Option Investor

Daily Newsletter, Tuesday, 1/12/2016

Table of Contents

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

Market Wrap

Pause to Breathe

by Jim Brown

Click here to email Jim Brown

The Dow opened the day with a +192 point gain but it was quickly sold and the index returned to negative territory until 2:PM. The closing rally came after oil rebounded from a 12-year low at $29.93 to end the day at $30.65.

Market Statistics

Crude oil appears to be driving the market and that is not a good sign because prices are going lower. Bond king Jeffery Gundlach helped to rally the market after he said this morning that technicals suggested a short-term bottom in the oil market. "Fundamentals are lousy but the technicals call for a short term bottom today. A short-term bottom is due today, actually." Gundlach manages $85 billion for DoubleLine Capital.

Crude flirted with $30 all morning and finally broke that $30 level at 2:PM to trade at $29.93 and a 12-year low. It was December 2003 the last time we saw oil at this level. The rebound was instant thanks to the Gundlach comments and the vast number of puts at the $30 level. Immediately traders began covering their positions with the February futures contract expiring next Wednesday.

If the markets are going to continue to follow crude prices, we are in trouble. Goldman Sachs is targeting $20 in their worst-case scenario. Morgan Stanley just revised their outlook to a $20 target. Investment bank Standard Chartered targeted $10 a barrel in their call this morning. We have not seen oil below $10 since 1998. Standard said there is no equilibrium in the market and there is no fundamental relationship currently driving the market toward that supply/demand balance.

Christine Lagarde, chief of the IMF, warned that existing supply/demand factors meant oil prices would "likely stay low for a sustained period."

OPEC responded to rumors there would be an emergency meeting to discuss production by saying the rumor was false and there would be no production meeting until the regularly scheduled meeting on June 2nd. Saudi Arabia is actually talking about increasing production because demand is expected to rise in 2016 by 1.2 million barrels per day. Instead of allowing that demand to soak up the current 1.2 mbpd of excess production and balance prices, Saudi wants to gain more market share by increasing production at lower prices.

The last time oil was under $10 in 1998 it was because of Saudi Arabia. Other OPEC nations were not sticking to their production quotas and oil prices were falling. Saudi demanded they honor the quotas but they continued overproducing. In order to punish the other OPEC members and bring them back into the fold, Saudi increased production to record levels and flooded the market with oil. They drove the price down to $10 and U.S. rig counts declined from the historic high of 4,530 to 488. For reference, the rig peak in 2014 was 1,931 and we have declined -1,267 to 664. Last week alone the rig count declined by -34 rigs.

U.S. production hit a three-month high last week at 9.212 million bpd despite the decline in rigs. The EIA said today that U.S. production was going to fall in 2016 by -720,000 bpd and more than the prior estimate for -560,000 bpd. Unfortunately, that will only make up for the addition of 500,000 bpd from Iran when sanctions are removed at the end of January.

Currently producers are in a world of trouble. With WTI crude at $30 the Bakken producers are getting only about $22 for their oil and Canadian producers are getting about $15 a barrel. The problem is a lack of available transportation and storage for oil produced from those areas.

That is far below their cost to produce and so far below they are forced to quit spending money on drilling. However, instead of drilling they are completing previously drilled wells as a way to increase production without drilling new wells. The fraclog is said to be as many as 4,000 wells across the USA. This is why production continues to increase while rig counts are crashing.

Now that the December 31st tax day for refiners has passed, we can expect to see inventories begin to rise sharply. Last year inventories rose from 382.4 million on January 2nd to 490.0 million on April 24th. That is a 108.5 million barrel increase in about 16 weeks or roughly an average gain of 6.78 million barrels per week. It would be next to impossible for a similar gain this year because of lack of storage, which is currently nearing operational capacity.

We know that refiners and speculators will want to buy every barrel of cheap oil they can find because in the long term the price will rise significantly. Refiners will fill every tank they have because it will increase their profit margins later. Analysts are projecting bankruptcies could be 25% to 35% of current producers and service companies if oil remains this low for long. That would force consolidation and would force production moratoriums because creditors would not allow these bankrupt companies to continue to drill and complete wells because that is an extreme cash burn at these prices.

Over the next three months, we can expect to see oil prices continue to decline and $25 a barrel is not unreasonable. We could see lower prices but everything depends on U.S. production rates. If there is no material decline as the EIA expects then prices could go even lower. If production suddenly begins to fall off a cliff then prices could rebound. I do not believe we are going to see a significant production drop until summer or later but I could be wrong. If crude prices continue to fall as expected the equity market is in real trouble.

The opening rally in stocks was brought to you by the lack of a material decline in the Chinese markets. They traded sideways most of the day after some volatility right at the open. We need some calm to return but the Shanghai Composite chart below suggests there is more weakness ahead. The index closed at 3,022 with the 3,000 level critical support. A break of that support could see a drop of 30% or more to 2,000.

The U.S. economics out today were not market moving reports. The NFIB Small Business Survey for December rose from 94.8 to 95.2. Most of the internal components declined with expectations for credit conditions and expansion plans weakening. The "expect economy to improve" component fell from -7 to -14 and the lowest level in more than a year. The only really positive component was the plans to increase employment, which rose from 11 to 15. That is confusing since the rest of the components were either flat or down. The report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose slightly from 3.6% to a 3.7% rate. Openings increased from 5.349 million to 5.431 million. This is a seriously lagging report for the November period and was ignored.

The only highlight on tomorrow's calendar is the Fed Beige Book, which is expected to be mostly unchanged.

The earnings calendar is also weak for Wednesday. The pace picks up with Intel and JP Morgan on Thursday and many of the big banks on Friday.

S&P Capital IQ updated their earnings forecast and S&P companies are now expected to post a -5.7% decline in earnings for Q4. This would be the second consecutive quarter of earnings decline. Revenues are expected to decline -1.3% for the fourth consecutive quarter of declines. Seven of the ten S&P sector are expected to post earnings declines with only telecom, consumer discretionary and health care expected to post gains.

Intel (INTC) was upgraded by two companies today. Mizuho upgraded the company to a buy with a price target of $37. Pacific Crest upgraded to a buy with a price target of $35. Mizuho said Intel's server chips continue to dominate the cloud and the hyperscale computing sector. Also, the PC market is expected to be "less bad" in 2016. The PC market is still 60% of Intel's revenue. PC sales have been down 13% to 15% annually since 2013. In 2016, Mizuho expects only a 3-4% decline. The analyst said there were one billion installed PCs more than three years old that could be involved in a replacement cycle in 2016. They believe Intel will also benefit from new enterprise tablet chips. Intel is also expanding into industrial, medical and automotive markets. Intel reports earnings on Thursday.

Bank of America (BAC) upgraded Apple (AAPL) to a buy from neutral and a price target of $130 saying the concerns over production cuts were already priced into the stock. The bank said Apple could be poised for a bullish cycle after earnings on the 26th. Apple shares gained +$1.43 to $100 but remains well off its recent highs.

DreamWorks Animation (DWA) was upgraded by FBR from neutral to outperform because of larger than expected license payments from Netflix. DWA gave Netflix the continued global rights to its products for the current 180 countries that it now has, up from the prior 60 country distribution platform. That should produce some big checks from Netflix. The company's Kung Fu Panda series is doing great and the KFP 3 sequel is expected to be a big hit. Analysts are expecting a domestic box office of $185-$200 million. FBR put a $29 price target on DWA with the stock at $24 so it was not a big leap of faith in DWA.

Lululemon (LULU) gained +4% after raising guidance due to stronger than expected holiday sales. LULU had given cautious guidance only a month ago so business must have really improved. The company said Q4 revenue could be $690-$695 million, up from prior guidance of $670-$685 million. Earnings are now expected to be 78-80 cents and higher than the prior guidance of 75-78 cents. Analysts were expecting 77 cents on revenue of $679 million. Cowen & Co raised its price target from $52 to $66. Shares opened about 9% higher but faded into the close.

Stifel upgraded Coca-Cola to buy from hold on valuation and improving growth trends. Shares gained +50 cents.

KBW upgraded Wells Fargo (WFC) from neutral to outperform saying the recent sell off was a buying opportunity at "cheap enough" levels. Shares gained +$1.25 to %51.36.

Starbucks (SBUX) said it was planning on opening 500 new stores in China with plans to operate 3,400 there by 2019. There are currently 2,000 Starbucks stores in China. Same store sales in China rose +9% in 2015. At the end of December Starbucks had 23,043 stores in 68 countries with 14,803 company-owned and licensed stores in the America's segment. Shares rose +$1.64 on the news.

YUM Brands (YUM) also rose in afterhours after the company said same store sales grew +1% in China in December. The KFC locations in China saw an increase of 5%. Sales declined at Pizza Huts. YUM has been challenged in China from multiple food problems over the last three years. Any sales increase is positive.

United Continental (UAL) said passenger revenue would be lower than expected because of the terror attacks in Europe and the lack of oil executive travel to and from Houston. Low oil prices should have been a boost for United but in this case, the company said lower energy executive travel all over the world is reducing traffic. Shares are approaching a 52-week low under $50.

After the bell, Met Life (MET) said it was planning to spin off its U.S. life insurance unit, which is the largest in the country. That represents about 20% of Met's earnings as of the last quarter. The CEO said the spinoff was part of the company's strategic initiatives to increase shareholder value. He said an independent company would be able to compete more effectively and generate stronger returns for shareholders. Met is designated as a "Systemically Important Financial Institution" or SIFI and is restricted in what is can do and required to maintain higher capital levels. By splitting into multiple companies, they can remove themselves from the SIFI designation. Met has more than $600 billion in assets. Shares rallied 8% in afterhours.

CSX Corp (CSX) reported earnings after the bell that declined -5% on a -6% drop in shipments. The company reported earnings of 48 cents compared to estimates for 46 cents. Revenue of $2.78 billion missed estimates for $2.92 billion. The earnings came from a -13% cut in expenses. The CEO said "negative global and industrial market trends projected for 2016 are expected to decrease earnings and revenue." This suggests the health of the U.S. economy is weakening when shippers of all goods complain about slowing traffic. Shares declined slightly after the close.

Copper fell to a new post crisis low at $1.95 as global commodity demand continued to decline. "Dr Copper" is still telling us the global economy is weakening.

Two U.S. Navy boats and crews are being held by Iran after one boat developed engine trouble and both drifted into Iranian waters in the Persian Gulf where one boat ran aground. The boats were moving between Kuwait and Bahrain when the Navy lost contact. The Iranian news agency said the sailors were trespassing in Iranian waters and they were detained. Pentagon spokesman Peter Cook said they had been in contact with Iran and had been "assured" they would be returned promptly. I doubt they will be returned until after President Obama's State of the Union Speech tonight. They will make convenient hostages to make sure the President does not say anything negative about Iran.

Since guns are banned in Germany, there has been a run on Pepper Spray after the gang rapes and sexual assaults over the last two weeks. This graphic shows the increase in the number of people Googling pepper spray. Sales have increased more than 600% and most stores are sold out.


We are due for a rebound. The markets are very oversold but they have so far resisted the potential for a giant short squeeze. On the positive side, the indexes have rallied at the close for two consecutive days and that is the opposite of the prior two weeks.

With the S&P bouncing off 1,900 on Monday, that is an ideal place for a rebound even if only temporary. This is option expiration week and I am sure there are a lot of put options that need to be closed before Friday. Assuming China's market does not implode this week I would not be surprised for the U.S. markets hold their current levels and maybe post some additional gains.

However, the week after January expiration has been known to experience some significant declines in weak markets. When December and January are historically strong the market tends to continue higher. Given the performance over the last few weeks, I would be cautious ahead of next week.

Volume has been very high for the last five days averaging nearly 9.0 billion shares per day.

The S&P set an intraday high of 1,947 at the open and then failed to return to that level with a close at 1,938. That is somewhat troubling but the S&P did manage to post a +15 point gain.

Every prolonged market decline is interspersed with days of temporary rebounds. Until we see a pattern of higher lows, we should remain cautious.

The trading over the last several days has given us some key levels to watch. Those are 1,950 and 1,900 on the S&P. A move past those levels in either direction should see the market accelerate.

At Monday's low of 16,232 the Dow had declined -1,518 points from its 17,750 high on December 29th. That is a significant decline without any material rebound. The minimal +117 rebound today was decent but not on the scale you would expect to see if there was a real short squeeze in progress. It is not unusual to see 200-300 point rebounds if the shorts are really worried.

The Dow rallied +192 at the open before falling back into negative territory at -70 midday. That is not a sign of a healthy market or that shorts are worried about covering. The afternoon rally at exactly 2:PM smells of a buy program and I am sure it was helped by the rebound in crude prices. It does not give me confidence that we are headed immediately higher.

We are oversold. This is option expiration week. We cannot define direction until this week is over because of those influences.

The downside target for the Dow is 16,000 and I wish we would just drop there and get it over with. Secondly, as long as I am wishing I would wish for that to be the bottom and the start of an 11-month rally. That wish has about as much chance of coming true as my Powerball ticket does in being the winner.

Resistance is 16,600 and 16,665. Support is 16,232 and 16,000.

Normally a +48 point day on the Nasdaq would be a good day. While I am not complaining the Nasdaq did drop -543 points from the December 29th high at 5,116 to Monday's low at 4,573. Rebounding 48 points is only a minor gain compared to those losses.

The 2015 leaders are still absent from the winners list with the exception of GOOGL. This means profits are still being taken and there is a fair amount of rotation in progress. That is normally good for the market but it remains to be seen if that rotation will lift it back to the December levels.

Apple helped today after the upgrade and Intel could help on Friday if the earnings are decent. Next week we will begin to get some tech and biotech earnings and hopefully a positive trend will develop.

Resistance is 4,715 and 4,900 with support at 4,600 and 4,550.

The Russell 2000 is the black sheep of the family. The index dipped into bear market territory on Monday and intraday today and only gained +3 today to close down -19.38% from its highs. The 1,036 level is a 20% decline and the low today was 1,028. The small caps are normally the strongest in December and January and this cycle they have been the weakest by far.

Until we see the Russell begin to rebound consistently, the broader markets are going to be weak. However, the Russell is handicapped by a lot of energy stocks and its rebound could be slow until crude prices firm.

Futures are up slightly but China's markets have not yet opened. Crude oil is up slightly at $30.75 at 7:15 ET because the weekly API inventory report said inventories unexpectedly declined -3.9 million barrels for the week ended on Friday while gasoline inventories rose +7 million barrels and distillates gained +3.7 million. I suspect this is catch up accounting from the last week of December when refiners were trying to push as much oil through the system and convert it to refined products before the taxman came to count oil levels. The EIA report on Wednesday morning is the most accurate report.

I am not convinced that today's rebound is the start of a rally. I believe it is just some equalization of the oversold pressures and traders covering their options in an expiration week. Rebounding oil should help somewhat but I do not expect it to continue.



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New Plays

Breaking Out From A Major Consolidation

by James Brown

Click here to email James Brown


Pinnacle Foods Inc. - PF - close: 44.44 change: -0.25

Stop Loss: 42.45
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 12, 2016
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 885 thousand
New Positions: Yes, see below

Company Description

Trade Description:
2016 is off to a rough start and investors could turn more defensive as they look at an uncertain future. That could be behind the rally in shares of PF these last several days.

PF is in the consumer goods sector. According to the company, "In more than 85% of American households, consumers reach for Pinnacle Foods brands. Pinnacle Foods is ranked on Fortune Magazine's 2015 Top 1000 companies list. We are a leading producer, marketer and distributor of high-quality branded food products, which have been trusted household names for decades. Headquartered in Parsippany, NJ, our business employs an average of 4,500 employees. We are a leader in the shelf-stable and frozen foods segments and our brands hold the #1 or #2 market position in 10 of the 14 major categories in which they compete.

Our Birds Eye Frozen segment manages brands such as Birds Eye®, gardein®, Birds Eye Steamfresh®, C&W®, McKenzie's®, and Freshlike® frozen vegetables, Birds Eye Voila! ® complete bagged frozen meals, Van de Kamp's® and Mrs. Paul's® frozen prepared seafood, Hungry-Man® frozen dinners and entrees, Aunt Jemima® frozen breakfasts, Lender's® frozen and refrigerated bagels, and Celeste® frozen pizza. Our Duncan Hines Grocery segment manages brands such as Duncan Hines® baking mixes and frostings, Vlasic® and Vlasic Farmer's Garden® shelf-stable pickles, Wish-Bone® and Western® salad dressings, Mrs. Butterworth's® and Log Cabin® table syrups, Armour® canned meats, Brooks® and Nalley® chili and chili ingredients, Duncan Hines® Comstock® and Wilderness® pie and pastry fruit fillings and Open Pit® barbecue sauces. Our Specialty Foods segment manages Tim's Cascade Snacks®, Hawaiian® kettle style potato chips, Erin's® popcorn, Snyder of Berlin® and Husman's® snacks in addition to our food service and private label businesses."

PF has been actively pursuing strategic acquisitions. Last year they bought Canadian-based Garden Protein International Inc., the maker of a plant-based protein brand Gardein. In the first quarter of 2016 PF is about to close on its acquisition of Boulder Brands Inc. (BDBD).

Here's a brief description of BDBD from the company, "Boulder Brands, Inc. is committed to offering food solutions that give consumers opportunities to improve their lives - one product at a time. The company's health and wellness platform consists of brands that target specific health trends: the Glutino® and Udi's Gluten Free® brands for gluten-free diets; the Earth Balance® brand for plant-based diets; EVOL foods for consumers seeking simple and pure ingredients; and the Smart Balance® brand for heart healthier diets."

The BDBD acquisition is expected to add about $0.20 5o PF's earnings in 2016. There has been some investor concern that PF may have paid too much for BDBD but the company feels the acquisition gives them a good position in the growing gluten-free market. Independent research firms forecast gluten-free sales to see a +6% compound annual growth rate (CAGR) between now and 2019. Meanwhile PF is forecasting their total sales to grow +22% CAGR from 2016-2018.

At least one Wall Street firm is bullish on PF. Yesterday BMO Capital Markets upgraded their outlook on PF to "outperform" and gave it a $50 price target. BMO feels that PF is their "top pick" for 2016.

Technically shares of PF have been consolidating sideways in a huge pennant-shaped consolidation for months (see weekly chart). At the same time shares have respected the long-term bullish trend of higher lows. The action this week has produced what looks like a bullish breakout from its major consolidation pattern. We want to see some follow through since the $45.00 region has been resistance in the past. Tonight we are listing a trigger to launch bullish positions at $45.15.

Trigger @ $45.15

- Suggested Positions -

Buy PF stock @ $45.15

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

Buy the MAR $45 CALL (PF160318C45) current ask $1.85
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

After Bumpy Session, Stocks End Higher

by James Brown

Click here to email James Brown

Editor's Note:
Traders were in a buy-the-dip mood midday. Most eyes were on the plunge in crude oil, which flirted with a breakdown below $30.00 a barrel before trimming its losses. The major U.S. indices managed to end Tuesday with a gain.

Our TMH trade was triggered. AKAM hit our stop loss.

Current Portfolio:

BULLISH Play Updates

The Kroger Co. - KR - close: 41.24 change: -0.04

Stop Loss: 40.45
Target(s): To Be Determined
Current Gain/Loss: -3.5%
Entry on December 30 at $42.75
Listed on December 26, 2015
Time Frame: Exit PRIOR to earnings in early March
Average Daily Volume = 726 thousand
New Positions: see below

01/12/16: The action in shares of KR was a little bit worrisome today. The early morning rally failed at resistance near its 10 and 20-dma. Fortunately traders bought the dip again around support near $40.60.

No new positions at the moment.

Trade Description: December 26, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 48 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

A few months ago BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's to grab a quick bite to eat. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.4%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

Looking at the company's results they continue to beat estimates. KR announced their fiscal 2015 Q1 results on June 18th with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Their 2015 Q2 results were announced on Sept. 11th. Earnings were $0.44 a share, beating estimates by five cents. Revenues were relatively flat at $25.44 billion. Same-store sales were up +5.3%. Management raised their full-year same-store sales guidance from +3.5%-4.5% to 4.0-5.0%

Q3 earnings came out on December 3rd. Earnings of $0.43 a share beat expectations by four cents. Revenues were still relatively flat at $25.07 billion (from a year ago). Same-store sales were up +5.4%. Management then raised their fiscal 2016 earnings guidance above Wall Street estimates. The stock soared on this report and bullish outlook.

Traders have been reluctant to let go of KR's stock. When the market dipped sharply a couple of weeks ago investors jumped in to buy the dip. Now KR has rebounded back toward its all-time highs. The point & figure chart is very bullish with a long-term target of $62.00. Thursday's intraday high was $42.67. Tonight we are suggesting a trigger to launch bullish positions at $42.75.

- Suggested Positions -

Long KR stock @ $42.75

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

Long APR $45 CALL (KR160415C45) entry $1.15

12/30/15 triggered @ $42.75
Option Format: symbol-year-month-day-call-strike

Team Health Holdings - TMH - close: 44.03 change: -1.09

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: -3.3%
Entry on January 12 at $45.55
Listed on January 11, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 875 thousand
New Positions: see below

01/12/16: TMH's performance today was also troubling as shares underperformed the market with a -2.4% decline. The broader market's early rally this morning was enough to lift TMH to new relative highs and TMH hit our suggested entry point at $45.55. Not long afterwards the stock reversed plunged -5.4% from its morning highs before finally bouncing.

No new positions at this time.

Trade Description: January 11, 2016:
Tonight we are adding TMH as a relative strength play. Really? A relative strength play for a stock that lost -23.7% in 2015 and is down -35% from its 52-week high? The answer is yes.

TMH is in the services sector. According to the company, "At TeamHealth, our purpose is to perfect our physicians' ability to practice medicine, every day, in everything we do. Through our more than 16,000 affiliated physicians and advanced practice clinicians, TeamHealth offers outsourced emergency medicine, hospital medicine, anesthesia, orthopaedic hospitalist, acute care surgery, obstetrics and gynecology hospitalist, urgent care, post-acute care and medical call center solutions to approximately 3,400 civilian and military hospitals, clinics, and physician groups and post-acute care facilities nationwide. Our philosophy is as simple as our goal is singular: we believe better experiences for physicians lead to better outcomes-for patients, hospital partners and physicians alike."

TMH definitely made some headlines in the last quarter of 2015. On October 20th shares of TMH surged on an unsolicited $5 billion buyout offer from AmSurg (AMSG). TMH management rejected the offer. On November 2nd AMSG tried again and raised the cash portion of the cash and stock offer. TMH said no again. Then on November 23rd TMH announced they had completed their acquisition of IPC Healthcare Inc., a national acute hospitalist and post-acute provider organization.

TMH did not have a good second half in 2015. The stock peaked near $70 in August and the correction accelerated in December. Finally TMH found support in mid December around the $43-45 zone. TMH briefly pierced support at the bottom of this trading range on January 4th when stocks started 2016 with a loss. The U.S. market went on to produce its worst first five days of the year on record. Yet TMH shares did not participate. The stock continued to consolidate sideways, building support (the relative strength I was referring to).

It looks like traders started to notice that TMH was not breaking down any further. The stock started to see stronger volume as it bounced toward the top of its trading range. Today we see shares of TMH breakout past resistance at $45.00 and its 20-dma. If the broader market does bounce TMH could accelerate higher. Today's intraday high was $45.44. We are suggesting a trigger to launch bullish positions at $45.55. We will plan on exiting prior to TMH's earnings report in early February (no firm date yet).

- Suggested Positions -

Long TMH stock @ $45.55

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

Long FEB $50 CALL (TMH160219C50) entry $1.65

01/12/16 triggered @ $45.55
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

CF Industries - CF - close: 32.54 change: +0.09

Stop Loss: 34.15
Target(s): To Be Determined
Current Gain/Loss: +15.8%
Entry on January 06 at $38.65
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

01/12/16: Bullish analyst comments for CF this morning did not have any lasting impact. Shares bounced with the broader market but soon rolled over into new lows. CF managed to pare its loss to end virtually unchanged by the closing bell.

No new positions at this time.

Trade Description: January 5, 2016:
CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

- Suggested Positions -

Short CF stock @ $38.65

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

Long FEB $35 PUT (CF160219P35) entry $1.20

01/11/16: new stop @ 34.15
01/09/16: new stop @ 35.75
01/07/16: new stop @ 37.05
01/06/16: new stop loss @ 38.75
01/06/16: triggered on gap down at $38.65, suggested entry was $38.85
Option Format: symbol-year-month-day-call-strike

Eaton Corp. - ETN - close: 49.95 change: +0.80

Stop Loss: 51.85
Target(s): To Be Determined
Current Gain/Loss: -2.3%
Entry on January 11 at $48.85
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 3.9 million
New Positions: see below

01/12/16: ETN spent today's session trying to get through resistance near the $50.00 level. The early morning rally failed near $50. Then when the market bounced this afternoon ETN made another rally attempt back to this key level.

More conservative investors might want to tighten their stop loss. No new positions at current levels. Wait for a new relative low under $48.50.

Trade Description: January 9, 2016:
Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

- Suggested Positions -

Short ETN stock @ $48.85

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

Long FEB $47.50 PUT (ETN160219P47.5) entry $1.55

01/11/16: triggered @ $48.85
Option Format: symbol-year-month-day-call-strike

Harley-Davidson, Inc. - HOG - close: 42.35 change: -0.55

Stop Loss: 44.15
Target(s): To Be Determined
Current Gain/Loss: +7.4%
Entry on December 11 at $45.75
Listed on December 09, 2015
Time Frame: Exit prior to earnings in late January
Average Daily Volume = 3.15 million
New Positions: see below

01/12/16: HOG's attempt at a rally this morning didn't last very long The stock quickly fell back toward yesterday's low and new short-term support around the $42 area.

No new positions at this time.

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

01/11/16 new stop @ 44.15
01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 22.91 change: -1.11

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: - 5.0%
2nd position Gain/Loss: +21.0%
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

01/12/16: The market did not post another loss today. That helped the volatility indices deflate a bit. The VXX fell -4.6%.

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


Akamai Technologies - AKAM - close: 46.88 change: +1.42

Stop Loss: 46.85
Target(s): To Be Determined
Current Gain/Loss: +5.0%
Entry on January 07 at $49.34
Listed on January 06, 2016
Time Frame: Exit PRIOR to earnings in early February
Average Daily Volume = 2.1 million
New Positions: Yes, see below

01/12/16: After yesterday's plunge I cautioned readers last night that AKAM could see an oversold bounce. When the market opened higher shares of AKAM surged with a spike towards $48. Our new stop loss was hit at $46.85.

*small positions to limit risk* - Suggested Positions -

Short AKAM stock @ $49.34 exit $46.85 (+5.0%)

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

FEB $50 PUT (AKAM160219P50) entry $3.43 exit $4.75 (+38.5%)

01/12/16 stopped out
01/11/16 new stop @ 46.85
01/09/16 new stop @ 50.35
01/07/16 triggered on gap down at $49.34, suggested entry was $49.75
Option Format: symbol-year-month-day-call-strike