Market Summary: Bulls Climb Wall of Worry as Bears Hibernate
The bulls brushed back the bears’ feeble attempts to change momentum last week, as the charge to all-time and decade-highs continued. The major indices were higher for the fourth-straight week and are showing steady gains in a historically bullish month.
Third-quarter earnings season is starting to slow as well, but not retail sales, which offered hope for the holiday season. Housing stocks rebounded, and the financial stocks showed strength before getting sideswiped by overseas regulators.
This will be the last full week of trading ahead of Thanksgiving week and Black Friday, as next week gives those of us in the United States a chance to relax. There is still work to be done until then, so there will be no breaks until Wall Street closes.
The technical picture continues to favor the bulls, as the indicators I have said to watch for are blossoming like roses despite the chill in the air. The grind to make money is still looking good, but we still have to watch our backs for any possible bear attacks.
The Dow dipped 18 points, or 0.1%, to close at 17,634 on Friday. The blue-chips were choppy during the first half of trading but managed a high of 17,664 before fading to a low of 17,613 during the second half of the session. The closes above 17,600 held all week, which is where the bulls are building a nice floor of support. There is risk to 17,350-17,200 on a close below 17,500. Last week’s all-time intraday high reached 17,705 and keeps my near-term fluff targets of 17,800-18,000 in play. For the week, the index added 61 points, or 0.4%, and is up 1,058 points, or 6%, for 2014.
The S&P 500 gained half of a point, or 0.02%, to settle just below 2,040. The index kissed 2,042 at the start of trading before a late-session test to 2,035. Support at 2,025 has held for seven-straight sessions, and a dip below this level could lead to 2,010-2,000. The bulls came within 4 points of triggering my near-term target of 2,050 on Thursday and are just 3% away from triggering my 2,100 target from February for the S&P 500. The index gained more than 8 points for the week, or 0.5%, and is higher by 191 points, or 10%, year-to-date.
The Nasdaq jumped 8 points, or 0.2%, to finish at 4,688. The bears matched Thursday’s low of 4,664 on Friday, but the “double-bottom” and additional support at 4,650 held. This level served as prior resistance, and the bullish signs continue to point towards a run to Nasdaq 5,000. Tech traded into my near-term 4,700-4,800 zone on Thursday after pushing a peak of 4,703. Support at 4,650 has held for five-straight sessions, with backup at 4,600-4,575. The index advanced 56 points, or 1.2%, last week and is in the green by 512 points, or 12%, for the year.
The Russell 2000 fell just over a point, or 0.1%, to end at 1,173 ahead of the weekend. The small-caps were rocky from start to finish after a pop to 1,177 and a failed run at 1,180. This level was cleared mid-week by the bulls and offered hope for a blast past 1,200 before Thursday’s 1% drubbing. Support at 1,175-1,170 held all last week, which was an encouraging sign, but a close below the latter could lead to 1,160. For the week, the small-caps added half of a point, or 0.5%. For the year, the Russell is showing a gain of 10 points, or 1%.
The S&P Volatility Index ($VIX, 13.31, down 0.48) was a little elevated last week but managed to close below 13.50 and was little changed for the week. This led to the flat action, overall, last week. I have talked about the bears needing to get a close above 15 to put a little panic in Wall Street’s panties, while the bulls needed to get below 12.50. Monday’s low reached 12.38, but the bears held 12.50 by the closing bell. Thursday and Friday’s high reached 14.31 and 14.15, respectively, with the bulls holding 15. A close above 16 and the 50-day moving average would be a very bearish signal. Otherwise, I have talked about single-digits triggering on the VIX this year. July’s low reached 10.28 on the VIX.
The same type of action on the VIX could play out again this week, and the clues have helped me call the market’s direction with pinpoint accuracy all year long. The talking heads and slick-talking pros have ignored the VIX for a few years now, but it continues to be one of the best clues for market forecasting.
I talked about a mini trading range forming last week and into this week and, although the market finished higher overall, the small-caps pulling back to support was a little disappointing. It was not a back-breaker by any means, as the index still made a slight gain, but it was nothing to write home about. The consolidation was healthy, as the back-filling and push to resistance were all done without the volatility we have seen in recent weeks.
The bulls got a Monday win, with the Dow closing above 17,600, but the bears got a rare Friday victory to snap a four-session Friday slide. Remember, mixed Monday and Friday closes on the Dow can indicate trading ranges, and I talked about the prior Monday losses being contained. Friday’s slight pullback wasn’t too big of a deal, as support held. This week’s Monday/Friday closes need to show strength, or strong positive closes, as it would signal that money is still moving in from the sidelines.
Financial stocks were looking peachy until a few of the major U.S. banks were fined for currency manipulation. Overseas regulators fined Citigroup (C), JPMorgan Chase (JPM), HSBC (HSBC) and UBS (UBS) along with the Royal Bank of Scotland over $4 billion in total, which led to a “sell-the-news” event. The fines posed no substantial risk to the bottom line of the aforementioned banks that settled, but it will show up in their earnings next quarter. There could be some more slap-on-the-wrist fines or other developing stories that may be worth watching, but, for the most part, the pullback in the financial stocks wasn’t too bad.
The Financial Select Spiders (XLF, $24.06, down $0.08) held near-term support at $24 but face risk to $23.75 on continued weakness. A close below $23.50 and the 50-day moving average would be bearish clues that more damaging news is forthcoming. A run past $24.50 would suggest that continued 52-week peaks are in store.
Housing stocks showed some strength following a number of earnings beats and upbeat forecasts from the homebuilders. This is an encouraging sign and one I talked about last week by saying that the banks needed to lower their lending ratings to support housing. The Fed has taken the punch bowl away from the banks and, at some point, the banks will need to show some type of return for their investors. Once interest rates start to rise, banks will compete and hopefully a steady cycle of housing starts will appear in 2015.
I have chatted about lower corporate tax rates for years and more so this year. That sentiment has been echoed numerous times since the Republicans got back on the D.C. map. A competitive corporate tax rate, along with a rising housing market and less-than-stringent credit approvals would be three strong stories going into 2015.
Retail sales numbers last week came in better than expected, which was another clue I said to watch for, as a number of earnings surprised Wall Street. I won’t bore you with the numbers, as I was more interested in the companies’ outlooks headed into the holiday shopping season. However, I want to highlight Wal-Mart Stores (WMT, $82.96, up $0.02), as shares traded to fresh all-time highs after crushing estimates and leading the group higher.
I told you weeks ago that lower gas prices would have consumers feeling good and spending more. The suit-and-ties figured this out last week and echoed those sentiments as well. I showed last week’s 10-year chart with Brent oil holding $80, but the possibility of $75-$70 coming into play looked strong. Thursday’s drop below $80 might be the straw that breaks the camel’s back if $77.50 fails to hold.
Mother Nature could throw the bulls or bears a curveball depending on how oil and natural gas trade into year-end. Colder weather is already sweeping some regions of the country and could have a dramatic effect on both oil and natural gas prices. Another polar vortex could be damaging to the economy.
It is still important to remember that nothing in the market is a given and anything can happen during the next six weeks. The chances of the bears going into hibernation continue to look good, but, with too many hunters in the woods, they could awaken at any moment. October was a fresh reminder of how fierce bearish growls can get, but I have outlined all of the traps (support levels and other technical clues) that I am watching in case momentum fades.
I will talk more about my year-end price targets in the coming weeks, as there is no need to review them until we get a little closer. The one thing that worries me is that bullish sentiment is at record highs, which is why I said last week that a trading range could develop through this week.
Of course, I would love to see a continued rally, but a slight pullback might disinterest Wall Street and have them looking forward to the holiday break next week. A rally into December could resume once the suit-and-ties abandon ship, figuring the “highs” are once again in, and possible geopolitical events and politics are still unknown curveballs.
Ahead of the open, futures look like this: Dow (-33); S&P 500 (-5); Nasdaq 100 (-6.5).
Imax (IMAX) on the Verge of a Breakout
Imax (IMAX, $30.33, down $0.11) is a $2 billion entertainment technology company based in Mississauga, Ontario, Canada that specializes in motion picture technologies as well as performing film development, production, post production and distribution to the company’s theatres worldwide. The company operates in seven segments: Imax Systems, Theater System Maintenance, Joint Revenue Sharing Arrangements, Film Production and Imax Digital Media Remastering (DMR), Film Distribution and Film Post-Production.
- IMAX Systems segment designs, manufactures, sells, or leases Imax theater projection system equipment.
- Theater System Maintenance segment maintains Imax theater projection system equipment in the Imax theater network.
- Joint Revenue Sharing Arrangements segment provides Imax theater projection system equipment to exhibitors.
- Film Production and Imax DMR segment produces films and performs film re-mastering services.
- Film Distribution segment distributes films for which the company has distribution rights.
- Film Post-Production segment offers film post-production and film print services.
- The company also owns and operates Imax theaters, rents 2-D and 3-D large-format film and digital cameras to third party production companies, and production technical support and post-production services.
Imax sells or leases its theater systems to theme parks, private home theaters, tourist destination sites, fairs, and expositions. It serves institutional customers, such as science and natural history museums, zoos, aquaria, and other educational and cultural centers, as well as commercial multiplex exhibitors. As of June, 2014, the company operated 868 Imax theaters, including 735 commercial multiplexes, 19 commercial destinations, and 114 institutions in 59 countries.
The company was founded in 1967 when filmmakers Graeme Ferguson, Roman Kroiter, and Robert Kerr watched a multi-screen film at the Montreal Expo ’67. The film used formatting which either depicted different images concurrently or the same image replicated on one screen that would led to a more real life experience. They wanted to develop this idea to create a theatre with giant screens, surround sound and stadium seating.
They sought engineer William Shaw in 1968 to help develop technology for this project. Shaw created larger and more realistic experiences for audience that included oversized screens, surround sound, and steep seating for better viewing. Before retiring, Shaw created a 3-D camera.
On June 10, 1994, the company went public on the Nasdaq stock exchange at a price of $13.50. Shares reached an intra-day high of $13.75 before closing the day at $13.00. Shares would reach a high of $49 in 1999 and bottomed at $2.41 in late 2008.
Chief Technology Officer and engineer Brian Bonnick developed technologies that made it possible to shoot Hollywood films for Imax (short for Image Maximum) screens. Bonnick and his group created Imax DMR (Digital Media Remastering), which allowed conventional films to be up-converted into Imax format. These technologies would allow the company to attract Hollywood production houses, a key for the success of the company.
Walt Disney (DIS) became the first studio to release theatrical films in the Imax process. In 2003, it signed a 20-picture deal with Warner Brothers (TWX), which was later extended in 2010 to another 20 films. It also signed similar multi-film deals with DreamWorks Animation (DWA) and Disney. The company has added new technologies to enhance the Imax Experience and the Imax MPX theatre system and have also revamped Imax 2-D footage into Imax 3-D.
The Imax Experience is designed to make the audience feel like they are part of the movie. A standard Imax theatre has a huge rectangular screen, usually 16 meters high by 22 meters wide (approximately 52 feet by 72 feet), many times larger than the screen at a normal movie theater. The largest Imax screen is 30 meters (98 feet) high. The screen is large enough to fill your field of vision and creates a sensation of motion in most viewers, and motion sickness in some. Meanwhile, an Imax dome provides a hemispherical screen that wraps the entire theater. Domes can be up to 30 meters in diameter.
To fill this gigantic screen with a clear picture, Imaxfilms are shot and printed on huge film (15/70mm) that is completely unique in the industry. For this reason, no full-length feature film has yet been shot entirely using Imax cameras due to the numerous difficulties presented with the format. The cameras are much larger and heavier than standard cameras, and as they are noisier, it makes dialogue recording difficult. The cost of the film is also much greater than standard 35mm film.
The ticket prices are usually two to three times that of a regular movie theatre, while seats are slightly more comfortable than those of any movie theatre. Filmmakers are flocking to have their films converted into Imax format or actually shooting part of the movie for Imax. Those filmmakers can get more record box offices if the movie is also shown at Imax theatres. On July 9, 2014, Bad Robot (a J.J. Abrams production company) confirmed that select scenes in Disney and Lucasfilm’s upcoming Star Wars Episode VII would be captured with the Imax film camera, in addition to the standard 35mm film.
The success of their screens and “Imax Experience” has made it possible for Imax to sign deals with countries around the world. In 2009, the company signed a deal to build the first ever Imax theatre in Tianjin, China. In March 2011, China’s Wanda Cinema Line announced a 75-theatre deal with the company. China is the second largest market after United States with roughly 25 Imax theatres located throughout the country.
Imax aims to attract more viewers by decreasing the admission prices in China. However, DMAX is large-screen cinema format developed in China by the China Research Institute of Film Science & Technology and China Film Group. It was created in an attempt to challenge the Imax monopoly that currently dominates China’s large-screen film market. The screen size is 12 meters high by 20 meters wide compared to Imax’s 16 meters high by 22 meters wide. As of 2012, more than a dozen DMAX cinemas have been opened in China, with ticket prices being lower than competitor Imax. This is a development to watch going forward.
On Oct. 23, the company reported results for the third quarter and here were the highlights:
- Revenue for the third quarter increased 17.8% to $60.7 million as compared to $51.5 million a year ago.
- Gross margin improved to 58.3% for the third quarter as compared to 53.4% a year ago.
- Operating margin improved to 8.7% for the third quarter as compared to 3.3% a year ago.
- GAAP net income was $4.9 million in the third quarter, an increase from $1.6 million a year ago.
- IMAX global box office revenues totaled $169 million in the third quarter, a 28% increase from a year ago.
- The company signed deals for 42 theatre systems in the third quarter.
Revenue has flat over the past few years, but it is slowly rising. Analysts’ estimates that revenue and earnings will rise in the fourth quarter (December 2014) and drop in the first quarter (March 2015) seems about right. Revenue should stay strong as 3-D and Imax movies become more and more popular. Imax theaters have the largest digital screen in country but seasonal patterns will dictate sales. Imax is also sticking its fingers in the home theatre installation pie business but I don’t think sales will move the needle that much to make a difference.
Two of the company’s top competitors are AMC Entertainment Holdings (AMC) and Regal Entertainment Group (RGC).
The stock seems slightly undervalued, with positives (green) outnumbering negatives (red) 11 to 10. The stock seems a growth play with a high gross margin, profit margin, operating margin, sales growth, and return on assets. Current ratio is above two, which means that it is fairly liquid. More importantly, short sellers are starting to cover as shares near 52-week peaks. The high short interest could cause a short squeeze if more good news is released.
On the negative side, trailing PE, forward PE, price/sales, and price/book are all a little high.
Imax could also be a possible takeover target as its growth rates and margins seem superior to its competitors. Perhaps a Chinese company makes the most sense as they could quickly capture and enhance the Imax brand.
Earlier this month, Beijing Bona International Cineplex Investment and Management, a wholly-owned subsidiary of China’s largest privately-owned media film distributor Bona Film Group (BONA) agreed to open three more Imax theatres in China. The deal brings the total Imax theatres to four for Bona which opened its first Imax theatre in Tianjin back in 2012. Additionally, Imax signed an agreement with Toho Cinemas, that includes the launch of its first multiplex in downtown Tokyo.
At $30, the stock is between its low target of $28.00 and median target of $32.50 made by the 16 analysts recorded by Thomson/First Call. Mean target is $33.13, and high target is $39.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.0, up from 2.1 a week ago.
The short-term chart shows the recent breakout above $30 that will now try to serve as support on any pullback. A close below $29 would be a signal momentum has faded and a possible test to $28-$27.50.
The Imax March 33 calls (IMAX150320C00033000, $1.00, flat) are trading near $1 and would double if shares reached $35 by mid-March. These options would give the trade over 4 months to play out. If Imax shares are trading at $35 the March 33 calls would be $2 in-the-money (ITM). At $36, the options would be $3 ITM for a 200% return. If I add these longer-term options to the Momentum Stocks Weekly Portfolio, I will send out a Trade Alert.
Momentum Stocks Weekly Play List
All prices given in this update are current as of Nov. 14, 2014.
The Momentum Stocks Weekly Closed Trade Track Record for 2014 is 28-10, for a 74% win rate (113-17, or 87% win rate, overall since the start of 2011).
To download the most current Momentum Stocks Weekly returns of closed positions in Excel format, click here.
Discovery Laboratories (DSCO, $1.58, up $0.01)
Sold to open the DSCO April 2 calls (DSCO150417C00002000, $0.40, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Stop Target: None
Action: Near-term resistance is at $1.65-$1.70. Support is at $1.60-$1.50 and a break below the latter could lead to $1.25.
On Nov. 11, I suggested buying DSCO shares at $1.60 while selling to open the DSCO April 2 calls for 40 cents. This lowered the cost basis of the trade to $1.20. If shares are “called-away” at $2 by next April, the trade will make 67%.
Psychemedics (PMD, $15.27, up $0.13)
Original Entry Price: $14.45 (11/3/14)
Lowered Price from dividends: None
Exit Target: $20+
Stop Target: $10
Dividend Yield: 4.2% (60 cents/ 15 cents quarterly)
Action: Shares closed above $15 midweek after holding the 200-day moving average throughout the week. Resistance is at $16. Support is at $14.75 followed by the 50-day and 100-day major moving averages on a close below this level.
Read my full write-up on PMD from Nov. 3 for a more details on why I like this company.
Flextronics International (FLEX, $11.10, up $0.21)
Original Entry Price: $9.12 (10/21/14)
Lowered Price from Selling Options: None
Exit Target: $12+
Stop Target: Raise from $10.50 to $10.70 (Stop Limit)
Action: Raise the Stop Limit from $10.50 to $10.70. Last week’s low was $10.73.
Resistance is at $11.25-$11.50 and a close above the latter should get the 52-week high of $11.83 in play. Support is at $10.75 with backup at $10.50 and the 100-day moving average.
Aruba Networks (ARUN, $21.57, down $0.04) Covered Call Trade
Sold ARUN November 20 calls (ARUN141122C00020000, $2.10, down $0.15)
Original Entry Price: $19.24 (10/17/14)
Lowered Price from Selling Options: $18.04
Exit Target: $25+
Stop Target: $15
Action: Shares did well holding the 50-day moving average last week after reclaiming this level on Tuesday. There is additional risk to $20 and the 100-day and 200-day moving averages. Earnings are due out this week and the position will likely get “called away” as long as shares hold $20. If not, I will provide an update on the trade next week. I may also provide an update on Friday as a reminder of how the trade is holding up.
Read my previous comments from Nov. 3 by clicking here.
On Oct. 17, 2014, I recommended buying ARUN shares at $19.24 and selling to open the ARUN November 20 calls for $1.20 to lower the cost basis to $18.04. If the position is “called-away” by mid-November, the trade will make 11%.
Bank of America (BAC, $17.14, down $0.08)
Original Entry Price: $16.23 (10/17/14)
Lowered Price from Selling Options and dividends: None
Exit Target: $20+
Stop Target: $17 (Stop Limit)
Dividend Yield: 1.2% (20 cents/ 5 cents quarterly)
Action: Last week’s low touched $17.07 midweek with the Stop Limit of $17 holding.
The 52-week high is roughly $18, set back in March. Support is at $17-$16.75 and the 50-day moving average. Resistance is at $17.25-$17.50. I will send out a Profit Alert if $17 triggers this week. Otherwise, continue to hold.
Pizza Inn Holdings (PZZI, $6.90, down $0.10) Stock Trades
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $12
Stop Target: $5
Original Entry Price: $8.10 (10/11/13)
Lowered Price from Selling Options: No options available
Exit Target: $12+
Stop Target: $5
Action: Shares zoomed 9% mid-week and were pushing resistance at $7 following a better-than-expected quarter. The numbers came early as the company reported 4Q figures in late September. Either way, I like their numbers.
Click here to read my in-depth commentary and write-up on Pizza Inn.
Huttig Building Products (HBP, $3.40, up $0.09) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Stop Target: $2 (Stop Limit)
Action: Shares tested short-term support at $3.25 throughout the week and there is additional risk to $3. A close above $3.60 and the 50-day moving average would be bullish.
This is a small company with a big presence in the housing industry and a market-cap just south of $100 million. Huttig has been around for over 100 years and there is little Wall Street coverage with only 1 analyst following the stock.
This is a “cheap” way to play the housing sector with a quality stock. Despite the fits and starts the industry has been going through the past few years, this is a solid company with an improving balance sheet.
Limelight Networks (LLNW, $2.65, down $0.04) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: None
Exit Target: $5
Stop Target: $1
Action: Shares traded to a high of $2.80 early last week following better-than-expected earnings. There are clusters of resistance at $2.90-$3. Short-term support will try to hold at $2.60 followed by $2.40 on a break below this level.
Read about why I feel Limelight is a takeover target by clicking here.
Trades on Hold: AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 2011), Rambus (RMBS, November 2011), Bebe Stores (BEBE, February 2012), Vivus (VVUS, July 2012), Zynga (ZNGA, March 2014), Galena Biopharma (GALE, 2014)
Editor and Chief Options Strategist
Momentum Stocks Weekly