Dear Momentum Stocks Weekly Subscriber,
“Everybody, listen to me
And return me my ship
I’m your captain, I’m your captain
Though I’m feeling mighty sick
I’ve been lost now for days uncounted
And it’s months since I’ve seen home
Can you hear me? Can you hear me?
Or am I all alone?”
On Fridays, I often play an office tune to reflect the current market sentiment as a way to wind down the week. I have spun some classic tunes over the years, and some of my favorites are “Squeeze Box,” “Jailbreak,” and the one above, of course, “I’m Your Captain” from Grand Funk Railroad.
Aside from that, I watched Rounders this past weekend. Classic movie. I wish they would make a sequel because playing poker and the stock market can feel like the same game.
I stayed relaxed and I hope you did, as well, because the game plan went swell. However, the upcoming action is still a mystery, and it’s up to me to trust my instincts and the hand Wall Street has dealt us going into the “river” and “turn.”
My notes from Friday and last week’s action have me calling the bears’ bluff. I said the bears might go “all-in” on a Texas Hold ‘Em flop with nothing. However, I still have to worry what kind of hand they are holding. If they have pocket aces, last week’s flop becomes much more important. The bulls have been cashing chips to higher-highs all year long, and I’ve done well following their lead. I said last week’s action would shock Wall Street and have the weaker hands folding.
I have a lot to cover, so it is crucial that you absorb today’s information. I’ve done all the homework for you, and the portfolio is the proof in the pudding that this is exactly what I wanted to see happen last week.
Hopefully, history repeats itself as I will talk about some bullish trends, other market news and what to watch for.
Greece, China and oil worried Wall Street last week, with elevated volatility soaring as the bears awoke from their winter hibernation. Their growl scared away Wall Street pros and the Average Joes, as the second and third layers of support were tested by mid-week and into Friday’s close.
I mentioned that the weaker hands would fold like cheap lawn chairs ahead of a possible year-end rally that should (key word “should”) start today. However, this week promises to be just as volatile with the expiration of December options on Friday, the Hindenburg Omen and Triple Witching all in play.
The Dow dropped 315 points, or 1.8%, to close at 17,280 on Friday. The blue-chips were holding near-term support at 17,400-17,350 for much of the session before the late-day plunge to the 50-day moving average. This level will now serve as resistance. There is additional risk to 17,250-17,000 and the 100-day moving average on further weakness. I would be surprised but not shocked if 16,800 and the 200-day average come into play.
The S&P 500 stumbled 33 points, or 1.6%, to settle at 2,002. I was worried about shaky support at 2,025, as I said that a break below this level could lead to 2,000. The index held this level but was saved from any further declines by the closing bell. The bears fell short of cracking the 50-day moving average, but there is risk to 1,975-1,950 on a close below the 100-day moving average.
The Nasdaq tanked 54 points, or 1.2%, to end at 4,653. I warned of the bears making push into the 4,675-4,650 zone, and Friday’s action came right on cue. Although I’m excited that it was a possible bottom, there is additional risk to 4,600-4,575 and the 50-day moving average. A recovery of resistance at 4,700 and prior support will be the first bullish clue to look for on a rebound.
The Russell 2000 sank 14 points, or 1.2%, to finish at 1,152. The small-caps opened at 1,160, and I wanted to 1,150 hold into the close. It did, but not by much. There could be some “stretch” to 1,140-1,135 if the bears keep their momentum. A close below this area could setup the potential for a drubbing to 1,125-1,100, which is where I would back the truck up. I would like to see the bulls reclaim 1,160 today. There would be additional resistance at 1,170-1,175, but let’s clear the first hurdle and see where Monday closes before getting excited.
The S&P Volatility Index ($VIX, 21.08, up 1.00) zoomed to a high of 23.06 in the final minutes of Friday’s action and closed above 20 for the second-straight session. I warned of additional risk to 22.50-25 and, at this point, 30 isn’t out of the picture.
The VIX closing above 20 was a major deal. I talked about how a close above 20 would be bearish, and I said not to “panic” until the bears won this level. Panic was probably not my best mental note, as I wanted to see panic on Wall Street, but I don’t want you to panic.
I still need to confirm the lows are in, but there is way more upside potential if a rally or rebound resumes. However, at this point, there could be just as much downside action.
The last time the VIX closed above 20 was in mid-October when the index traded above this level for six sessions. This could be the one negative for the bulls, as additional closes above 20 this week would signal weaker stock market prices.
Each week, there are a number of indicators I write down, add or change to get a feel for market direction. I have the Top Six things to watch on a post-it note to get a good read on the bears and what kind of hand they are holding. Here are my notes:
- The small-cap bounce should begin mid-December, and last week’s breakout could signal a trading range with some spicy volatility.
- This week will offer great entry prices to play the rally into 2015. If my indicators turn south, that’s no problem, as it would signal that it is time to roll with the bears. However, puts have been tough bets in recent years, which is why I haven’t aggressively added them. I have had some success with puts this year, but timing is crucial.
- The VIX held 15, so don’t panic until 20 is tripped.
- Don’t worry until the downside 10-year uptrend lines come into play. This was the last thing I mentioned before heading to press Monday morning, and I listed the uptrend levels for each of the major indices as a side note.
- Watch the financial stocks to see how they hold up.
- Watch Friday’s close. It could be an important tell or wild card heading into options expiration week. Next Friday is December options expiration week, which is also known as “Freaky Friday” around the Wall Street blocks. It is also called a “Triple Witching” day, which happen four times a year on the third Friday of March, June, September and December. This is when the contracts for stock index futures, stock index options and stock options expire on the same day.
These were my mental notes, and the action played out like a fiddle.
The bears started the week with a second-straight Monday win, and the action set the tone for the rest of the week. I wasn’t worried about any possible pullback until Friday, as I wanted to keep my emotions in check and wait until the dust settled. I started building my bullish Watch List as stocks went on sale, and I also looked at the short side and possible bearish put options ideas just in case I have to go to “Plan B.”
The bulls had won three-straight Fridays before this past Friday’s beat down, and I said it would be an important session to determine how this week plays out.
Mixed Monday/Friday closes signal trading ranges, which is why I prepared for one at the start of December with the possibility of a pullback. New highs were set, and new lows were breached. I predicted spicy volatility, but last week’s action was served with some Sriracha!
Lower Monday/Friday closes usually mean money is moving out of the market, so today will be just as important as the Mondays in recent weeks, especially with Friday’s pullback on the Dow.
The last time the Dow had a Monday/Friday pullback was in early October, which is right when I said a bottom would be forming. In mid-September, a lot of investors panicked and bailed on the bulls. Not me.
I say all of this not to brag or boast but to show you that you need to trust the game plan. In late September and early October, I wasn’t buying bullish near-term options, as I said there would be a major swoon into October. A lot of investors “freaked out,” and I don’t want you to be this type of investor or trader. In November, I warned of a weak start to December and tax-selling season, and said that the VIX would be a major clue to watch. Well, here we are.
I still want to improve on this track record, and this time of year has been great to Momentum Stocks Weekly over the past few years. It has been a while since I have recommended shorting a stock or buying longer-term put options, but there are some names I like if the action favors the bears next year.
The bears pushed the 50-day moving averages on the broader market last week, but tech and the small-caps held up well. October’s slide led to a breakdown in all of the major indexes below their 50-, 100- and 200-day moving averages. This is why Wall Street is “on the fence” this week.
The good news for the bulls is that the Mondays before December option expiration week usually show a gain. During the past 13 years, the S&P 500 has closed higher nearly 70% of the time to start the week and hopefully it will give the blue-chips a lift.
December options expire this week, which I mentioned in my Top Six list of things to watch. Fancy words like “Triple-Witching,” “Quadruple-Witching” and “Freaky Friday” are all Wall Street code for the expiration of December options this Friday.
I will be ignoring the noise and slick-talking pros, as history shows that this Friday is actually a bullish session as well. The S&P 500 has finished higher 70% of the time over the past three decades. I like the fact that history is favoring the bulls, but I also have to realize that it may not repeat itself this week.
I was all over the pending breakdown in Brent oil ($BRENT) and said that lower oil prices would be a major bonus for the consumer. Crude oil tanked below $60 for the first time in five years, and gas prices have fallen daily for nearly three months.
My No. 1 concern last week was the Russell 2000, as I knew the index would be the most volatile. I mentioned that the small-cap bounce should start today, so that index will be my main focus. The index held its 200-day moving average, but notice the 50-day moving average in the chart above, as it is quickly slopping upward with a “golden cross” formation in the works. This is a bullish signal and one Wall Street will hopefully notice after the fact.
The financial stocks pulled back following negative headlines from Bank of America (BAC, $17.13, down $0.34) and Citigroup (C, $53.40, down $0.11). BofA said their trading revenue would decline for the current quarter, while Citigroup announced job cuts and was fined, along with other banks, for its shenanigans for trying to drum-up its investment-banking business.
I have talked repeatedly about the financial stocks needing to lead the next leg of the market higher, and they had into the first week of December. They were my number five concern.
Last week’s volatility weighed on the sector, as the Financial Select Spiders (XLF, $24.14, down $0.48) slipped 4% from Monday’s high of $25.07, including Friday’s 2% pullback when the bears doubled down. Support at $24 held, but there is risk to $23.75 and the 50-day moving average.
Although the financial stocks were and could still be peaking, they are about the only market sector that hasn’t reached historic highs this year despite the Dow and S&P’s record runs. In fact, the sector has lagged the overall bullish run for the past five years. I would love to see them lead the run higher into 2015 (along with tech and the small-caps).
The talking heads and Wall Street pros seem so stressed about when the Fed will raise interest rates, but I mentioned that rising loan rates would be huge for financial stocks. Banks, which have suffered from years of historically low rates, need to lower their lender standards, and they may be ready to loosen their reins now that the Fed is gone. If there is a little give-and-take between the big banks and borrowers, the rebound to higher highs should continue in 2015.
There has been some chatter about the “Hindenburg Omen,” which officially triggered at the beginning of the month. The technical indicators that make up this fancy pattern usually call for a bear market pullback. The selloff in the energy sector was the hammer that hit the bullet, as a number of them have been put out to pasture.
The Hindenburg Omen theories don’t usually hold up well in bull markets and occur when a substantial number of stocks set either new 52-week peaks or fresh 52-week lows, but not both at the same time. The omen also assumes that the market is acting “normal,” but the volatility in oil actually negates this theory.
Last week offered great entry prices to play a possible rally into 2015, which was my No. 2 priority as I built my Watch List. The indicators I follow on a daily basis were stretched and tested, and I used the chaos to remind myself to start buying when others were fearful.
I still have no problem shorting a stock or buying put options, but I am a trend trader, and most of my positions have been bullish all year. I learned in 2013 that it is hard to trade puts in these types of incredible bull market rallies. In 2008, I had no problems riding shotgun with the bears and buying put options, but let’s wait until the 10-year uptrend lines crack before jumping off of the bullish bandwagon.
I also said to watch the 10-year uptrend lines, which was my fourth major worry on my “Top Six” list.
“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.”
I doubt that these levels come into play over the next few weeks, but they could in 2015 if there is continued weakness this month and through January.
The Fed will also hold a two-day meeting starting on Tuesday, so there could be some added fireworks. We haven’t heard from Janet Yellen in an FOMC minute, and her comments will need to be crafted in a way that Wall Street can handle.
The odds favor the bulls this week, and it is important to trust our game plan. I reminded myself that last week would provide great entry prices for future trades but that the bears still needed to be respected. Friday’s final hour meltdown was either a bonus package or the start of what could be a major trend change.
My boots-on-the-ground research showed that all major stores, restaurants, malls and movies theaters in my town were packed throughout the weekend. I did some early Christmas shopping for friends and family and was not surprised by the bustling activity. However, my real shopping list was made last week when stocks and options went on sale.
I’m normally not this long-winded, but I know we have new subscribers, and a lot of traders want to know what the heck is going on. I have done my best to break down the headlines and the chart work for you so you can see how I trade, and I hoped it has helped.
Ahead of the open, futures look like this: Dow (+108); S&P 500 (+14); Nasdaq 100 (+33).
Chapter 1. Rex Energy (REXX) Could be Worth a Gamble
As oil falls, consumers are cheering lower prices at the pump, but lower oil has also caused oil stocks to crater. Rex Energy (REXX, $5.18, down $0.03) has clearly fallen off a cliff and could offer an attractive entry price at current levels.
The $271 million oil and gas exploration company based in State College, Pennsylvania operates in the Appalachian and Illinois basins of the United States. The company focuses on the Upper Devonian/Burkett Shales, the Marcellus Shale, Utica/Point Pleasant Shales, and the Bridgeport/Cypress Sandstones. At the end of 2013, it owned an interest in nearly 1,800 oil and natural gas wells and had estimated proved reserves of 850 billion cubic feet equivalent (Bcfe). Its reserves:
- were 61.3% natural gas, 32.6% NGLs, and 6.1% crude oil and condensate
- were 41.9% proved developed
- had a reserve life of approximately 25.1 years based upon 2013 production
Besides searching for oil, natural gas, and natural gas liquids (NGLs), the company’s field services segment provides oil and gas field services comprising water sourcing, water transfer, and water disposal services, as well as equipment rental primarily in the Appalachian Basin.
Successful real estate businessman Lance T. Shaner founded ERG Illinois in 1996. Shaner, who received his Bachelor of Arts in History from Alfred University, expanded ERG Illinois to include four oil and gas properties in the state. In 2005, the company changed its name to PennTex Resources Illinois.
Thomas C. Stabley and Benjamin W. Hurlburt founded the Rex Energy on March 8, 2007. Stabley holds a Bachelor of Arts in accounting from the University of Pittsburgh, while Hurlburt received a Bachelor of Science degree in finance from Pennsylvania State University. PennTex Resources LP became a wholly owned subsidiary of the company.
The company raised $105.6 million through a public offering of 9.6 million shares on the NASDAQ at $11, the low end of the estimated $11 to $13 each. The company planned to sell 9.2 million shares of common stock, and stockholders planned to sell an additional 5.47 million shares. Thus, the offering was expected to total 14.67 million shares. Shareholders did sell 5.47 million shares in the offering. Outstanding shares stood at 31.20 million. Share opened for trading at $11, but closed at $10.13.
Since the IPO, shares rocketed higher in 2008 after reaching a low of $7.55 on Sept. 14, 2007. Oil and gas stocks operating in the Marcellus Shale went wild over its natural gas potential. A Jan. 17, 2008 Penn State press release estimated the formation to contain 168 trillion cubic feet of natural gas. Rex Energy held lease rights to 46,000 net acres in western Pennsylvania. Then on Feb. 25, 2008, the company released record earnings for the fourth quarter and year ending Dec. 31, 2007. Shares reached a peak at $28.06 on June 20, 2008.
But like all stocks, the credit crisis pounded the shares back to earth, reaching a low of $1.12 on March 6, 2009. Then the stock started to march back up, hitting a high of $24.98 on Oct. 18, 2013, before pulling back again.
The map shows the Rex Energy’s properties as of June, 2014. Production volume rose 71.8% from a year ago. Production for the third quarter averaged 169,658 Mcfe (Thousands of cubic feet equivalent) per day, of which 63.1% was attributable to natural gas, 11.8% to oil and condensate, 15.8% to NGLs, and 9.3% to ethane production. The company plans to produce 179,000-185,000 Mcfe in the fourth quarter.
- Revenue increased 37% to $86.5 million as compared to $63.0 million a year ago.
- Non-GAAP net income was $1.6 million (or $0.03 per share), down from a net income of $6.4 million (or $0.12 per share) a year ago.
- EBITDAX from continuing operations was $42.2 million for the third quarter, up 21% from a year ago.
Revenue has been climbing in a nearly linear line, and analysts expect that to continue. Analysts also expect earnings to bottom in the first quarter. Both are bullish signs. However, a red flag is that total expense seems to be on the rise.
Consistent with its historical practice, Rex Energy continues to add to its hedging position at prices that generate strong rates of return in order provide additional certainty regarding its expected cash flows. For 2015, the company has approximately 49% of its current natural gas production hedged at a weighted average floor price of $4.15. The company has also hedged approximately 43% of its current oil production for the first half of 2015 at a weighted average floor price of $90.88. The question is if oil will rise back to $90 by the first half of 2015.
On Nov. 4, 2014, Michael L. Hodges, who joined the company in June 2012, stated he will resign from his position as Chief Financial Officer. His resignation is expected to be effective Jan. 31, 2015. If a successor has not been appointed at the time of his anticipated departure, Curt Walker, the company’s Chief Accounting Officer, will serve in a dual role and assume the interim Chief Financial Officer duties until a permanent replacement is found. Such a change in management could be a good thing, especially since the stock has dropped so much. This news could boost the stock price in the coming months.
As oil continues to fall, analysts have been cutting estimates, which is a big reason why the stock has fallen so much. On Nov. 10, BMO Capital was the latest analyst firm to cut annual EPS estimates to $0.33 from $0.46 for fiscal 2014, and to -$0.41 cents from $0.76 for fiscal 2015. The firm lowered the price target to $10 from $16 for the energy company.
The company has seen a lot of volatility lately. On Nov. 17, the stock jumped 9%, only to give back 3% the next day. On Nov. 20, it traded at two times the normal volume and ended up 4%. On Nov. 26, shares traded at five times the normal volume and ended down 3%. This bullish-bearish-bullish-bearish movement could signal insider trading, institutional trading, and/or a big movement in the stock coming.
Two of the company’s major competitors are Cabot Oil & Gas (COG) and EQT Corporation (EQT).
The stock seems slightly undervalued, with positives (green) outnumbering negatives (red) 12 to 11. The stock seems a speculative growth play with a high gross margin but low operating margin, sales growth, and return on assets. And price/sales, price/book, and price/assets are all less than one. But most important of all, short sellers are covering, and institutions and insiders are buying.
On the negative side, PE and short interest are very high. But the high short interest could cause a short squeeze if positive news comes out.
At $5.18, the stock is below its low target of $7.00 made by the 13 analysts recorded by Thomson/First Call. Mean target is $13.33, median target of $14.00, and high target is $19.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.1, unchanged from a week ago.
The short-term graph looks more bullish than bearish. The price is at first support, and it is likely that it would head up to first resistance. The MFI, RSI, Stochastic %K, and W%R are all in or near oversold territory. The stock rose one time the MFI, RSI, Stochastic %K, and W%R were at similar levels, as indicated by the orange line. The MACD seems it will form a bullish upward cross in the near future.
Catching a falling knife is always dangerous. but I like this stock for a possible addition to the portfolio this month or in December. If I take action, I will send out a Trade Alert.
Chapter 2. Momentum Stocks Weekly Play List
ll prices given in this update are current as of Dec. 12, 2014.
The Momentum Stocks Weekly Closed Trade Track Record for 2014 is 32-10, for a 76% win rate (117-17, or 87% win rate, overall since the start of 2011).
You can view the entire list of open and closed trades on our website. View the trades by clicking here.
Brocade Communications Systems (BRCD, $11.09, down $0.16)
Original Entry Price: $11.47 (12/5/14)
Lowered Price from selling options: N/A
Exit Target: $15+
Stop Target: $10
Current Dividend Yield: 1.3%
Action: Shares traded to a high of $10.55 to start last week. The dividend of 3.5 cents didn’t hit our account this time but will in three months. The pullback to $11 looks encouraging to start new positions but there is risk to $10.75 and the 50-day moving average. Resistance is at $11.40-$11.50 followed by $11.75.
AT&T (T, $32.16, down $0.55)
Original Entry Price: $33.88 (12/5/14)
Lowered Price from dividends/ selling options: N/A
Exit Target: $40
Stop Target: $30
Current Dividend Yield: 5.7%
Action: I mentioned there would be further risk to $32-$30 on a drop below $33 and the 200-day moving average. Shares ended at their session low on Friday and the 52-week low is at $31.74. The dividend is approaching 6% and should attract investors starving for yield in 2015. Resistance is at $32.75-$33.
Discovery Laboratories (DSCO, $1.33, down $0.01)
Sold to open the DSCO April 2 calls (2015) (DSCO150417C00002000, $0.25, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Stop Target: None
Action: Shares were volatile last week after testing a low of 99 cents on Tuesday and rebounding into Friday to prior levels. The 3-cent pullback came on unusually high volume of over a million shares on two sessions. Normal daily volume is just under 300,000 shares and it ran nearly five times higher. This could be a very bullish, or bearish, sign of things to come. With a small market-cap of just over $100 million, the high volume could signal takeover chatter.
I warned of further risk to $1.25 but that has obviously expanded to $1. Resistance is at $1.50.
I still like the position at current levels and new subscribers can still sell to open the DSCO April 2 calls to lower the cost basis.
On Nov. 11, I suggested buying DSCO 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%.
Pizza Inn Holdings (PZZI, $7.00, up $0.06) 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 traded to a high of $7.23 on Friday after the company announced more Pie Five stores would be opening in 2015. A deal to bring 10 units to the Kentucky region now brings the number of stores to 400 company-owned and franchise units under contract. The Pie Five stores have just started providing growth for the company and investors are getting in on a terrific ground floor opportunity. The explosion in the brand name and the quality of their pies are both sweeping the nation, and you have to check them out. Management is solid and their franchising model will provide a nice steady stream of income for years.
The close above the 50-day moving average was bullish. Near-term resistance is at $7.20-$7.40 and the 100-day moving average. There is risk to $6.75-$6.50 if $7 fails to hold.
Click here to read my in-depth commentary and write-up on Pizza Inn. This is my favorite stock heading into 2015 and I love new positions at current levels.
Huttig Building Products (HBP, $3.22, down $0.01) 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 closed below short-term support at $3.25. I have warned of additional risk to $3 on a close below this level. Resistance is at $3.35 and the 50-day moving average followed by $3.50.
Read my original write-up for HBP by clicking here.
Limelight Networks (LLNW, $2.86, up $0.01) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: N/A
Exit Target: $5
Stop Target: $1
Action: Resistance is at $3 and a close above this level could have me adding new positions. Support at $2.75 has been strong. A close above $3 would be bullish for a run to $3.25-$3.50.
Read about why I feel Limelight is a continued takeover target going into 2015 by clicking here.
Trades on Hold: 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.
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)
Momentum Stocks Weekly