.

Since 1948, the Fed has hiked rates 118 times. For 112 of those hikes the GDP was over 5.5%. Only 2 times was it below 4.5% growth. One of those was in 1982 when the Fed had to reverse course almost immediately because they hiked in a slowing economy.

They have never hiked rates with economic growth this low until now. There have been 55 meetings with no hikes since the rate was lowered to zero exactly seven years ago in December. It has been 11 years and 6 months since the prior series of rate hikes began. One out of five money managers in the business today has never managed money in a rate hike cycle.

The calendar for next week is headlined by the Q3-GDP revision. Analysts are expecting no change but I would be very surprised if that came to pass. This is the last revision for Q3 and large adjustments sometimes appear. We will get the first look at Q4 GDP on January 29th.

There are quite a few economic reports next week but nobody will be paying attention. With Christmas on Friday and the market closing early on Thursday, it creates a long holiday weekend for traders. Normally they will try to extend it even further by taking the first three days off as well. This is going to create a very low volume environment and volatility could either be extreme or nonexistent.

Nike, Ensign Group and Empire Resorts will all split on December 23rd. Of the three, the only one I would buy after the event would be Nike. They also report earnings after the close on Tuesday.

For the full split calendar click here.

Disney (DIS) shares crashed despite the record setting news about ticket sales for Star Wars. Rich Greenfield of BTIG moved to the dark side of the force and downgraded Disney to a SELL rating with a $90 price target. His downgrade was clearly scheduled to take advantage of any sell the news event on the day Star Wars opened. He said the trouble with ESPN cord cutters would linger and Disney's cable business that includes ESPN makes up 45% of their revenue.

Multiple analysts came out to rebut the BTIG view but it did not help the shares. Rosenblatt Securities provided a conflicting outlook with a buy rating and price target of $130.

Star Wars ticket sales for Thursday previews broke a record at $57 million. The previous record was $43.5 million for Harry Potter Deathly Hallows part 2. Globally the previews totaled $130 million and also a record. Tickets for this weekend are sold out and they are selling for as much as $200 online. The faithful have been lining up by the tens of thousands at theaters around the country to score a good seat when their ticketed show arrives. Analysts believe the opening weekend receipts will easily exceed $200 million. The current record is $208.8 million for Jurassic World.

One company with 800 employees chartered 19 buses, rented 10 screens at one multiplex, and took everyone to see the movie.

The Rotten Tomatoes review site has a near perfect 95% score with many fans calling it the best film in the series since the 1983 Return of the Jedi. That would not be hard since the 3 prequels were not serious movies.

I still believe any sell off is a buying opportunity on Disney. The company has more than 30 movies on the calendar over the next three years and that includes two more Star Wars installments. They will open Shanghai Disney this spring and the cruises are still selling out. The ESPN problems will be resolved when people resubscribe ahead of the Olympics in 2016.

Invest with the Force and add some Disney shares to your long-term portfolio. At Friday's close of $107.56 there is risk to $98 but there is also upside potential to $130. Disney paid $1.37 in dividends in 2015.

Shares declined -$4.29 to knock about 30 points off the Dow.

Boeing (BA) was downgraded from outperform to market perform at Wells Fargo. The analyst said Boeing might lower guidance when it reports earnings in January. Investors should be aware of price cuts on 777s and weak demand for 747s. Higher interest rates will also make leasing the planes more expensive. Boeing is also in the design phase of a 757 replacement and that could boost R&D spending through 2018 and "crowd out share buyback programs" according to Wells Fargo. Shares declined -$6 to knock about 45 points off the Dow.

Dow component Goldman Sachs declined on general weakness in the banking sector. Shares have been declining for over a month despite expectations for a rate hike. The major banks have announced increased loan loss reserves because the drop in oil prices has severely weakened the credit quality in the energy sector. Add in the high yield problem from last week and the huge withdrawals from the bond market and Q4 earnings are likely to be under pressure. Shares declined more than $7 to knock about 50 points off the Dow.

One stock overcoming Friday's market volatility was Darden Restaurants (DRI). The company posted earnings of 54 cents compared to estimates for 42 cents. They raised guidance for the full year to $3.35 and up from a prior estimate at $3.30. Same store sales are now expected to be +3% compared to prior estimates for +2.5%. They said Olive Garden customers are spending more money on the newly invigorated menu that includes a new line of "breadstick sandwiches." Shares rallied $4 on the news.

Homebuilder Lennar (LEN) posted earnings of $1.21 that beat estimates by 10 cents. Revenue rose +16% to $2.95 billion. Home deliveries rose +10% to 7,657 homes. New orders also rose +10% to 6,053 homes. The order backlog rose +14% to 6,646 with a value of $2.48 billion. The average home price rose +6%. For the full year, Lennar earned $3.46 on revenue of $9.47 billion. Shares fell on the news in a bad market.

Remember BlackBerry (BBRY)? The company had nearly faded from view after it fell to penny stock status back in October. Shares rallied +10% after the company reported a loss of only 3 cents compared to estimates for a 14-cent loss. Revenue of $548 million rose +12% quarter to quarter after nine consecutive quarterly declines. Software revenue more than doubled and device sales rose for the first time in four quarters. BlackBerry has a new secure Android phone called the Priv. They sold 700,000 in the quarter with the average price rising from $240 to $315. It is not often that you see the price of a smartphone go up. CEO Chen said this was the turnaround quarter with the Priv hitting over 30 countries this quarter.

CarMax (KMX) dropped more than -6% after the company posted earnings of 63 cents compared to estimates for 68 cents. Revenue of $3.54 billion also missed estimates for $3.63 billion. Revenue rose +4.1% and the slowest since the quarter ended on May 2012. In the year ago quarter sales rose +7.4%. They could not blame it on the weather with the warmest October on record and November not much colder. They blamed the earnings miss on higher advertising expenses in a "challenging quarter."

Fossil Group (FOSL) was downgraded by Goldman to a "sell" from hold. Goldman put a $26 price target on the stock with a close at $37 today. The bank lowered earnings estimates -20% to $2.86 for 2016 and -28% to $2.47 for 2017. Goldman said organic sales growth would decline to mid-single digits over the next two years. The flurry of new watches from competitors including Apple is going to depress prices in general.

Apple shares cannot catch a break. Jabil Circuit (JBL) reported lowered guidance for the current quarter. Jabil manufactures the casings for iPhones and gets about 25% of its revenue from Apple. Stifel Nicolas warned that Apple sales were probably behind the lowered guidance. RBC analyst, Amit Daryanani also pointed to the Jabil warnings when he cut Apple earnings estimates for the March quarter from $2.59 to $2.37 and lowered the price target from $150 to $140.

In the last couple of weeks Raymond James, Bank of America, Baird Equity Research, Needham and Morgan Stanley have cut estimates for iPhone shipments citing reductions in build rates from Asian suppliers.

Apple shares closed below support at $107.50 on Friday with a -$2.95 drop to $106 and putting the stock in a bear market. The high close was exactly $133 and Friday's close was a 27-point decline or -20.3%.

Apple has lost more than $160 billion in market cap since the highs. That decline is larger than 477 companies in the S&P-500. Currently Apple's market cap if $591 billion and it is still the largest company.

Amazon (AMZN) continues to expand its reach and capabilities. News broke on Friday the company was in talks to lease 20 Boeing 767 jets that would be added to its existing fleet of 5 that I wrote about a couple weeks ago. Apparently, that test run for those five over the last several months has worked out for the retailer. Baird analyst said Amazon would eventually create its own logistics service and have excess capacity they could sell during non-peak seasons. Amazon would not comment directly but they have a policy of not disclosing news until the deals are done.

The current five planes are being managed by Air Transport Services (ATSG) out of an old DHL facility in Wilmington Ohio. Amazon is not licensed to operate aircraft on commercial routes so they have to contract with a third party. Amazon is increasing their capabilities because FedEx and UPS cannot keep up. A Bizrate study found that on-time deliveries had fallen from 93.3% on Dec 1st to 89.9% on Dec 15th. One percent equates to 300,000 packages out of the 30 million UPS has been delivering each day in December. Since FDX and UPS have added capacity each year in an effort to keep up with the growth of online shopping it appears they are not keeping up. That is an opportunity for Amazon to develop its own infrastructure capacity and depend on UPS and USPS only for the local deliveries.

I reported a couple weeks ago that Amazon said it was building a fleet of "several thousand" trucks to ship between warehouses and hubs in 69 U.S. cities. They are starting to show up in public and they are labeled "Amazon Prime" for obvious advertising reasons.

Slice Intelligence said Amazon captured 39.3% of e-commerce spending from November 1st through December 6th. That was up from 37.9% in the same period in 2014. That is more than the next 21 retailers combined including Walmart, Target, best Buy, Macys, Home Depot, Nordstrom and Costco.

Forrester Research said online spending was on track to rise +11% in November and December to $95.5 billion. More than 2,900 merchants that use Channel Advisor software to sell their products on Amazon saw sales rise +19.5% in the second week of December. That was more than the overall e-commerce growth rate of 15% in the same period.

Crude oil closed at $34.55 after dipping intraday to $34.29 and a 12-year low close on a weekly basis. Inventories rebounded +4.8 million barrels after "supposedly" dropping -3.6 million the prior week. I seriously doubt the prior week number was correct since refinery utilization declined -1.4% to 93.1% and refiner inputs of oil declined -150,000 bpd while imports rose +257,000 bpd for that week. I suspect it was an error in the numbers and somewhere in the hundreds of reports that are submitted one was overlooked. That error was corrected this week when the new weekly data was collected and that caused the spike in inventories.

The rise in inventories weighed on prices all week. On Friday, we were facing the expiration of the January contract on Monday and anyone holding a long position needed to close it.

There was a bump in mid-afternoon when the active rig counts were reported from Baker Hughes. You may remember active rigs declined -23 the prior week. This week they were flat overall but there was some number confusion here as well. Oil rigs rose +17 and active gas rigs declined -17 while the total remained flat at 709. Does that strike anyone else as strange that after seeing oil rigs decline -21 last week that they would suddenly shoot back up +17 this week while gas rigs plunged -17? While I cannot prove it, I suspect some of the classifications were messed up the prior week and corrected this week. This is another weekly collection of hundreds of documents and the numbers tallied and reported. It would have been very easy to accidently categorize some oil rigs as gas rigs and when the new reports were collected this week that was magically reversed.

The intraday spike in oil prices on this data was quickly sold as I expect other astute investors assumed the same number confusion.

The gain in crude inventories to 490.7 million puts the total only -212,000 barrels below a historic high. The inventory levels are expected to continue higher over the low demand winter months.

Natural gas declined to $1.76 for the week and a 16-year low. With gas prices this low and warm weather still with us because of El Nino the outlook for prices is grim. Some analysts believe we could see $1.50 in the coming months. This is a very good reason why active gas rigs are falling and are now at an 18 year low. The shares of gas producers are also at post recession lows.

Swift Energy (SFY) traded as high as $68 in 2008 and the company was delisted last week at 16 cents. The company is in talks with bondholders after it skipped an $8.9 million interest payment on December 1st. Normally a company does a reverse split to lift its stock price to avoid being delisted. Swift Energy appears to have given up or maybe they wanted the large number of outstanding shares to trade for debt forgiveness. Many energy companies are now doing that is order to get some breathing room. The short story is that shareholders, that have hung on are now going to be wiped out in any debt/share exchange.

The December quadruple witching options expiration is the strongest of the four quarters. Investors and fund managers have positions that took them to year-end and now they either have to be exercised or closed. Volume across all the exchanges was the second strongest of the year at 12.65 billion shares, second only to the 14.2 billion on August 24th. That was about 3:1 declining volume over advancing volume while declining stocks were 2:1 over advancers. New 52-week lows were 494 compared to 1,073 on Monday. Stocks rebounded during the week and many did not return to their lows in the Thr/Fri sell off.

In the unbelievable column, the yield on the ten-year treasury declined to 2.19% after topping out at 2.33% after the Fed announcement. This is even more surprising because outflows from bond funds were at near record highs ahead of the Fed meeting. Something changed minds after Wednesday's close and suddenly treasuries were being bought in significant volume, probably as a safe haven investment since the Fed is not expected to hike again until March or April.

The market should have gotten a boost from the stimulus moves in Japan overnight. The BOJ added 300 billion yen to its program to purchase equity ETFs. That is roughly $2.5 billion in dollars with the yen at 121.29 to the dollar at Friday's close. The Dollar Index closed down on Friday after a sharp spike on Thursday as a result of the Fed move. The Friday decline was probably due to anticipation it would be at least three months before the Fed hiked again. The dollar was up strongly for the week so there was some profit taking involved as well.

The global economy is not likely to improve soon because the Baltic Dry Shipping Index closed at a historic low at 477. That is down from 2,337 in 2014 and 11,793 high in 2008 before the global recession. This indicates the cost to ship dry goods along the various ocean shipping lanes. The index declines when there are more empty ships bidding on the next cargo and rises when there is more cargo than ships. Closing at a historic low suggests the volume of goods being shipped around the world is also at a multi year low.

The CRB Commodity Index ($CRB) closed at 172.16 and a 41 year low. Commodities have not been this cheap since 1973 and I am sure quite a few people reading this commentary were not even born in 1973 and the vast majority were not investing in 1973. This is another indicator of the weakening global economy and another reason why the Fed should not have hiked rates. The Fed claims the commodity deflation is transitory but it looks pretty pronounced to me. Prices are already well below the 2009 recession lows.

Over the last ten years the global GDP has risen from $28 trillion to $78 trillion (+178%) Over the same period, the total global debt has risen from $40 trillion to $225 trillion (+462%). Comstock said not only is this not sustainable but it is why global growth is so slow. Debt requires payments that reduce the amount of money available to grow. Corporate debt issuance in the U.S. rose more than $1 trillion in just the first nine months of 2015. Comstock also said the global deflation in commodities is screaming a warning of a global recession ahead. Comstock Article

Historically commodities and the equity markets tended to trade relatively in tandem. Since the beginning of 2013 that has changed. Equities rose and commodities crashed. That relationship must return and that means either the stock market will crash or commodities are about to experience a huge rally. Since commodities are not going to rally until the global economy recovers that is not good news for the equity markets.

The Dow Transports ($TRAN) closed at a two year low. This is the worst performance outside of a recession and could be a signal that one is coming. The railroads, airlines and trucking companies have all warned about slowing traffic. The airlines have plenty of traffic but they have to discount the prices so low their revenue per passenger mile is falling. Some are bringing back snacks in an effort to entice passengers to use them instead of another carrier. Low oil prices should help them but most are not benefitting from the drop. They hedged the high prices a year ago and now they are suffering from hedges that are twice the current price of oil.


The S&P is down -2.6% for the year with eight trading days to go. To close in the green for the year it has to close over 2,059. We were there last week but Friday's flush could mean we are going to have a tough time regaining that level.

Personally, I think Friday was mostly options expiration, post Fed portfolio adjustments and some end of year exits. Literally tens of thousands of traders have now closed up shop until after Christmas. Expiration Friday was the punctuation to a year of tough trading. 2015 has seen the worst performance for mutual fund returns since 1998. Fourteen of the last 16 days have seen triple digit moves on the Dow in mostly alternating directions.

To confirm my idea that the downdraft was mostly options related the S&P-500 SPY ETF traded 46 million shares in the last 30 min and closed exactly at $200. This would have been the max pain trade. We have not talked about that much in recent years because of the increased volume in options and in high-frequency trading. Some 48% of the volume in December has been high-frequency trading.

There were 165,737 Dec $200 calls traded on Friday and 314,338 Dec $200 puts. That was the highest volume strike on both puts and calls. It was the strike where the most options above and below that level expired worthless. However, because of the sharp decline there were a lot of higher puts that expired in the money.

SPY December Calls

SPY December Puts

Unfortunately, the S&P-500 chart has confirmed another lower high and lower low and that is negative regardless of what caused it. The 2,020 support failed again and we could easily retest the strong support at 1985-1990.

The chart is negative and even if we do get a Santa Claus rally, the overhead resistance becomes stronger on every lower high. With the very low volume expected for next week, I think it will be very difficult to overcome the negative chart.

Support is 1985-1990 and resistance 2,060.

The Dow had only one stock in positive territory and that was Caterpillar. Why it was positive is a puzzler. They said before the open that total global machine sales were down -11% in November. Global resource industries sales were down -28% and global construction industry sales were down -7%. Shares dipped on the news to a two-month low but rebounded later in the day. The minor 32-cent gain did little to offset the major losses from Goldman, Boeing, Disney and others.

The last three declines saw the Dow stop on the 100-day average, currently 17,151. The sell on close orders pushed it slightly lower to 17,128 but close enough for our purposes. This is a two-month low. Horizontal support at 17,130 caught the falling knife.

Support at 17,050 and psychological support at 17,000 will be the defensive levels for monday. Any break below 17,050 will likely signal a major washout in progress and we could be headed back to the September lows at 16,000.

While I do not expect a move below 17,000, I did not expect this two-day -670 point crash from 17,800 either. The market is not behaving rationally and that makes it dangerous. When indexes move slowly either up or down investors have a chance to form opinions and strategize about new plays. When the Dow plunges nearly 700 points in two days there is no strategy other than sell fast to preserve profits and limit losses.

The Nasdaq Composite declined -79 points or -1.6% compared to the -2.1% on the Dow and -1.3% on the Russell 2000. Tech sentiment was supported by the Biotech sector with the $BTK losing only .7% and finishing the week with a gain of +3.5%. The BTK had two days of major gains on Tue/Wed and gave back very little on Thr/Fri. This kept the Nasdaq from joining its brethren at two month lows.

Apple's -7 point drop for the week was a major weight on the Nasdaq and the losses accelerated as the week progressed. With so many analysts cutting estimates it is not likely to improve significantly next week.

The Nasdaq came close to strong support at 4,900 with a close at 4,923. The intraday decline on Monday dipped to 4,871 but rebounded instantly. That 4888-4900 support level should be decent but with any material negative volume we could see a collapse.

The Russell 2000 did not give back all its gains since the Monday low but it came close. The +36 point two day rally was followed by a -31 point decline. That makes Monday's support low at 1,112 the level to watch this week. Since the next two weeks are supposed to be dominated by small cap buying, ANY further decline below 1,112 would be a sell signal. The seasonal norms for December have been trashed and the lack of any small cap buying next week would be market negative.

The NYSE Composite closed at a two month low. The NYSE did dip below this level on Monday but did not close here. The NYSE appears destined to retest 9500-9600 from the August/September crash. With a high percentage of commodity and energy stocks, the index is fighting an uphill battle.

The S&P-400 Midcap Index ($MID) is also at a two month low and very close to the 1,350 support that appeared in the Aug/Sep crash. Midcaps have been performing worse than small caps and I would not be surprised to see this support retested.

While I believe the majority of the selling on Thr/Fri was related to quadruple witching, it may be wishful thinking to expect a rebound next week. Monster declines like those we have had for the last two weeks produce confusion and timidity. Investors are afraid to go back into the market because there is no trend and they are still in pain from being knocked out of their positions.

Add in the low volume from most traders being away from the market and it can cause even more volatility OR no volatility at all. With fund managers now out of the market for the rest of the year, their volume is also missing. I would be cautious about launching new positions in either direction until a trend develops.

Despite the volatility, the analyst community is not backing off their estimates for yearend 2016. Cannacord is the highest at 2,350 followed by RBC Capital at 2,300, Bank America at 2,250, Wells Fargo at 2,245 and Morgan Stanley at 2,175. Just because they put out an estimate does not mean that is where the market is going. I will publish On January 1st the results from the 2015 estimate contest and the majority missed their targets by a mile.

The S&P has not been down two years in a row since 1980-1981. That means it has been 34 years since we had a back-to-back loss and the odds are good 2016 will finish higher. Typically, when we have a down year the following year is positive.

A survey of multiple strategists by Barron's suggests the equity markets will rise about 10% in 2016. The strategists gave their reasons in an article last week. David Kostin, Goldman's chief strategist believes the Fed will hike 4 times in 2016 to raise rates to 1.25% to 1.5%. His comments echo the feelings of the majority of analysts. Full Article

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Random Thoughts

Billionaire investor Sam Zell said "I think the economy is closer to falling over than it is to going up. I think there is a high probability we are looking at a recession in the next 12 months."

Last week I reported that JP Morgan said there was a 76% chance of a recession within the next three years and 55% over the next 12 months. Former fund manager Raoul Pal said the odds were 65% there will be a global recession. Citigroup also forecast a recession over the next 12 months.

Chinese officials finally admitted they faked the economic data. However, they claim they are not faking it now but did so in years past. They say that is why the current numbers are falling so sharply because the big numbers in the past were faked. So, do we believe them now or not? Some numbers were reported at levels that were twice the actual activity level. One county in the Liaoning province reported economic activity that was 127% higher than actual. They reported a GDP of 9.5% compared to the first three quarters of 2015 at 2.7%. Fortune Article

This year is on track to be the first losing pre-election year for the Dow since 1939. With the Dow down -3.9% for the year it will take about a 700-point rebound to return to positive territory. Santa needs to show up in a hurry with a sleigh full of bullish investors. "If Santa Claus should fail to call, bears may come to Broad and Wall." The Santa rally was defined by Yale Hirsch in 1972 as the seven-day trading period that covers the last five trading days of the year and the first two days of the New Year. Stock Trader's Almanac

While that "Santa failing to call adage" has been around for a long time it is not accurate. There is no evidence that it is true and actually some decent evidence to the contrary. Santa Adage Fails

More people shop on Dec 26th than shop on Black Friday according to American Express. As many as 66% of Americans will shop on the 26th compared to 45% on Black Friday and 47% on Cyber Monday. In a survey from Ebiquity 38% of Dec 26th shoppers will be shopping for themselves to take advantage of discounts. Some 25% said they will be using gift cards they received for Christmas. The survey also found that 76% of respondents think re-gifting is acceptable and 57% plan to do it this holiday season.

With the announced Dow-DuPont merger and the plan to split into three separate companies, we could see DuPont removed from the Dow 30. Amazon has been pegged as the next addition to the Dow with Alphabet also a potential candidate. However, Amazon would have to announce a major stock split of 6:1 or even 8:1 to be included. Since the Dow is a price weighted index they would never add Amazon at $665 but a $110 price after a 6:1 split would be acceptable. Apple split 7:1 before it was included in the Dow. Google at $750 would need an 8:1 split to be eligible for inclusion. However, with Google's dual share status (GOOG, GOOGL) they might not be included until one class is eliminated. Berkshire Hathaway (BRK.B) is another possibility but that dual share class problem exists there we well. They split the B class shares 50:1 several years ago so they could be included in the S&P-500.

There have only been 60 changes to the Dow since it was started on May 26th, 1896. Its longest stretch without a change was 17 years between 1939 and 1956.

There were 257 hedge funds closed in Q3, up from 200 in Q2. The total for the first nine months of 2015 is 674, compared to 661 in the same period in 2014. Decreasing investor risk tolerance was blamed for the two-year flood of closures. Money managers have been crushed by the market and geopolitical events like the 4% devaluation of the Chinese yuan in August. Hedge fund assets fell by $95 billion in Q3 to end at $2.87 trillion. That is the biggest decline since 2008-Q4 when $314.4 billion was withdrawn as the markets collapsed.

However, there were 269 new hedge funds opened in Q3 compared to 252 in Q2 and 785 for the first nine months of 2015. Bloomberg Report

Star Wars is grabbing all the headlines this weekend so it is not a surprise that the political cartoonists are merging politics and the movie theme. Cartoons


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If you do not take an interest in the affairs of your government, then you are doomed to live under the rule of fools."



New Plays

A Tough Environment For This Industrial Name

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:



Eagle Materials Inc. - EXP - close:

Stop Loss: 61.65
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 19, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 800 thousand
New Positions: Yes, see below

Company Description

Trade Description:
The outlook for homebuilders has soured and the XHB homebuilders ETF has sunk toward multi-month lows. Meanwhile the energy sector is getting crushed as crude oil falls to six-year lows. Together they make a tough environment for EXP who serves both homebuilders and the energy industry.

EXP is in the industrial goods sector. According to the company, "Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas."

The company has struggled to meet Wall Street earnings estimates all year long. The last three quarters in a row have seen EXP miss both the earnings estimate and the revenue estimates. Their most recent report was October 26th. Analysts were looking for a profit of $1.18 per shares on revenues of $336.6 million. EXP only delivered $1.11 a share, which was a -40% drop from a year ago. Revenues were up +15.5% from a year ago to $329.0 million, below expectations.

Technically the stock is in a bear market. The market's bounce on Tuesday and Wednesday produced an oversold bounce in shares of EXP but this has failed with the market's reversal lower in the last two sessions. The point & figure chart is bearish and forecasting at $47.00 target. EXP has broken down below what should have been round-number support at $60.00. The next support level could be the $50.00 region. Tonight we are suggesting a trigger to launch bearish positions at $58.65.

Trigger @ $58.65

- Suggested Positions -

Short EXP stock @ $58.65

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

Buy the FEB $55 PUT (EXP160219P55) current ask $2.35
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 Hammered Lower Into Option Expiration

by James Brown

Click here to email James Brown

Editor's Note:
Friday was a quadruple-witching option and futures expiration. This fueled a significant amount of volume. Unfortunately a lot of that was down volume with the market in a widespread decline.

FBHS has been removed. SBUX hit our stop loss. Our WDC trade was triggered.

Current Portfolio:

BULLISH Play Updates

Activision Blizzard, Inc. - ATVI - close: 38.47 change: -0.40

Stop Loss: 36.40
Target(s): To Be Determined
Current Gain/Loss: +0.8%
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

12/19/15: ATVI tried to rally off its Friday morning lows. Unfortunately it couldn't resist the market's riptide and shares slipped -1.0% on the session. If shares break $38.00 the next support level should be $37.00.

No new positions at this time.

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


iShares Russell 2000 ETF - IWM - close: 111.48 change: -1.73

Stop Loss: 111.45
Target(s): To Be Determined
Current Gain/Loss: -1.0%
Entry on December 15 at $112.65
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: see below

12/19/15: The IWM has almost completely erased its Tuesday-Wednesday bounce in the last two days. The stock market suffered its worst one-day drop in months on Friday and the IWM gave up -1.5%.

The intraday low on Friday was $111.47. Some quote feeds say $111.44 but this is an error. In the last minute of trading on Friday the IWM fell to $111.47 before closing at $111.48. Our stop loss is at $111.45. The bad news is that closing on the low for the session does not bode well for Monday. There is a chance the IWM gaps down on Monday morning, immediately stopping us out.

No new positions at this time.

Trade Description: December 12, 2015:
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.

- Suggested Positions -

Long the IWM @ $112.65

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

Long JAN $115 CALL (IWM160115C115) entry $1.18

12/15/15 triggered @ 112.65
Option Format: symbol-year-month-day-call-strike


Microsoft Inc. - MSFT - close: 54.13 change: -1.57

Stop Loss: 53.20
Target(s): To Be Determined
Current Gain/Loss: -0.9%
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

12/19/15: Goldman Sachs upgraded shares of MSFT from a "sell" to a "neutral" on Friday. Sadly that didn't help the stock price. MSFT plunged -2.8% to close near short-term support at $54.00.

No new positions at this time.

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


SolarCity Corp. - SCTY - close: 56.91 change: -0.35

Stop Loss: 51.85
Target(s): To Be Determined
Current Gain/Loss: +49.2%
Entry on December 14 at $38.15
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: see below

12/19/15: I am shocked that our SCTY was not stopped out on Friday. Shares are up +50% in about a week. The stock market was hammered lower on Friday and would have been the perfect excuse to sell SCTY. SCTY did see some profit taking but traders bought the dip on Friday morning. The intraday low was $52.34. Shares managed to pare their losses to -0.6%.

No new positions at this time.

Trade Description: December 12, 2015:
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.

*small positions to limit risk* - Suggested Positions -

Long SCTY stock @ $38.15

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

Long JAN $40 CALL (SCTY160115C40) entry $2.78

12/17/15 new stop @ 51.85
12/16/15 new stop @ 50.85
12/14/15 new stop @ 35.85
12/14/15 triggered @ $38.15
Option Format: symbol-year-month-day-call-strike


SolarEdge Technologies - SEDG - close: 26.95 change: +0.87

Stop Loss: 24.95
Target(s): To Be Determined
Current Gain/Loss: +25.6%
Entry on December 15 at $21.45
Listed on December 14, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 790 thousand
New Positions: see below

12/19/15: SEDG also outperformed the market on Friday. Traders bought the dip at $25.30 on Friday morning and the stock rebounded to a +3.3% gain on the session. It did not hurt that the stock was upgraded and given a new $36 price target on Friday morning.

No new positions at this time.

Trade Description: December 14, 2015:
The world is changing. Over the weekend 195 countries signed a pledge to help cut greenhouse gas emissions and stall global warming. It doesn't matter if you're a climate change skeptic or a diehard supporter, governments are going to implement policies that change how we consume energy. It should be bullish for solar energy companies.

SEDG is in the technology sector. They're considered part of the semiconductor industry. According to the company, "SolarEdge provides an intelligent inverter solution that has changed the way power is harvested and managed in solar photovoltaic systems. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system. The SolarEdge system consists of power optimizers, inverters and a cloud-based monitoring platform and addresses a broad range of solar market segments, from residential solar installations to commercial and small utility-scale solar installations."

The company is growing fast. Their Q2 results, announced on August 12th, beat estimates on both the top and bottom line. Revenues were up +120% from the prior year and management raised their Q3 guidance.

Q3 results were announced on November 4th. Analysts were expecting a profit of $0.29 a share on revenues of $110 million. SEDG beat both estimates. Earnings were $0.36 a share. Revenues were up +16.9% from the prior quarter and up +71.8% from a year ago to $115.1 million. Gross margins improved from 28.7% in Q2 to 29.1% in Q3.

Guy Sella, the founder, Chairman, and CEO of SolarEdge, commented on their quarter, "We are very satisfied with another strong quarter of record revenues and improved gross margins. In addition to our very positive financial results, this quarter we introduced our new HD Wave inverter topology, demonstrating our technological leadership in the market. We are confident that our global presence and expanded product offering position us well for continued growth." Management then raised their full-year 2015 revenue guidance.

The stock appears to have bottomed with the lows in the $15-16 area. The last few weeks have seen the trend reverse higher with a pattern of higher lows and higher highs. Shares recently broke through significant resistance at $20.00, at its 50-dma, and its trend line of lower highs. The point & figure chart is bullish and forecasting at $27.00 target.

The stock displayed relative strength today. We are suggesting a trigger to launch small bullish positions at $21.20. SEDG has been volatile in the past. I consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long SEDG stock @ $21.45

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

Long MAR $25 CALL (SEDG160318C25) entry $2.10

12/16/15 new stop @ 24.95
12/15/15 new stop @ 19.25
12/15/15 triggered on gap open at $21.45, trigger was $21.20
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Columbia Sportswear - COLM - close: 45.38 change: +1.40

Stop Loss: 46.25
Target(s): To Be Determined
Current Gain/Loss: -1.4%
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

12/19/15: Ouch! Shares of COLM were upgraded to a "buy" on Friday morning. The analyst put a $55 price target on the stock. This must have sparked some short covering at the open. Shares rallied to short-term resistance near $46.00 and settled with a +3.1% gain.

No new positions at this time.

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

12/18/15 COLM rallies on an upgrade
12/16/15 new stop @ 46.25
12/08/15 triggered @ $44.75
Option Format: symbol-year-month-day-call-strike


Ctrip.com International - CTRP - close: 48.59 change: +0.18

Stop Loss: 50.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 15, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.7 million
New Positions: Yes, see below

12/19/15: Hmm... the action in CTRP on Friday was surprising. The market crashed but CTRP managed to hold support near $48.00 and spent most of the day drifting sideways. I suspect this relative strength was a reflection of CTRP being added to the NASDAQ-100 index, which occurs on Monday.

There is no change from our recent comments. Our entry point to launch bearish positions is currently at $47.65.

Trade Description: December 15, 2015:
Occasionally stocks can get ahead of themselves. Investor enthusiasm can become too frothy that drives a stock too high and shares eventually fall back to earth. That could be the case with CTRP.

CTRP is part of the services sector. According to the company, "Ctrip.com International, Ltd. is a leading travel service provider of accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. It is the largest online consolidator of accommodations and transportation tickets in China in terms of transaction volume. Ctrip enables business and leisure travelers to make informed and cost-effective bookings by aggregating comprehensive travel related information and offering its services through an advanced transaction and service platform consisting of its mobile apps, Internet websites and centralized, toll-free, 24-hour customer service center. Ctrip also helps customers book vacation packages and guided tours. In addition, through its corporate travel management services, Ctrip helps corporate clients effectively manage their travel requirements."

First the good news, CTRP is in a growing business. According to a Goldman Sachs analyst, the online travel market in China could triple to $200 billion by 2020. In October this year CTRP made a deal with rival online Chinese travel company Qunar, which was owned by Baidu.com (BIDU). The two companies merged and together will control 70% to 80% of the hotel and air ticket market in China. BIDU now owns 25% of CTRP. Larger rival Priceline.com (PCLN) is also investing in CTRP. PCLN recently invested $500 million in a convertible bond deal with CTRP, which could eventually lead to PCLN owning about 15% of CTRP.

CTRP is also seeing strong business results. Their Q3 earnings, which came out on November 18th, were way above expectations. Management then raised their Q4 guidance above Wall Street estimates. The stock also had a 2-for-1 split, which occurred on December 1st. If that wasn't enough good news the stock is also being added to the NASDAQ-100 on Monday, December 21st.

The merger news with Qunar produced the gap higher in October. The strong Q3 earnings and bullish guidance produced the big gap higher in November. With a rally from $30 in late September to $57 in mid November it appears CTRP just ran too far too fast. The stock has started to correct lower.

The stock split has taken place and it is common for stocks to see a post-split depression. They can also see a post-earnings depression after a big rally on the news. One could argue that all the good news has been priced into CTRP. What's the next catalyst to buy it?

Technically shares are breaking down. The bounce today failed at round-number resistance at $50.00. Shares did not participate in the market's rally yesterday or today. It looks like the pullback in CTRP is not over yet. The point & figure chart is bearish and forecasting at $41.00 target.

Now eventually CTRP will find support and shares will rebound again but support could be all the way down in the $37-40 zone. Yesterday's intraday low was $47.74. We are suggesting a trigger to launch bearish positions at $47.65. Please note this is an aggressive, higher-risk trade. The stock can be very volatile. Use small positions to limit risk.

Trigger @ $47.65 *small positions to limit risk*

- Suggested Positions -

Short CTRP stock @ $47.65

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

Buy the MAR $45 PUT (CTRP160318P45)

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


GameStop Corp. - GME - close: 28.76 change: -0.29

Stop Loss: 31.25
Target(s): To Be Determined
Current Gain/Loss: +4.8%
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

12/19/15: Shares of GME fell another -4% on Friday morning. The stock bounced at $27.90 and managed to pare its loss to -0.99% by the closing bell. If GME continues to bounce on Monday we can look for new resistance near the $30.00 level.

No new positions at this time.

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

12/17/15 new stop @ 31.25
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: 45.12 change: -0.30

Stop Loss: 47.35
Target(s): To Be Determined
Current Gain/Loss: +1.4%
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

12/19/15: HOG ended the week with a -0.66% decline and a new closing low for the year. Shares look poised to accelerate lower. If you're looking for an entry point consider waiting for a drop under $45.00.

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

12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike


Leucadia National Corp. - LUK - close: 16.46 change: +0.10

Stop Loss: 17.16
Target(s): To Be Determined
Current Gain/Loss: +7.0%
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

12/19/15: LUK spent Friday's session churning sideways in a 50-cent range. The stock looks very oversold but it can always get more oversold.

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

12/14/15 new stop @ 17.16
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: 21.77 change: +1.61

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: + 0.2%
2nd position Gain/Loss: +25.0%
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

12/19/15: The big two-day reversal lower in stocks has fueled a decent bounce in the volatility index (VIX), which added another +9.29% on Friday. The VXX almost kept pace with the VIX by adding +7.99%.

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


Western Digital Corp. - WDC - close: 58.86 change: -0.54

Stop Loss: 62.35
Target(s): To Be Determined
Current Gain/Loss: -0.0%
Entry on December 18 at $58.85
Listed on December 17, 2015
Time Frame: Exit PRIOR to earnings in late January
Average Daily Volume = 3.5 million
New Positions: see below

12/19/15: Our new bearish play on WDC is open. Shares continued to sink and lost -0.9% on Friday. Our trigger to launch bearish positions was hit at $58.85. The stock closed at a new two-year low. I would consider new positions at current levels.

Trade Description: December 17, 2015:
Increased competition has turned hard drives into a commodity business. Prices for drives are falling. WDC is trying to move into higher-margin business with its acquisition of SanDisk (SNDK) but the action in the stock suggest Wall Street is concerned.

WDC is in the technology sector. According to the company, "Founded in 1970, Western Digital Corp., Irvine, Calif., is an industry-leading developer and manufacturer of storage solutions that enable people to create, manage, experience and preserve digital content. It is a long-time innovator in the storage industry. Western Digital Corporation is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to OEMs, distributors, resellers, cloud infrastructure providers and consumers."

WDC, and its rivals, face an industry wide challenge. Consumer demand for personal computers (PCs) has been slowing down for years. PCs were replaced by laptops. Now laptop demand is in jeopardy because they are being replaced by tablet PCs. At the same time growth in technology and disk drive creation has generated the ability to produce huge disk drives with massive amounts of storage. That means consumers and businesses need to buy fewer drives for the storage they need.

Another issue has been the trend in solid state drives (SSD). Buyers prefer SSD drives because normally they are faster, thinner, and use less power than traditional spinning hard drives. Selling hard drives to PC and laptop makers is the majority of WDC's business (more than 40%). WDC recently announced plans to buy SanDisk (SNDK) who has a strong SSD business. That makes sense because demand for SSDs are replacing demand for normal hard drives. One problem is just like all computer hardware, it becomes cheaper to make as technology improves. The price of SSD drives has fallen sharply and the spread between SSD and normal hard drives will continue to narrow.

WDC's deal to buy SNDK is valued around $19 billion. The company is planning to borrow $17-to-$18 billion for the deal. The surge in debt has some analysts concerned about WDC. Another potential challenge is that WDC is also in the process of a deal with Unisplendour, which is a China-based company trying to make a $3.8 billion investment into WDC. At the time this Unisplendor investment was valued at $92.50 per share (for about 15% of WDC). You may have noticed that shares of WDC are now trading near $60.

WDC announced the SNDK deal on October 21st. Shares declined on the news. Actually shares of WDC were already in decline on speculation they might buy SNDK (for the record, the NASDAQ was in rally mode). There are concerns that WDC may have paid too much for SNDK.

Shares of WDC have been trying to find support in the $60-65 zone for the last few weeks. Now it looks like WDC is breaking down from this trading range and the next support level could be $50.00. Shares underperformed the market today with a -2.5% decline. Any further weakness could be an entry point for bearish trades. The point & figure chart is bearish and forecasting at $36.00 target. Monday's intraday low (Dec. 14th) was $59.06. Tonight we are suggesting a trigger to launch bearish positions at $58.85.

- Suggested Positions -

Short WDC stock @ $58.85

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

Long FEB $55 PUT (WDC160219P55) entry $2.62

12/18/15 triggered @ $58.85
Option Format: symbol-year-month-day-call-strike



Fortune Brands Home & Security - FBHS - close: 53.76 change: -1.54

Stop Loss: 53.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 16, 2015
Time Frame: Exit PRIOR to earnings in February
Average Daily Volume = 1.4 million
New Positions: see below

12/19/15: FBHS is not cooperating. Shares failed at resistance on Wednesday and Thursday. The stock underperformed the market on Friday with a -2.78% plunge and broke down under its mid December low.

Our trade has not opened yet. Tonight we are removing FBHS as a candidate.

Trade did not open.

12/19/15 removed from the newsletter, suggested entry was $56.65


Starbucks Corp. - SBUX - close: 58.62 change: -0.90

Stop Loss: 58.45
Target(s): To Be Determined
Current Gain/Loss: -3.5%
Entry on December 15 at $60.45
Listed on December 08, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 8.8 million
New Positions: see below

12/19/15: The market's widespread sell-off on Friday pushed SBUX down to new multi-week lows. Shares traded below what should have been support near $59.00 and its 100-dma. Our stop loss was hit at $58.45.

- Suggested Positions -

Long SBUX stock @ $60.45 exit $58.45 (-3.5%)

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

FEB $65 CALL (SBUX160219C65) entry $1.07 exit $0.44 (-58.9%)

12/18/15 stopped out @ 58.45
12/15/15 triggered @ $60.45
12/14/15 adjust stop loss to $58.45
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