Dear Momentum Options Subscriber,
The bulls extended their winning streak to seven-straight weeks, but tech lagged and finished lower last week. The Dow and S&P 500 showed strength, and the small-caps rebounded to end the week in positive territory.
The bulls are in great shape to trip a couple of my year-end price targets from February. The Nasdaq and S&P 500 are just about there, but my Dow and Russell 2000 targets will likely have to wait until 2015. Of course, the bears always have to be respected, but the winter hibernation could continue as Wall Street plays catch up.
The Dow added 58 points, or 0.3%, to end at 17,958 on Friday. The blue-chips held positive territory throughout the session and made a run to an all-time intraday high of 17,991. I have talked about fluff up to 18,250 over the near-term if the bulls do trigger 18,000. Support at 17,800 has been solid and would need to hold on a pullback. There is additional help at 17,600, and a close below this level would signal a possible trend change. The Dow gained 130 points, or 0.7%, for the week.
The S&P 500 advanced 3 points, or 0.2%, to finish at 2,075. The index held steady for much of Friday’s session and reached a peak of 2,079 — another all-time high. The bears tried to ruin the party late in the day, but the 1-point drop to 2,070 was hardly noticed. There is risk to 2,060-2,050 on a close below this level, but the bulls are still on track to trip my year-end target of 2,100. For the week, the S&P was higher by 8 points, or 0.4%.
The Nasdaq jumped 11 points, or 0.2%, to settle at 4,780. Tech made another run at 4,800 and traded to a high of 4,788 before a late day fade back to even. The bulls held positive territory by a fifth of a point and, more importantly, the index closed above 4,775. The bears came close to cracking support at 4,750-4,725 last week, but the higher highs and lower lows were a bullish sign and keep my year-end target of 4,800-5,000 in play. For the first week of December, the Nasdaq lost 11 points, or 0.3%.
The Russell 2000 gained 9 points, or 0.8%, to close at 1,182. The small-caps got off to a slow start on Friday after kissing 1,972, but the rebound to 1,185 and close above 1,180 eased my concern. Near-term support at 1,175-1,170 is still shaky, but the test and hold to 1,150 last Monday might have been the dip Wall Street was supposed to buy. For the suit-and-ties that didn’t, they may have missed a train that is possibly headed past 1,200. For the week and month, the Russell 2000 added 9 points, or 0.8%.
The S&P Volatility Index ($VIX, 11.79, down 0.59) fell 5% as the bulls put a little more distance between themselves and the 12.50 level. I have talked about a test to single-digits coming this year, and the July low reached 10.28. The VIX will become a more prominent subject in the coming weeks, as the slick talking pros say it’s too low, but they have gotten it wrong all year.
Longer-term subscribers know that the VIX has been and continues to be one of my best trading tools for figuring out market direction. It has also been a great indicator for keeping my emotions in check. The bears will be gunning for a rebound past 12.50 this week, and there would be additional risk to 13.50 if cleared. I would not actively seek put options on the indexes until the VIX clears and holds 20 for several sessions. Here is a look at the 10-year chart for the VIX.
The Dow has triggered 35 all-time record highs this year, and the S&P 500 has triggered 49. It is important to keep in mind that, in 2013, the Dow tagged 52 all-time highs. Last week was mixed and, while I mentioned that there could be a slight pullback, it was an overall bullish week. I would love to see the Dow make another highs this year, and there are exactly 17 trading days left in 2014. Before I put the horse, or, should I say bulls, in front of the cart, let’s see what the charts are telling us.
The S&P 500 came into the year at 1,848. The year-end price targets from the top brokerage firms ranged from 1900-1,975 when I dug up research in February. At the time, I found nearly a dozen brokerage firms in the 1,900 range. The average for much of Wall Street was 1,950, for a gain of 6%.
Goldman Sachs (GS, $195.45, up $3.50) set a target at 1,900 and penciled in a 3% move. An analyst from Bank of America (BAC, $17.68, up $0.47) estimated that the S&P 500 might trigger 2,000.
Morgan Stanley (MS, $37.24, up $0.45) and Oppenheimer tried to be slick by guessing 2,014 as a year-end target for the S&P. This would represent a 9% gain for the year. The high estimate came from an analyst out of JPMorgan (JPM, $62.70, up $1.32) who penciled in 2,075, a move of 12%. My year-end target in February was 2,100.
In July, Goldman upped its year-end target for the S&P 500 to 2,050, and others followed suit and now have price targets of 2,100-2,200 going into year-end and 2015. I consider this “cheating,” as they got a second guess, and the talking heads fail to mention their original targets, but at least they jumped on the bulls’ bandwagon. However, it felt like everyone, and I mean everyone, jumped off in September and October and said the highs were in. The pullback was scary, but the chart work I do every week kept me calm and focused. While I did take a few hits on bullish trades, I wasn’t aggressively seeking “short” positions and said bear market rallies die in October.
Most analysts predict 5% up-years, as they are too lazy to do the chart work, though some may go as high as the 7%-8% range. Following 2013’s gain of nearly 30% for the S&P, none of them believed a double-digit return was in store for this year. At current levels, the S&P 500 is up 12% year-to-date.
If 2015 goes well, a run to 2,300-2,400 could come for the S&P, but I don’t expect it to be smooth sailing. I like to wait until January’s action is finished and will then make my official “educated guess” in February on where the index will be by year-end 2015. However, you heard it here first.
For the knuckleheads who say the Dow is dead and needs to be abolished, it’s not going to happen. While the index may be in need of another “makeover,” the Dow Jones Industrial Average represents 30 stocks deemed as blue-chips. The stock market’s history started with the Dow, and the NYSE remains one of the most prestigious exchanges in the world.
The Dow has ended higher over the past five Decembers, and the month represents the best average gain for the year at 1.4%. The blue-chips have closed in positive territory in 84 of 117 years for a success rate of over 70%. For the history buffs, 1903 was the best monthly win for the blue-chips, as they posted nearly an 11% gain. The worst December came in the 1931 on a bear attack that resulted in a nasty 17% selloff.
I had penciled in a possible run to 19,000 for the Dow by year-end, but that target will likely have to wait until 2015 to trigger, with fluff up to 19,500-20,000.
International Business Machines (IBM) has tanked 12% this year, and Chevron (CVX) is down 10% year-to-date (YTD). Other YTD Dow laggards include Exxon Mobile (XOM) and General Electric (GE), which are both down 7%, and AT&T (T) and Boeing (BA) have lost nearly 4%.
These blue-chips will be classified as the “Dogs of the Dow” heading into 2015. This theory can be misleading, as it often refers to buying the 10 highest-yielding Dow stocks and not necessarily the 10 worst performers.
IBM has a current yield of 2.7%, Exxon yields 2.9%, Chevron is yielding 3.9%, GE’s dividend is at 3.4% and AT&T’s is a whopping 5.4%. My pick of the litter would be AT&T, although there is further risk to $30 on that stock.
A recovery in IBM should be enough to help the Dow clear 18,000 over the near-term, but all of the aforementioned “dogs” will need to bark a little louder in 2015 to get the index pushing 19,000. I also like IBM’s new partnership with Apple (AAPL), which I believe is one that Wall Street is undervaluing. Also, check out Apple’s website and videos on their upcoming watches. They are slick as ice and will be huge sellers. The iPhone 6 is also selling like hotcakes.
As far as the Nasdaq, I mentioned in November that tech should show strength over the next six months, and my year-end target of 4,800-5,000 came into play at the end of November.
The Nasdaq’s all-time intraday high of 5,132 was reached on March 10, 2000, with the index closing at 5,048. There was a tremendous selloff following the “dot com” bubble, as the index fell to an intraday low of 1,108 by October 2002.
I don’t believe that the index will fade at 5,000 this time around because there is a big difference between the unprofitable internet-savvy companies from then and the profitable ones that are trading now. In fact, the Nasdaq could trigger 6,000 in 2015 (or 2016) if all goes well.
The small-caps have struggled for over a month, as they have stayed in a tight trading range since the bounce off of the mid-October lows. Friday’s close was encouraging, but 1,200 needs to hold on a breakout. The 52-week high is at 1,213, and my year-end target was calling for a possible run to 1,400.
This was an aggressive price target and one that will likely stay intact for 2015, with fluff up to 1,450.
The Russell 2000 typically does well in January and usually outperforms the big-cap names. History shows that the small-caps start to move in October and tend to hit the gas in mid-December through January. This bullish run is often referred to as the “January Effect.”
The bears snapped a three-session Monday losing skid as the Dow finished lower last Monday. The losses were held in check, and the bulls got a Friday win to extend their winning streak to three-straight. I showed all of the Monday/Friday closes for all of 2014 last week for those of you who are just signing on. If the bulls get a win today, it would be a good clue that money might be moving into the market for the rest of the year.
I talked about the Wall Street pros possibly chasing a breakout into year-end, although many still don’t believe higher highs are in store. One of the talking heads stated last week that only 5% of fund managers were outperforming the market. The rest are looking ahead to the holidays.
Those who have been left behind will want to get off to a good start for 2015, but they will miss the Santa Claus rally that usually occurs during that last five trading days of the year and the first two of January. Wall Street has been waiting for a pullback that may have already come and gone and, while politics remain as headline risk for the remainder of the month and into 2015, the bulls are looking good.
Side Note: The current 10-year charts show downside risk to Dow 15,500; S&P 1,900; Nasdaq 4,000; and Russell 1,100 before the longer-term uptrend lines would be in play. If the small-caps fade below 1,150 and then 1,100, there is a good chance 2015 turns bearish.
Ahead of the open, futures look like this: Dow (-51); S&P 500 (-7); Nasdaq 100 (-13).
Momentum Options Play List
Closed Momentum Options Trades for 2014: 95-56 (63%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 8:30 a.m. EST.
Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
iShares Russell 2000 (IWM, $117.69, up $0.88)
IWM January 121 calls (IWM150117C00121000, $0.95, up $0.22)
Entry Price: $0.90 (12/5/2014)
Exit Target: $1.80
Stop Target: None
Action: Resistance is at $118. If cleared, a run past $120 could be in the works. Friday’s high reached $117.98, and the 52-week high is just south of $121. Near-term support is at $115.
PowerShares QQQ (QQQ, $105.38, up $0.01)
QQQ January 107 calls (QQQ150117C00107000, $0.90, up $0.17)
Entry Price: $0.98 (12/5/2014)
Exit Target: $2.00
Stop Target: None
Action: I have talked about the QQQs making a run to $110, and the recent 52-week high is north of $106. Friday’s peak reached $105.70. I would like to see $105 hold on any pullback.
American Express (AXP, $92.65, up $0.82)
AXP January 95 calls (AXP150117C00095000, $1.10, up $0.27)
Entry Price: $0.75 (12/3/2014)
Exit Target: $1.50
Stop Target: $0.85 (Stop Limit)
Action: Set a Stop Limit at $0.85 to protect profits.
Shares traded to a high of $92.86 on Friday and held $92.50. The next wave of resistance is at $95, which could be challenged if $93 clears. The 52-week high is at $96.24. Support is at $90.
JDS Uniphase (JDSU, $13.32, up $0.30)
JDSU January 13 calls (JDSU150117C00013000, $0.80, up $0.15)
Entry Price: $0.65 (12/3/2014)
Exit Target: $1.30
Stop Target: None
JDSU March 14 calls (JDSU150320C00014000, $0.80, up $0.10)
Entry Price: $0.70 (12/3/2014)
Exit Target: $1.40
Stop Target: None
Action: Resistance is at $13.50-$13.75. If cleared, a run to $14-$15 should be in the works. Support is at $13 and the 50-day moving average. There is additional risk to $12.50 and the 100/200-day moving averages on a close below $12.75.
You can read my full update on JDSU in the Dec. 3 Alert.
Diamond Foods (DMND, $29.23, down $0.30)
DMND December 32 calls (DMND141220C00032000, $0.60, down $0.10)
Entry Price: $0.87 (11/18/2014)
Exit Target: $1.75
Stop Target: None
Action: Support is at $29. Near-term resistance is at $30.50. Earnings are due out after the close today, and this will likely be an all-or-nothing trade at this point. An earnings miss or lowered guidance will crush the premium left in the options if shares fall below $29. A run to $33, technically, by Dec. 20, is needed for the trade to break even. Shares need to move 10% higher on Tuesday’s open or I may exit the trade to save any premium that might be left.
You can read my detailed write-up on DMND in the Nov. 19 Mid-Market Update.
IMAX (IMAX, $30.46, up $0.15)
IMAX December 32 calls (IMAX1220C00032000, $0.25, flat)
Entry Price: $0.35 (11/12/2014)
Exit Target: $0.70 (Limit Order on Half)
Stop Target: None
Action: Shares need to make a move this week, as the trade is running out of time. These December options expire next Friday. Support at $30 has been solid, but resistance at $31.50-$32 needs to clear by Friday.
International Business Machines (IBM, $163.27, down $0.98)
IBM January 170 calls (IBM150117C00170000, $0.80, down $0.25)
Entry Price: $1.75 (11/10/2014)
Exit Target: $3.50
Stop Target: $0.50
Action: Support is at $163.50-$162.50. Resistance is at $165, and a close above this level will lead to some short-covering and a possible push towards $170.
You can read more about why I like this trade and its risk/reward setup in the Nov. 11 Pre-Market Update.
Flextronics (FLEX, $11.29, up $0.02)
FLEX January 11 calls (FLEX150117C00011000, $0.55, flat)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.25
Stop Target: None
Action: Shares traded to a high of $11.32 on Friday. Resistance is at $11.50, and a close above this level should get the 52-week high of $11.83 in play. Support is at $11, with backup at $10.75 and the 100-day moving average.
Trades on Hold — other 2014 Portfolio Open positions (2): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
Rubicon December 8 calls (From August 2014) — Continue to hold.
Fortinet December 29 calls (from September 2014) — Shares closed at another 52-week high on Friday. A run to $30 could still come. I will bring back daily coverage of the trade once $29 clears — Continue to hold.
Editor and Chief Options Strategist