In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The market gave bullish signals last week despite a continuation of the tight trading ranges, and fresh all-time highs were set once again. Volume was anemic last week, and the lightest it has been all year on Friday, as traders left for early vacations.
Despite the hard stance of “sell and May and go away,” Wall Street might be playing catch up again when it gets back from break. This week will be shorter than usual due to Monday’s holiday, but the first trading day after Memorial Day is usually bullish.
The Dow dropped 53 points, or 0.3%, to finish at 18,232 on Friday. The blue-chips opened a point higher to 18,286 and spent the rest of the session in negative territory. Resistance at 18,350 held for the third-straight session following the bullish runs to all-time highs of 18,351 and 18,350 earlier in the week. I have talked about fluff to 18,500 on continued strength, with a chance at 18,750 triggering on a breakout. These levels are still in play as long as support at 18,200 holds, which it has for six-straight sessions. A close below 18,100-18,000 and the 50-day moving average might signal that a short-term top is in.
The S&P 500 fell nearly 5 points, or 0.2%, to end at 2,126. The index was choppy throughout the morning before pushing a high of 2,132 later in the day. Resistance at 2,135 has been sticky following last Wednesday’s all-time high of 2,134.72. There is additional fluff to 2,150 and possibly 2,170-2,175 once that level cleared. This represents over 1%-2% of further upside from current levels. Support is at 2,125, with additional help at 2,115-2,110. A close 2,100 and the 50-day moving average would also suggest that a top is in.
The Nasdaq slipped slightly more than a point, or 0.03%, to settle at 5,089. The tech index opened at its low on Friday at 5,085 but easily held fresh support at 5,075. There is additional help at 5,050, which is a level I wanted to see hold following last Monday’s breakout. Backup support is at 5,000 and the 50-day moving average. The index made a late-day run past resistance at 5,100 to 5,103 before finishing just below this level. Continued closes above 5,100 would be bullish for a possible 1%-2% push to 5,150-5,200. The 52-week high is at 5,119, and the all-time intraday high is at 5,134.
The Russell 2000 declined 4 points, or 0.4%, to close at 1,252. The small-caps tried making another run past 1,260, but short-term resistance held and the bulls fell a point short. Closes above this level keep 1,270-1,275 in play. Support at 1,250 and the 50-day moving average held for the fourth-straight session following last Monday’s breakout above this level. Friday’s low touched 1,248 and there is additional support at 1,240 on a close back below 1,250. There would be risk to 1,225 and the 100-day moving average on a close below 1,240.
The S&P 500 Volatility Index ($VIX, 12.13, up 0.02) traded to a high of 12.37 on Friday, but the bulls easily held 12.50. There is risk to 13.50-15 on a close back above this level, but I have talked about a test to 11.50-10 coming on continued strength. The 52-week low on the VIX is at 10.28, which was set last July.
The VIX is one of the main reasons that I have stayed bullish throughout May, as I have said that single digits could come into play by the summer. The environment feels similar to last year in a lot of ways because the suits-and-ties continue to say that the VIX is broken and irrelevant.
When the VIX is in the high-teens or pops past 20, the knuckleheads are quick to point out the action and volatility. The VIX, for me, has been a tremendous help in trying to call market tops, bottoms and trading ranges for decades, so I don’t mind the negative headlines it may get.
I watch the VIX daily and, if single digits do come into play, there will be more chatter on how broken the VIX is. Ignore the noise, as I believe that the VIX still matters.
The focal point of last week was the Fed news, as the most recent meeting minutes revealed that a rate hike in June is unlikely. At least that is what the talking heads are saying. The zombies are still concerned about the economy, and most experts still aren’t expecting a rate hike until later in the year.
The “smart” money believes that the longer the Fed holds off on rates, the higher the market can go, and that the moment the Fed raises rates, the market is going to correct 10%, or more.
Minutes from the April meeting showed that only a couple of Fed heads thought economic data would improve enough to trigger a rate hike at the Fed’s next meeting, which is scheduled for mid-June.
Last week, Charles Evans, President of the Chicago Fed, made it public that the U.S. wouldn’t see higher rates until early 2016. I don’t believe that this will be the case, but he is the most dovish of the group.
On Friday, Fed Chair Janet Yellen said that she expects the U.S. central bank to raise rates this year. She went on to say that the process was expected to be gradual, with the timing of the first hike dependent on the strength of the economy. It was another broken-record speech, but it gave the market a late-session lift.
I have mentioned that a quarter-point hike would be minuscule in the grand scheme of the things. In my opinion, even this “sluggish” economy could handle a 1% rate hike, or four quarter-point rate hikes.
I have also been saying all year long that I could care less when then Fed raises rates, and the sooner, the better. It has been nearly nine years since the Fed has raised rates. If you think about that for a minute, nine years is a very long time.
While money might become more expensive for consumers, banks will make more for their shareholders as interest rates rise. Higher rates also mean that the economy is “recovering,” which is what everyone wants to hear.
The Financial Select SPDR (XLF, $24.86, up $0.01) pushed fresh 52-week highs last week and cleared $25 in the process. I mentioned that continued closes above $24.80-$25 would be a very bullish development. Thursday’s low on the backtest was $24.83. This shows that fresh support is trying to hold at prior resistance, which is a bullish signal.
The longer-term chart on the XLF is showing a possible run to $30. Money seems to be moving into the financial stocks, as it’s a sector that has underperformed the market for a few years now.
I have been covering the weakness in the transports, and last week’s action set fresh lows for the year. The test and close below 8,500 on the Dow Jones Transportation Average ($TRAN) was an omen, as I have been mentioning that continued closes below 8,550-8,500 would be bearish. Friday’s low touched 8,452.
The divergence between the Dow industrials and the transports is the widest it’s been in three years. The Dow has been able to push fresh highs, as the disparity is being partially offset by some of the strength in the blue-chip financial stocks.
Dow component Goldman Sachs (GS, $207.80, up $2.85) closed Friday at fresh 52-week peaks, while JPMorgan Chase (JPM, $66.47, down $0.18) set one north of $67 earlier in the week. Meanwhile, Visa (V, $69.62, up $0.25) is at all-time highs following a 4:1 stock split in March.
Although blue-chipper American Express (AXP, $81.25, up $0.49) is down 8% for 2015, shares have recovered the $80 level and, more importantly, their 50-day moving average. The stock came into the year just above $93 and suddenly looks cheap at current levels. The suits-and-ties might find this an attractive play, as shares will likely challenge $100 this year or next.
The AXP July 85 calls (AXP150717C00085000, $0.65, up $0.10) look tempting at current levels. Longer-term traders can target the AXP October 87.50 calls (AXP151016C00087500, $1.15, up $0.05) on continued strength.
I often talk about support and resistance getting “stretched,” and it remains to be seen if “Mr. Armstrong” will break or return to prior form for the transports. The bears may be reaching a peak, as these types of elevator drops occur before some eventual stair-stepping. However, it’s not safe to catch falling knives, and a recovery of the 200-day moving average is needed before a rebound can be trusted.
With all-time highs triggering last week, it has been amazing to see the number of knuckleheads that have called and are still calling for a 10% correction. For the ones who have said there would be one before May, they are probably going to be wrong and can guess again next month on when the 10% slide will happen.
The Dow has set seven intraday and six closing all-time highs in 2015. The S&P 500 has triggered a dozen intraday all-time highs and 10 closing all-time highs. The Nasdaq has kissed 16 multi-year highs and 14 closing multi-year highs. And, finally, there have been 15 intraday all-time highs and 13 closing all-time highs on the Russell 2000.
I’ve mentioning that I expected a bullish environment through mid-June and perhaps July. However, if price action and bearish clues dictate a change in plans, so be it. I will have no problem going short or using put options when the time comes, but the bears aren’t there yet.
From desk to press, futures look like this: Dow (-9); S&P 500 (-3); Nasdaq 100 (-4).
Momentum Stocks Weekly Play List
All prices given in this update are current as of May 22, 2015. I hereby disclose that I will be participating in the following trade(s).
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 16-0, for a 100% win rate (129-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Dot Hill Systems (HILL, $7.10, up $0.06)
Original Entry Price: $7.10 (5/21/15)
Lowered Price from Selling Options: N/A
Exit Target: $14.00-$15.00
Return: 0%
Stop Target: $10.00
Action: Shares traded to a high of $7.14 on Friday. Resistance is at $7.20-$7.25. Support is at $7.00 with $6.75 serving as backup.
The 15-year chart is super bullish showing clusters of resistance up to $8.00-$10.00 If these levels clear, shares could make a run toward $15.
Shares started 2003 just above $3.00 and cleared $7.00 by the second trading day of May. Ten days later, shares were pushing $9.00 and tapped $11.49 by June 2, 2003. On July 2, 2003 shares reached $15.64 and were pushing $17.47 when August rolled around.
Shares started 2015 near the $4.50 level, and I would love to see a similar run over the next three to six months. Find the the historical prices from the aforementioned 2003 time frame here.
I point this out because I don’t want you to think I’m blowing smoke about a possible move to double digits.
My $14.00-$15.00 target represents a lofty return from current levels but it’s one that is possible given the stock’s price history.
Of course, a double from current levels depend on support holding and momentum continuing but the technical picture looks great.
Fundamentally, the company recently posted solid earnings and will report again in early August. This removes the headline risk from this event over the near-term but should be a positive catalyst.
Earlier this month, Dot Hill reported a profit of $0.61 a share on revenue of $61.1 million. This topped estimates for $0.61 a share on revenue of $60.1 million. Over the past four quarters, the company has matched estimates three times with a 2-cent beat in between.
For the current quarter, Dot Hill forecast earnings of $0.04-$0.08 a share on revenue of $58-62 million. Wall Street has penciled-in a profit of $0.06 a share on revenue $58.7 million. Obviously, there is a little cat-and-mouse game going with analysts but the company’s guidance is in-the-middle and tilted towards a revenue beat.
The storage space is competitive but Dot Hill’s storage options are more real-time solutions. This gives them a leg up on their competitors EMC (EMC), NetApp (NTAP) and Nimble Storage (NMBL).
NetApp shares tumbled 10% last week following an earnings miss so there is risk to the sector. Analysts were quick to downgrade the stock but I’m looking for HILL to emerge as the best in breed and for momentum to hold.
For 2015, the amount of storage data is expected to reach over five zettabytes. This is double the number from three years ago, and demand is expected to double about every two years afterward.
Even more compelling is the fact that 90% of the planet’s data are considered “unstructured.” The explosion in mobile devices and the internet of everything will continue to grow and will only add to the increasing need for storage. As the world becomes more connected, mobile data traffic will continue to fuel the need for stored solutions.
Mergers and acquisitions could also come into play if the industry consolidates as synergies between bigger companies and the space look compelling.
Flextronics (FLEX, $12.26, flat)
Original Entry Price: $12.55 (5/19/15)
Lowered Price from Selling Options: N/A
Exit Target: $15+
Return: -2%
Stop Target: $10.00
Action: Shares were on the verge of fresh 52-week peaks north of $12.86 before fading below their 50-day moving average near week’s end. FLEX touched a low of $12.09 on Friday and held near-term support at $12.00 and the 100-day moving average. Resistance is at $12.25-$12.50.
Psychemedics (PMD, $14.64, up $0.14)
Original Entry Price: $15.67 (5/5/15)
Lowered Price from Selling Options and dividends: No options available
Exit Target: $18.00-$20.00
Return: -7%
Stop Target: $12.00
Action: Backup support at $14.50 was tested last week following the close below $14.75 and the 200-day moving average. A close below $14.00 would bearish. Resistance is at $14.75-$15.00.
The stock currently yields 3.9% and pays a 60-cent annual dividend. Psychemedics provides drug testing services for companies and organizations through the analysis of hair samples. It is a more accurate way of detecting abuse for illegal drugs and helps companies manage these types of issues.
Wells Fargo (WFC, $56.00, down $0.01)
WFC October 60 calls (WFC151016C00060000, $0.67, flat)
Entry Price: $0.67 (5/5/2015)
Exit Target: $1.35
Return: 0%
Stop Target: None
Action: Near-term support for WFC is at $55.50 followed by $55.00 and the 50-day moving average. Resistance is at $56.50. Shares traded to a fresh 52-week high of $56.70 last week and look poised to clear $60.00 during the next few months.
Limelight Networks (LLNW, $4.20, down $0.07)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7.00
Return: 7%
Stop Target: $4.00 (Stop Limit)
Action: Multi-year resistance is at $4.50. Support is at $4.00 followed by $3.75 and the 50-day moving average.
Discovery Laboratories (DSCO, $0.83, flat)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Return: -51%
Stop Target: $0.50
Action: Shares traded to a low of 78 cents on back-to-back sessions last week. Hopefully, this represented a short-term double-bottom. Resistance is at $1.00.
Bank of America (BAC, $16.75, up $0.02)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options and dividends: $17.28
Exit Target: $20+
Return: -3%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Resistance is at $16.75-$17.00. A close above the latter would be super bullish. Support is at $16.50 followed by $16.25 and the 200-day moving average. A close below this level could lead to a test to $16.00 and the 50- and 100-day moving averages.
We previously sold to open (wrote) the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
Rave Restaurant Group (RAVE, $13.70, down $0.25)
Original Entry Price: $8.00 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 71%
Stop Target: $12.60 (Stop Limit)
Action: Near-term support at $13.75 is in play following the drop back below $14.00. Backup support is at $13.50. A close below this level could lead to $13.00-$12.75 and a test of the 100-day moving average. Resistance is at $14.00-$14.25 and the 50-day moving average.
Huttig Building Products (HBP, $3.36, flat)
Original Entry Price: $4.00 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -15%
Stop Target: $2.00 (Stop Limit)
Action: Shares fell below support at $3.40 and tested their 200-day moving average to start last week. Backup support at $3.25 and the 50- and 100-day moving averages held on continued weakness. Resistance is at $3.40-$3.50.
Although I’m discouraged with the price action in the stock, the company recently reported better-than-expected earnings. New subscribers can start adding shares at current levels while current subscribers should consider adding to their positions to lower the cost basis.
Rambus (RMBS, $14.40, down $0.09)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Return: -12%
Stop Target: $9.00
Action: Resistance is at $14.50-$14.75. A close this level could lead to $15+ and fresh 52-week peaks. Near-term support is at $14.00 followed by $13.50 and the 50-day moving average.
Shares are in a solid uptrend and new subscribers can feel comfortable opening positions at current levels.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes.
I do not recommend adding to these positions or opening new positions, but if you are already holding the stocks, we recently opened covered calls on these positions. If you missed the alert, you can find it here.
AKS Steel Holding (AKS, May 2011) – We sold to open (wrote) the AKS September 6 calls (AKS150918C00006000) on 4/30/2015 for 40 cents. Continue to hold.
DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents. Continue to hold.
Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents. Continue to hold.
Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents. Continue to hold.
Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents. Continue to hold.
Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents. Continue to hold.
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly
